The South African Reserve Bank's recent interest rate cut by 50 basis points to 5%, which is aimed at stimulating the economy through consumer spending, is unlikely to have any effect on banks' tough stance on lending, which could inhibit potential growth in the economy.
A lower interest rate would normally allow consumers and businesses to capitalise on having more disposable income. For example, consumers who are currently in debt will also benefit from lower interest rates as the cost of paying off a loan is lower. However, this effect may be subdued due to the lending policies of banks.
In order for the economy to grow, banks need to lend money and open their channels to encourage consumer spending and to stimulate the economy. Following the rate cut, commercial banks cut their lending rate to 8.5% from 9%, but because the global economy is still in murky waters, and economic growth in developed nations is slowing, banks are not confident that economic difficulties are over yet and are hesitant on lending.
With the ratio of household debt to disposable income hovering near 78%, banks have come out cautioning consumers of borrowing more money. Banks' lending criteria have also become more stringent with regulatory challenges, and they are still dealing with high debt levels and a flaky global market, so they aren't as flexible as they would have been in the past, despite unsecured loans forming their core business strategies.
On account of these factors, property investors who require short-term liquidity for commercial purposes are subject to lengthy processing and tougher lending criteria and may not be privy to immediate cash flow. This could jeopardise their business interests while they are further unable to take advantage of lower interest rates.
Because of this, secondary lenders will need to play a key role in providing liquidity to the commercial market as they have the ability to lend money to asset-backed customers who need short-term cash flow.
Secured lenders, such as asset-backed lenders are able to process applications more quickly and provide asset-backed clients with financial solutions with a formal bank guarantee within seven days.
Local property investors should not be deterred from securing finance against their assets as they can continue to grow their businesses despite resistance from commercial banks. Most reputable second tier lenders will be able to secure funding for commercial developments that may not have been approved by a commercial bank.
Investors should consider their options and discuss their requirements with an asset-backed specialist if they are struggling to secure finance from the banks.