SA banks cut long-term lending to meet developed country regulations

The South African Reserve Bank, the country’s central bank. Photographer: Armand Hough. African News Agency (ANA)

The South African Reserve Bank, the country’s central bank. Photographer: Armand Hough. African News Agency (ANA)

Published May 13, 2024


South African banks increased the proportion of short-term lending in their loan portfolios since 2008 with the introduction of the Basel III-mandated net stable funding ratio (NSFR), resulting in decreased long-term lending, particularly in residential mortgages.

This is according to a study by the SA Reserve Bank, released on Friday, which investigated the effect of the NSFR on South African banks’ lending.

The NSFR was introduced globally as part of bank liquidity reforms post the 2008 global financial crisis, and it addresses mismatches in the maturity of assets and liabilities, which was identified as a major cause of the crisis.

However, there is little understanding how these reforms have affected emerging market banks, which the study attempted to provide some insight into.

The SARB said there were also “concerns about banks’ incentives to shift their portfolios away from sectors of the economy – such as small and medium-sized enterprises – that might be considered riskier but are vital for inclusive economic development”.

The Basel accords were intended to address regulation deficiencies in developed countries, which have different bank and financial systems from emerging countries. In South Africa, banks were given until 2018 to be compliant with the NSFR requirement.

“While total lending does not appear to have been affected, our results indicate the NSFR has influenced loan composition and maturity profiles,” the study’s authors said. The results also showed that the NSFR regulations in SA were largely compliant with Basel III standards.

The SARB said, however, that the impact of the NSFR on bank lending has been unclear, as it hinged on the adjustment strategy chosen by non-compliant banks to meet the liquidity ratio.

Banks also tended to hold a larger proportion of liquid assets as precautionary liquidity, especially in emerging economies.

The study showed that local banks had shortened the maturity of their loans to mitigate maturity transformation and improve their NSFR, which could make it harder for households to access credit.

The study found the South African banking sector was highly concentrated, with the market share of the top five banks – in terms of bank assets – at about 90%.

The sector was characterised by a high dependence on deposits as a source of funding, given that interbank markets are relatively small.

South African banks also held excessive liquidity.

Using January 2008 as the base year, corporate loans increased more than household loans after 2013, and as a share of total loans were more prominent from 2018, when the NSFR was implemented in South Africa.

Corporate loans remained above the share of household lending in the latter part of the sample period.

In the composition of loans between 2008 and 2022, mortgage advances remained the largest type of loans, but their relative weight decreased.

Conversely, the proportion of overdrafts, loans and advances to the private sector, as well as other loans and advances, increased in the later years of the study period.

Loans and advances by the banks grew from just over R100 billion in 2008 to above R400bn in 2022, but as a percentage of assets it fell from close to 8.5% in 2008, to below 6% in 2001 and just over 7% in 2022.

Household loans comprised over 80% of bank assets in 2008, and fell to just over 60% in 2021. A decrease in loans was offset by an increase in other assets and financial investments.

On the asset side, government debt security assets increased from about 5% to 14% of bank sector assets.