Government has put together a billion rand fund to put a "floor" under banks' "gap" market loans. Is this the US subprime market reinvented for SA?
Minister of Human Settlements Tokyo Sexwale announced that he has briefed banking executives on government's plans. These will be announced in Sexwale's budget speech on April 21. This is so as to "not surprise them".
The discussions revolved mostly around the "gap" market, defined as those earning R3 500 to R9 000 per month. This is the group that finds it most difficult, if not impossible, to access bank credit explained Sexwale.
The broad idea is that the fund will insure banks against losses from loans made to the "gap" market. Sexwale says this will not only enable banks to lend, but will raise the cap of what banks will commit to the sector.
The fund is essentially to give banks confidence to make loans they wouldn't have before. A bank executive heading for the exit just after the meeting commented that if the banks could've made money from a market they would be in there already.
This insight was mirrored by Cas Coovadia of the Banking Association. Somehow though, Sexwale believes that this government "insurance fund" will allow banks to make responsible loans compliant with the National Credit Act.
Sexwale acknowledged that the US, and global, economy was brought to its knees as a result of banks making loans to people they knew could never repay them. He spoke of local bank Unifer as an example to bear in mind. It lost billions through dodgy loans leading up to the small-bank crisis.
Interestingly, when asked if the fund will insure loans for specific groups in the "gap" or everyone, Sexwale responded "everyone". It will be interesting to see if this really is a colour-blind scheme in implementation.
So what's the difference between this SA government initiative and the US subprime implosion?
Sexwale said we have proper regulations in place, banks that value their reputations... and "[we] trust the banks aren't run by crooks".
Importantly Sexwale and the bank executives said they are working as a team to make this scheme workable. Hopefully this will result in a system that benefits those intended. Details were scarce as the scheme seems to be still in its early phase.
The fund is envisaged to start at R1bn, but Sexwale said that as the economic cycle improves he could approach Treasury to provide more guarantees, further underpinning bank loan books. This sounds a bit like chasing the cycle though, something US banks did as the housing bubble grew.
The question lingers, if the banks could really make money in the "gap" market then surely they would be there already? Does this scheme not privatise profits and socialise the losses just like America did?
Another issue is that government has been criticised over its implementation of plans. In fact, a similar discussion such as Monday's one happened in 2005. From the sounds of Monday's briefing, nothing has happened in the five subsequent years.
Minister of Human Settlements Tokyo Sexwale announced that he has briefed banking executives on government's plans. These will be announced in Sexwale's budget speech on April 21. This is so as to "not surprise them".
The discussions revolved mostly around the "gap" market, defined as those earning R3 500 to R9 000 per month. This is the group that finds it most difficult, if not impossible, to access bank credit explained Sexwale.
The broad idea is that the fund will insure banks against losses from loans made to the "gap" market. Sexwale says this will not only enable banks to lend, but will raise the cap of what banks will commit to the sector.
The fund is essentially to give banks confidence to make loans they wouldn't have before. A bank executive heading for the exit just after the meeting commented that if the banks could've made money from a market they would be in there already.
This insight was mirrored by Cas Coovadia of the Banking Association. Somehow though, Sexwale believes that this government "insurance fund" will allow banks to make responsible loans compliant with the National Credit Act.
Sexwale acknowledged that the US, and global, economy was brought to its knees as a result of banks making loans to people they knew could never repay them. He spoke of local bank Unifer as an example to bear in mind. It lost billions through dodgy loans leading up to the small-bank crisis.
Interestingly, when asked if the fund will insure loans for specific groups in the "gap" or everyone, Sexwale responded "everyone". It will be interesting to see if this really is a colour-blind scheme in implementation.
So what's the difference between this SA government initiative and the US subprime implosion?
Sexwale said we have proper regulations in place, banks that value their reputations... and "[we] trust the banks aren't run by crooks".
Importantly Sexwale and the bank executives said they are working as a team to make this scheme workable. Hopefully this will result in a system that benefits those intended. Details were scarce as the scheme seems to be still in its early phase.
The fund is envisaged to start at R1bn, but Sexwale said that as the economic cycle improves he could approach Treasury to provide more guarantees, further underpinning bank loan books. This sounds a bit like chasing the cycle though, something US banks did as the housing bubble grew.
The question lingers, if the banks could really make money in the "gap" market then surely they would be there already? Does this scheme not privatise profits and socialise the losses just like America did?
Another issue is that government has been criticised over its implementation of plans. In fact, a similar discussion such as Monday's one happened in 2005. From the sounds of Monday's briefing, nothing has happened in the five subsequent years.
- Realestateweb
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