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Why you could end up paying more for loans after Moody's downgraded South Africa's big banks

by , 27 August 2014

It's been a rocky few weeks for the banking sector.

After African Bank revealed huge losses and the need of a multibillion rand capital injection, the rest of the banking sector has felt the backlash.

Following the events with African Bank, ratings agency Moody's decided to downgrade five of South Africa's banks.

So what does this mean for you?

Let's take a closer look…

Moody’s downgrade could have a lasting impact on the banking sector

At the beginning of last week, after downgrading Capitec, Moody’s went on to downgrade Absa, Standard Bank, Nedbank and FirstRand.

In response to the downgrades, the stock market punished banking shares.

But it looks like the effect of the downgrades could hit the South African consumer.

News24 spoke with Professor Andy Hsieh of UWC’s School of Business and Finance, reports Fin24. And he thinks the downgrades will impact consumers.

The cost of borrowing looks likely to rise

In the interview, Professor Hseih said he believes the major impact of the downgrades will be a rise in “the borrowing costs for consumers”. And it won’t just be the man in the street that’s affected.

Professor Hsieh also thinks the “financing costs for the companies operating in these markets” will also rise as a result.

One of the main reasons that contributed to African Bank’s downfall was consumers defaulting on loan repayments.

Professor Hsieh says that consumers can “expect more stringent credit checks” when applying for loans. This is because the pressure will be on banks to ensure that consumers pay back loans amounts.

By tightening up the criteria for granting loans in the first place, the banks can lower their risks of consumers not paying money back during the course of a credit agreement.

This along with the Reserve Bank being in the midst of an interest rate hiking cycle adds additional pressure to consumers. As interest rates slowly rise, any credit repayments will rise too.

So going forward, expect to face more scrutiny when you go in search of a loan or bond at your bank.

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Why you could end up paying more for loans after Moody's downgraded South Africa's big banks
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