The Sarb said the quality of bank loan books has suffered amid high interest rates and announced plans to have lenders add protectively to their capital buffers in 2025.
“The longer interest rates remain high, combined with cost-of living increases, the more borrowers will experience strain,” the central bank said Wednesday in its Financial Stability Review. “This could manifest in rising non-performing loans and payment lapses, which could reduce capital and profitability in the financial sector,” it said.
The central bank said that it has decided to implement a 1% counter-cyclical capital buffer for lenders commencing January 1, 2025, to be completed by the end of that year.
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The buffer can be drawn down in the face of an economic shock, and countries who had them in place during the Covid-19 pandemic had found them to be helpful in relieving strain, it said.
Not tightening step
“The increase of the CCyB is not intended as a policy tightening measure but as a structural change that will make it possible in future for the Sarb to reduce it to up to 0% if there is excessive pressure on the banking system,” it said. The buffer can also be increased “up to 2.5% if there are signs of overheating in the banking system.”
It listed declining savings as a key risk to South Africa’s financial sustainability, as the impact of tighter monetary policy becomes more apparent.
The central bank has held interest rates at a 14-year high of 8.25% since July, while warning that it stands ready to act to ensure inflation remains under control. Annual price growth quickened at its fastest pace in five months in October to 5.9% from 5.4% in September, close to the top of policymakers’ 3% to 6% target range.
Loan defaults have risen in the face of stiffer debt-servicing costs and tepid economic growth.
“This risk is elevated for loans originated during previous years of low interest rates,” the central bank said. “Furthermore, the higher-for-longer interest rate environment is likely to dampen economic growth and employment levels, thereby reducing the opportunity to extend credit prudently.”
Central banks in advanced economies including the US have signaled they expect to keep rates at elevated levels to convincingly return inflation back to target.
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