Bad Banks – Yes, They Do Exist

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Bad banks – yes, they do exist

The banking sector in South Africa has a range of solutions that are offered. Operating a banking institution is a mammoth task, by any standards. When systems aren’t put in place, this can result in a disastrous ripple effect on the various bank divisions.

What are bad banks?

A bad bank is set up to buy the bad loans of a bank with significant non-performing assets at market price. By transferring the bad assets of an institution to the bad bank, the banks clear the balance sheet of toxic assets.

This process enables the clean-up of private banks with high levels of problematic assets and allows them to start lending again.

A case study of how bad banks work is the African Bank story.

With a rich history in the South African financial services industry, African Bank has gained a reputation as a trusted institution. Since being re-launched in 2007, the bank has continued to grow. It has gained more clients and has provided some much-needed services.

The bank landed in hot water due to reckless lending practices. The bank was providing loans to individuals who could not afford to make repayments and who were over-indebted. This led to multiple bad debts on the books of the bank- which it could not get rid of. The only solution was the bad banks model.

According to analysts, the bank was badly affected by its customers not being able to repay their loans, which were extended due to lax lending criteria.

African Bank was one of South Africa’s biggest unsecured lenders. Recent reports have stated that the extent of the losses were larger than initially stated.

Former CEO Leon Kirkinis followed a policy of only writing off bad debt after four months of failed instalments.

Momentum Wealth portfolio manager Wayne McCurrie said: “African Bank clearly was a reckless lender towards the end and management should shoulder the blame.”

 

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