Presentation to the Portfolio Committee on Trade and Industry: Debt Relief and African Bank 13 May 2016

Topics of discussion Matters relating to reckless lending African Bank’s Bad Loan Book If Good Bank is jeopardised? Financial Stability Implications Potential Contagion effects Conclusion 2

Matters relating to reckless lending SARB has not conducted an investigation on reckless lending pertaining to African Bank’s Bad Loan Book. Identification of reckless lending is not within the mandate of the Bank Supervision Department, but falls within the mandate of the National Credit Regulator (NCR) The SARB took note of the high growth rate in unsecured lending during 2010-2012, and more specifically in the sub loan categories of personal loans. The SARB did not view this as sustainable and accordingly made it a Flavour of the Year topic in its supervisory programme with banks during 2012. Following this intervention the growth rate in unsecured lending in the sub category of personal loans has reduced significantly to levels that the SARB believe is more sustainable without making access to finance through the banking system inaccessible 3

Matters relating to reckless lending continued… 2013 NCR investigation into African Bank Identification of reckless lending (Dundee branch) - African Bank maintained that it was due to fraud by certain employees and not reckless lending Fine (R300 million) was recommended, settlement was reached on a fine of R20 million African Bank agreed to write-off the loans, refund consumers, rescind judgments taken against consumers, remove judgment and adverse information listings from the credit records of consumers and develop an active engagement process with the NCR 4

African Bank’s Bad Loan Book The Bad Loan Book (NAV: R4.8 billion) now resides in Residual Debt Services Limited (RDS), which was created as part of the resolution and restructuring of African Bank Collections serve to support repayment of SARB’s loan of approximately R3.25 billion & guarantee obligations of approximately R3 billion The Bad Loan Book is ceded as security to the SARB It represents approximately 90% of the total assets of RDS – the “debt forgiveness” of these loans will render RDS insolvent, requiring SARB to withdraw its support Ultimately, the fiscus and subsequently the taxpayers would bear the cost of such write-off Collections for the Good Book and Bad Book is conducted through Good Bank, therefore contagion risk may arise as clients on the Good Book may therefore not want to pay their loans as “debt forgiveness” will not appear to be applied consistently. This can flow to other banks where clients have loans with those banks The viability of the recently launched African Bank will possibly be placed in jeopardy 5

If Good Bank is jeopardised? Salient components of Good Bank’s balance sheet: Net Advances: R20 billion Equity holders: SARB R5 billion Banks & PIC R5 billion Bondholders: Senior R34.5 billion Subordinated R1.5 billion Potential implications: Reduction in collections on net advances as a result of contagion from “debt forgiveness” from the Bad Loan book will materially affect the future prospects and business model of the Good Bank Equity holders may suffer substantial losses prior to bondholders Losses suffered by the SARB will effectively translate to a cost for the fiscus Losses suffered by bank equity holders will materially affect their financial performance and negatively impact their prudential ratios Industry participation in future bank resolution will in all likelihood disappear Subsequently, bondholders may be affected which in turn is likely to affect retail investors through investment funds The combined effect of the above is likely to pose a substantial financial stability risk to the South African banking sector 6

Financial stability implications Potential contagion risk to other financial institutions operating in similar markets Higher cost of funding for the banking sector and subsequently the consumer Adverse effects on banks’ financial position & erosion of confidence in the banking system from both a depositor and investor perspective Debt write-off = Wealth transfer to debtors. This may causes moral hazard problems, price distortion and encourage future delinquent behaviour A reluctance to provide credit to lower income categories affecting financial inclusion Providing relief to over-indebted consumers in effect rewards them for over-borrowing, at the expense of savers Reputational risk for South Africa and will raise questions around recognition of creditors rights Will affect ratings of banks due to value of loans on bank’s balance sheets being overvalued. May also affect the Sovereign rating of SA “Debt forgiveness” ignores the total value chain by focusing only on one element, i.e. Sellers profit on goods/services sold; consumer behaviour 7

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Conclusion SARB has not conducted an investigation on reckless lending pertaining to African Bank’s Bad Loan Book. Reckless lending is not within the mandate of the SARB African Bank “Good Bank” could be placed in jeopardy because of debt relief on the Bad Loan Book Further contagion risks to other retail unsecured lenders with negative financial and stability implications Debt relief is likely to be costly for the financial sector, the fiscus, taxpayers and the overall economy 11