Bruce Whitfield:
Well banks under increasing pressure to tighten their credit granting habits. This weekend, the president repeating its threat made by the Reserve Bank governor Tito Mboweni in December, remember saying he might force banks to up their capital requirements and that would give them less money to lend out.

Kokkie Kooyman is the banks analyst at Sanlam Investment Management and he joins us on the line this evening from Gabarone in Botswana. And Kokkie good evening, welcome to the program.

Kokkie Kooyman:
Yes, thank you very much Bruce.

Bruce Whitfield:
Basically government forcing banks to keep more money on deposit at the Reserve Bank so they cannot lend it out. That is really what this amounts to?

Kokkie Kooyman:
Yes, essentially central banks have basically two tools at their disposal when they want to curb credit growth. This clearly is what government wants to do. And the one is normally just hiking interest rates, making money more expensive. But A, it does not seem to work at the moment with the South African consumer, but B, it has had negative side effects in that you do attract offshore investors who look for a high yield, for instance, Japanese investors who only earn a quarter of half a percent of their own currency and then it becomes very attractive to put their money in rands.

So you have the side effect that the currency then strengthens and that is why what often happens, and in fact it is very interesting, the Reserve Bank of India has just done the same, they increased capital requirements, which effectively makes it more expensive for banks to lend out because they have to hold more capital for every rand they lend.

So instead of the Reserve Bank increasing interest rates, the deposit rates stay the same, so you don’t get more inflows, but the lending rates effectively goes up, because the banks try and lend, either they say, okay, we'll lend less or they make up for the increase capital, they try and get a wider margin, which means they try and charge more for loans and hence, you effectively have for the consumer, they pay more and then slow down lending demand.

Bruce Whitfield:
Now certainly today, we saw bank shares come under a bit of pressure. African Bank in particular, the micro lender down four percent on the day. One assumes that it would also impact the profitability of the banking sector?

Kokkie Kooyman:
Yes, very much. It depends on how much our Reserve Bank would be talking about. But, the more they do it, the more the effect would be. Just think of the return on assets of banks at let’s say, 1.5 percent to two percent.

So it is only the effect of their gearing that allows us to get returns on capital at the moment of say 25 percent. So the less they can gear, the more the return of capital comes down, and at the moment, global investors specifically, when it comes to bank shares, it is very much on the return of capital. So if the return of capital comes down, bank shares will come down.

Bruce Whitfield:
And certainly, I suppose, the government runs the risk of being accused of actually intervening in independent companies and how they work. You mentioned the fact that this has happened in India we saw share prices of Indian banks come down quite a lot recently, but are we not in danger of seeing government intervening in what should be a normal business practice?

Kokkie Kooyman:
It is very interesting that you mention that. Alan Greenspan, the previous chairperson of the US Federal Reserve Bank always felt that capital controls are actually not market friendly. He always felt that the market should do its work and that the main tool as a disposable is always interest rates, and you can actually see, how he, by increasing interest rates has finally brought the American consumer to a slowdown.

And maybe even in our country, the Reserve Bank just has not been patient enough and that the effect of the interest rate hikes still has to be seen. And that is why I think that in February we will definitely get another interest rate hike. But it is true that the world has changed, especially regarding hedge funds, and hedge funds very quickly are charged out at interest rates that are too high, and strengthen the currency.

So the government is in a difficult position, it wants the currency not to be too strong to stimulate exports. But it also does not want to intervene too much on the banking side. What does it do? Who am I so say what this governor should do, but I think he should hike once more and wait and see what happens.

Bruce Whitfield:
Because there is also surely a risk though, that if you actually force banks to actually cut down on their lending, they will almost ignore the higher risk business at the lower end of the market and that could make them go into contravention of the Financial Sector Charter, which demands that they lend to the lower end of the market. There are a number of actually push and pull factors here.

Kokkie Kooyman:
Absolutely, that is a very important point. And also, just the fact that, just think about it, effectively his is forcing them to go for higher margin. So he is actually increasing interest rates which you also don’t want because the banks are already under pressure for the margins they do make. Now you are forcing them to make higher margins to make up for the additional capital that they have to keep.

So normally the problem always, with these indirect interventions, it has all kinds of effectives. So you do something here that has other side effects which you have not thought through.

Bruce Whitfield:
So for the time been at least, government is making threatening noises, in the hope ones things that perhaps the banking sector will mitigate their own lending policies.

Kokkie Kooyman:
I think you are absolutely right and both Tito and now Thabo Mbeki have been doing that in an almost verbal intervention, to force the banks to lend less. The problem is, the banks will say there is not much they can do if it really is consumer lending that is pushing their demand.

But I think, what they can do is they can price controls. I personally think that there is a lot of lending going on and there is certainly going to be a higher amount of bad debts coming. I think anybody knows the anecdote of being offered three or four credit cards. So I think he needs to put a bit more verbal pressure as well on the banks. I think there is a bit of, as I said, too much lending going on.

Bruce Whitfield:
Kokkie Kooyman on the line to us from Gabarone in Botswana, thanks very much for your time this evening. And Kokkie Kooyman is the banks analyst at Sanlam Investment Management.