010307:Cas Coovadia,Managing Director and member of The Banking Association speaks to the media during the unveiling of a Code of Conduct (The Code) to address the public's concern about being harrassed and inconvenienced by people selling credit.Photo by Bonile Bam

South Africa’s biggest lenders had agreed with the government on a trial programme that would cut interest on R14 billion of loans to some of their most indebted customers, the head of the banks’ lobby group said on Thursday.

Loans to people in debt-counselling programmes would be rescheduled over five years, Cas Coovadia, the managing director of the Banking Association of SA, said at the World Economic Forum on Africa in Addis Ababa.

South Africa’s credit and competition regulators were both “on board” with the pilot project, he added.

“We may be able to restructure the debts of 70 percent” of those consumer-bank customers who were in arrears and in credit counselling, Coovadia said.

Bad debt levels at South Africa’s four largest banks, including Barclays subsidiary Absa and Old Mutual’s Nedbank unit, have remained elevated even as the Reserve Bank has held interest rates steady since the end of 2010, limiting the burden on borrowers.

With policymakers expected to raise rates this year to restrain inflation, loan books may sour further.

“The first step to restructure will be to reduce interest rates charged to (equal) the repurchase rate over five years,” Coovadia said. “If people still can’t do that, then the interest rate drops to zero.”

All South African banks and some retailers would be ready to test the programme by the end of June, Coovadia said.

The total number of consumers with impaired credit records increased by 100 000 to 8.93 million in the fourth quarter of last year, the National Credit Regulator said.

The lenders have been targeting low-income households to boost sales. In 2009, Standard Bank said it would loosen loan criteria for mortgages and credit cards.

Central bank statistics show savings as a percentage of household income was zero in the third quarter of last year.

“I am aware of the National Credit Act changes being considered and to be piloted,” said Louis von Zeuner, the deputy chief executive of Absa.

Absa reported a credit loss ratio of 1.01 percent last year, which was almost double the figure reported in 2007, before the financial crisis began.

Nedbank, which posted a 26 percent increase in quarterly profit in February, failed to reduce impaired debt as much as some analysts had anticipated.

The “industry would be looking to pilot a voluntary debt mediation” that “should result in faster resolution with less legal costs”, Nedbank’s chief executive, Mike Brown, said.

Four out of six economists surveyed by Bloomberg estimate that interest rates will rise by 50 basis points in the fourth quarter.

On Monday central bank governor Gill Marcus said economic growth appeared to be sustainable and moderate, and there was little or no room to lower rates given that inflation was at the top end of the target range. – Bloomberg