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JOHANNESBURG Suggestions in a recent Wall Street Journal article that problems in South Africas unsecured lending market are amounting to a subprime-loan crisis for the country are incorrect, according to CEO of Capitec Bank, Gerrie Fourie.

Fourie explains that inflated house prices were a significant driver of the USs subprime mortgage crisis in 2008, as individuals took out bonds that were larger than the real value of their homes. We lend against income and expenses, so you cant have an inflated situation. Theres a fundamental difference between what happened in the US and ourselves, Fourie tells Moneyweb.

Capitec, which reported a 21% climb in headline earnings to R1.2 billion for the six months ended August 2014, says it has strict affordability assessments and prudent provisioning. It provides 8% for loans that are up to date, 46% for clients who are behind with one installment, 74% for two installments and 87% for three installments. After 90 days in arrears it writes the loan off.

However, its doubtful that all other unsecured lenders are as conservative as Capitec, which even takes into account the size and stability of a loan applicants employer and the sector in which that employer operates before granting a loan.

Proposed amendments to affordability assessments in the National Credit Act (NCA) are still more lenient than Capitecs current model, according to chief executive of marketing and corporate affairs, Carl Fischer. Capitec has met with the NCR to point out loopholes in affordability guidelines and areas that are not strict enough.

African Bank for example would only start to provide for a loan once someone was more than three months in arrears, whereas Capitec is 100% provisioned at this point. It is extremely conservative and rightly so in this risky market, comments Jean-Pierre Verster of 36ONE Asset Management.

Although positive on Capitecs fundamentals, Verster is concerned that there may be knock-on effects of the steep contraction in lending from African Bank (Abil), whose disbursements under curatorship are less than half of what they were before they were placed under the control of a Reserve Bank-appointed curator in early August due to untenable levels of bad debt.

Verster points out that in the unsecured lending market, consumers will often take out a loan from one lender to pay another known as lsquo;borrowing from Peter to pay Paul. Since there is an overlap between Abil and Capitec clients, hes waiting to see what the vintages will be of the larger, longer-term loans issued by Capitec now that Abils credit tap is but a trickle.

His concerns are not unfounded. One of the largest debt review agencies in South Africa, DebtBusters says it has seen a 30% jump in enquiries since September 1 having done nothing different with its marketing. My assumption is that it is a month after Abil was placed under curatorship and presumably tightened lending criteria and that has caused lots of consumers to be unable to roll their unsecured debt with the use of another personal loan, comments Ian Wason, CEO of the Intelligent Debt Management (IDM) Group, which owns DebtBusters. The 30% jump has been consistent through the month and certainly hasnt tailed off, he says.

Nonetheless, Verster believes that if Capitec can see through the current storm it will establish itself as the biggest and strongest unsecured lender in South Africa, while also giving primary banks a run for their money by offering the lowest cost-banking product.

With a capital adequacy ratio of 38%, Capitec is 3x leveraged, which is lower than other larger banks that are around 7x leveraged, presenting less financial risk, Verster says.

In the light of Abil, youre looking at chalk and cheese, comments senior investment analyst at Old Mutual Equities, Neelash Hansjee. He says that while the numbers are good and Capitec has been fairly resilient, as a result of actions taken by management to slow loan sales, Old Mutual remains cautious on the consumer.

How else will people pay for housing?

Since banks have not created a model to address the housing need in South Africa, unsecured lending is vital, stresses Fourie. He says around 93% of mortgages granted in South Africa are above R350 000, with the number of people with a mortgage remaining stagnant at 1.8 million over the past seven years. There is a need for R500 000 and lower mortgages and no one is in that particular market. The only way to get credit is in the unsecured market, he points out.

NCR figures reveal that more than 50% of the value of the unsecured lending market goes to people earning R15 000 a month and more. Increasingly the more formal, higher income person is using the segment because its the only way to gain access to credit, says Fischer, who says that Capitec will provide vehicle finance in time.

It has recently partnered with SA Home Loans as a distribution partner for mortgages, performing an in-branch affordability assessment and then passing qualifying clients on to SA Home Loans.

Capitec points out that South Africas formal credit market is only seven years old, saying it is now bottoming out and should stabilise in the next seven to ten years. There is a future for unsecured lending, though we tread cautiously as the industry is still maturing, it says.

Krisada Chinavicharana, director-general of the FPO, yesterday said that relevant parties would be invited for discussion on the already-drafted law, which would then be forwarded to the Finance Ministry, and later to the Cabinet.

In the draft law, a ceiling for state expenditure is set under monetary and fiscal disciplines, including a public-debt ceiling at no more than 60 per cent of gross domestic product, and a definition of spending for populist projects. The law will be launched for specific budget-spending cases.

FPO officials have been assigned to add more details, which will help keep the governments spending in check in regard to fiscal and monetary discipline, he said.

The legal draft contains background defining principles for financial planning in the medium term, revenue collection, direction of the national expenditure budget, financial management, accounting, public funds, indebtedness and contingency funds.

The first of the two sections covers the states fiscal and monetary discipline, and the second covers the states accounting, reporting and inspection.

In the first section, expenditure budgeting is required to take into account the countrys economic situation, budget policy, necessities, capabilities for spending or debt obligations, state revenue collection, public debts and borrowings for the budget deficit. Meanwhile, the public-debt level has to be no more than 60 per cent of GDP. However, if necessary, the finance minister is allowed to set a new ceiling, although the treasury balance will have to remain at the necessary level for public agencies disbursement.

Off-budget expenditure will only be for the performance of duties and, if public agencies have such a budget, it has to be deposited at the Finance Ministry.

The second section allows the ministry to set state accounting standards and policy, with the reporting of revenue, expenditures, debt obligations, borrowings, and asset and financial management, among other things.

Public agencies, excluding state enterprises, will have to follow these standards and policy.

The finance minister also has to present an annual budget report to the Cabinet within 90 days from the end of a fiscal year, and to Parliament within 120 days.

Under the legal draft, the Finance Ministry is also required to report fiscal risks and the direction for risk management on a yearly basis.

Risk assessments from impacts to the macroeconomy, the governments financial policy system and the operating performance of public agencies, state enterprises and local administrative organisations that could burden the governments fiscal stance must be included in the report, which will be submitted to the Cabinet within 90 days from the end of a fiscal year.

MOSCOW, Oct 1 (Reuters) – The International Monetary Fund
halved its forecast for Russias 2015 gross domestic product to
0.5 percent on Wednesday, saying that international tensions had
created downside risks to its estimates.

Geopolitical uncertainties are having a big direct impact
on the Russian economy, Antonio Spilimbergo, the IMFs mission
head to Russia, told journalists.

Russia is embroiled in conflict with Ukraine. Consequently,
western countries have imposed a series of sanctions against
Moscow, which has retaliated with counter-sanctions of its own.
Both are taking a toll on its economy.

The IMF also urged Russias central bank to tighten its
monetary policy to anchor inflation expectations. It expects
inflation this year to come above 8 percent.

The monetary policy is very important to keep inflation on
target and it is important to anchor inflation expectations,
Spilimbergo said.

The central bank has an inflation target for next year of
4.5 percent, plus/minus 1.5 percentage point.

Spilimbergo urged the central bank to raise rates and keep
them positive in real terms, above inflation.

Our recommendation is for a tighter monetary policy stance
and at the same time defend the credibility of the central
bank, he said.

At last months rate-decision meeting, the central bank kept
rates unchanged, leaving its key rate, the one-week minimum
auction repo rate, at 8 percent.

Spilimbergo also said the IMF supports the central banks
stance against restrictions on cross-border capital movement.

The position of the central bank of Russia is against
capital controls, he said. We agree with this assessment. In
the present time, they would be not helpful and we do not
recommend them.

(Reporting by Lidia Kelly; Editing by Elizabeth Piper, Larry
King)

There are two ways to look at this, from a financial viewpoint or from a compassionate one.

From a strictly financial perspective, this is a no-brainer. Financial advisers and managers will typically advise reducing or even eliminating debt. This saves on interest payments while improving the balance sheet.

From the viewpoint of those losing their jobs through no fault of their own, things look a little different. For a middle class family going from a monthly income of $5,000 ($60,000 annual salary) to $1,400 per month, the question becomes how to pay the mortgage, utilities, food and job-search expenses. How does this affect the rest of us?

When asked what was the next most important commandment after ?Love thy God,? Jesus Christ answered ?Love thy neighbor as thyself.? He explained this with the parable of the Good Samaritan, showing that everyone, even the most despised and lowly, is our neighbor. In other words, Christians especially are called on to show compassion and practical help for those in need. And yes, compassion usually does cost money. The Samaritan pledged his personal credit for the injured man?s recovery. Would we do the same?

It all boils down to following Christ or following financial advisers. The GOP legislators choose to follow the money, as they seem to do so often. None of that Good Samaritan stuff for them.

This Nov. 4, I hope voters will look at candidates and check how they really behave, and who they follow ? God or Mammon.

? Jack Burke

Salisbury

Common sense needed

So sad, the responses of Aug. 19 to my ?common sense suggestions? (Letters, Sept. 14). Some espouse absolutely ridiculous suggestions, diverting and avoiding my suggestions of dropping from 170 state representatives in North Carolina to one per county or 100 ? stopping them from getting elected simply because they were the only ones running ? having one US senator and one US House rep per state and, finally, common sense term limits for all elected officers, federal, state and county.

Alas, it is their type of nonsensical diversion tactics/ideas that will keep ?common sense? reform from happening and being brought to the forefront and enacted.

The forefathers never envisioned a few dozen billionaires being able to advertise and try and sway/buy an election and buy candidates and favors. So an amendment to the Constitution to put in place a one-term limit on all elected offices is a must. Don?t be flippant; stick to the issues at hand. You?re not elected by the people and for the people when you have no one running against you and you win by default.

? Ed Miller

China Grove

Beware of balloons

Along with Whitey Harwood?s excellent suggestions for alternatives to balloons, I?d recommend the website www.balloonsblow.org. There are numerous alternatives to balloons, which pollute the environment and harm wildlife.

? Joanne Bryla

China Grove

New York district judge Thomas Griesa has declared Argentina in contempt of court, due to the nations actions in attempting to change debt jurisdictions as a result of the ongoing judicial conflict with holdout investors presided over by the US magistrate.

The justice deferred the imposition of financial penalties worth up to 50,000 dollars a day for a later date.

But he issued a clear warning that Argentina must stop efforts to get around his rulings by making payments locally.

These proposed steps are illegal and cannot be carried out, Griesa said, his voice rising, during a court hearing in lower Manhattan.

Those steps, he said, include legislation Argentina passed that would allow it to replace Bank of New York Mellon Corp as trustee for some restructured debt with Banco de la Nacion Fideicomiso while allowing a swap of that debt for bonds payable in Argentina under its local laws.

Griesa ruled that the country had not followed the courts orders following the passing of a law which seeks to remove the Bank of New York as Argentinas financial intermediary to pay bondholders, currently unable to receive funds for debt servicing.

He went ahead with the contempt ruling despite warnings from the government to US Secretary of State John Kerry that it could constitute interference in Argentinas sovereign affairs.

Plaintiff bondholders, led by Elliott Management Corps NML Capital Ltd and Aurelius Capital Management, have urged Griesa to consider unspecified non-monetary sanctions that could push the country to comply.

Those sanctions might, for instance, include barring Argentina from doing business with US banks, though such a ruling would likely engender fresh litigation over whether Griesa has the authority to do so.

Q I am a 20-year-old student. I earn money by doing part-time jobs. Am I eligible to get a credit card?

Hyder Ali, Hyderabad

It will be difficult for you to get a credit card as minimum annual income that you need to earn for getting a credit card is Rs 3 lakh. Even though most banks display a lower income criteria, in actual practice it is difficult to get a credit card without proven income levels of Rs 3 lakh per annum

Alternatively, you can apply for a secured credit card against your term deposit, provided you have a term deposit in the same bank that provides the secured card. These cards are 100 per cent guaranteed credit card against the term deposit. These cards offer a credit limit of up to 80 per cent of the deposit. Some of the banks issuing these secured credit cards are ICICI Bank, Axis Bank and SBI.

Q My wife is the owner of a shop, which was bought by me for her. She sold the shop after five years and had made a gain of `5 lakh. The proceeds of the shop have been deposited in our joint savings bank account. She is a homemaker and does not file income tax returns. I want to know whether she needs to file an IT return and pay income tax or whether I have to show the capital gains in my return and pay the tax on the property in my IT return.

CR Raju, Vizag

As per the provisions of Section 64, any income arising from the transfer of assets made to a spouse without consideration has to be included in the income of the spouse who has given such money. In your case, the money paid by you for purchase of the shop is treated as gift for this purpose. So the long term capital gains made on the sale of such shop is required to be included in your income. Please note that you will be entitled to take the benefits of indexation on cost of such property. You can also claim exemption under Section 54F by investing the sale proceeds in a residential house property or under Section 54EC by investing the indexed capital gains in capital gains bond of REC or NHAI.

Q I have a property in my 65-year-old mother’s name and we wish to take a loan of around Rs 6 lakh. The market value of the property is Rs 40 lakh. Please give more details about it.

Sridhar Chennai

Reversed Mortgage loans are extended by scheduled banks and housing finance companies. The reverse mortgage loan is secured by way of equitable mortgage of residential property.

Your mother should be the owner of a self-acquired and self-occupied house or flat. The residential property should be free from any encumbrances and the residual life of the property should be at least 20 years.

The loan is provided through monthly/quarterly/half-yearly/annual disbursements or a lump sum or as a committed line of credit or as a combination of the three. The maximum lump sum, which your mother can take, is restricted to 50 per cent of the total eligibility amount. There are no restrictions to the end use of the loan taken under reverse mortgage.

The maximum tenure of the loan is 20 years. The amount of loan can undergo revisions based on re-valuation of property at the discretion of the lender.

Your mother can continue to use the residential property as her primary residence till she is alive.

Harsh Roongta is CEO of Apnapaisa.com. You can send in your queries to movingmoney@deccanmail.com.

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Dollar should be replaced by use of several currencies in global trade and investment

The Bretton Woods system was born 70 years ago and died 44 years ago – too short a life. Nonetheless, in the post-Bretton Woods era, the world has enjoyed the benefits of floating exchange rates, but it has also experienced panics, such as the Mexican and Asian financial crises, the collapse of the dotcom bubble and the 2008 global financial crisis. We have seen technological developments nobody dreamed of, along with geopolitical power shifts and competition for world economic power.

The international monetary system has many unsatisfactory aspects. Major currencies function as international money (the medium of global transactions, store of international wealth, international unit of accounting). Each central bank has responsibility over its currency and pursues policies that are in the national interest. Little or no regard is paid to the global interest.

For many years, we have had globalized financial markets, with generally open capital accounts and free capital flows that provide diverse investment opportunities and funding sources. However, we have also seen that capital flows are volatile and even dangerous, particularly for small and medium-sized open economies. Since Bretton Woods broke down, there has been too much monetary and financial instability.

The economic dominance of the United States has led to the dollars international monetary dominance. That has yielded privileges for the US in running large, sustained current account and budget deficits. Lacking a better choice, emerging markets finance US deficits in return for monetary and financial stability and as a source of safe haven assets.

Though improving, US economic numbers are neither truly better nor more stable. In addition, the US has monetized its budget deficits, which is usually a recipe for monetary and financial disaster in jurisdictions with no such currency privileges. Six years after the global financial crisis, the bubble that has not burst is likely the market for US Treasury bonds and other G7 Treasury bonds.

We face an unstable equilibrium in the international monetary system with huge risks for the global economy. We must quickly deal with these weaknesses.

1. National monetary policies should be better coordinated.

The US is reversing, or tapering, its quantitative easing policy. The markets expect the US Federal Reserve Board to raise interest rates in 2015. All things being equal, this move could cause huge cross-border capital flows. Emerging economies that have suffered from a huge dollar trap (the accumulation of dollar reserves) may experience sudden capital outflows.

Red flags have appeared. Eurozone bonds have fallen to 200-year lows and emerging markets are particularly vulnerable. We all know that fiscal and monetary stimulus with lax regulations will promote artificial growth and asset bubbles, and we also know that once these themes slow or reverse, the consequences could be significant. We need better coordination to ensure stability.

2. Information sharing and disclosure should be improved.

The Special Data Dissemination Standards and General Data Dissemination Standards are good efforts by the International Monetary Fund to institutionalize data sharing, but more could be done.

The most striking issues over the past 44 years have been that: a) many central bankers and finance ministers have not had adequate mandates to share data and b) if such mandates exist, they are often unwilling to share, particularly during times of economic stress. The IMF must strengthen its sanctions and incentives to ensure that necessary, quality information is shared among member countries.

3. Capital movements should be better monitored and managed.

Yield-driven behavior by investors is exacerbating cross-border capital flows, which can destabilize both national and international financial markets. Countries should sequentially liberalize their capital accounts in line with efforts to strengthen their governance. The IMF should encourage countries to adopt suitable policies, such as Tobin tax-like approaches, to sterilize capital flows.

4. Cooperation and coordination should be at all levels.

International cooperation and coordination should be a strong focus. The IMF and Financial Stability Board should share data, analytical frameworks and staff, and all nations should do likewise.

I stress this point because this is a political process, and we are disappointed to see that quite often, national interests override the global interest. Changing that requires extraordinary political vision, wisdom and courage.

5. The role of a multi-currency system should be recognized.

We should seek an international reserve currency that is disconnected from any individual nation and can be neutral and stable in the long term. Until that point, a multi-currency system should be used more in international trade, investment and payments.

Shifts in economic power are unavoidable and currencies should reflect that, as was the case in the 1940s. At the very least, such a move will supplement the current dollar-dominated system.

Returning to Bretton Woods or passively retaining the current system would both be unwise. With effort from all countries, we may be able to create a more robust and flexible system. We must also remain on guard against panics and shocks.

The author Liu Mingkang is the former chairman of the China Banking Regulatory Commission.

Monetary policy

September 30th, 2014

THE members of the Federal Open Market Committee are not overly fond of being stuck at the zero lower bound (ZLB). Since December of 2008, the Feds preferred policy lever, the federal funds rate, has rested between 0% and 0.25%: effectively the lowest possible level, since the zero return on cash means that the central bank could not effectively deploy negative interest rates. Policy-making since then has been a monetary mess. Whether justified in their view or not, Fed members consider unconventional policy action, like asset purchases or promises to leave interest rates low for long periods of time, to be riskier than normal interest-rate policy. The FOMC fears that both encourage reckless borrowing and distort markets.The bar to easing via unconventional policy is therefore higher, and both the recession and recovery were more painful as a result.

Ill put things more plainly. Central bankers should hate the ZLB. Whether or not policy at the ZLB tends to raise financial instability, the central bank simply cant do its job when its main interest rate is at zero. Since December of 2008 the Fed has failed miserably on both of its primary objectives: maximum employment and stable prices. The unemployment rate has at no point been anywhere near the Feds estimate of the full-employment rate. And the Feds preferred inflation gauge has spent most of the past six years either below or well below the 2% rate of annual growth the Fed claims to want. In a ZLB world the Fed does not do its job. That is a serious problem for the American economy and the Fed. It is quite possibly the most serious problem the Fed could conceivably have.

So why is the Fed so determined to find itself right back at the ZLB in future, assuming it ever leaves it in the first place?

In the FOMCs most recent economic projections, the median expectation for the longer run level of the federal funds rate is 3.75%. Now thats according to the so-called dot plot, which virtually every member of the FOMC suggests markets should ignore (and yet they include it…). But even if we assume that the highest dot is Janet Yellens and that by 2017 she will be exerting dictatorial control over the Fed, that only takes the fed funds rate to 4.25%. Markets are also betting that rates will come to rest around that level.

But this is not good at all. The fed funds rate rose to 5.25% prior to the Great Recession and nonetheless tumbled to the ZLB. The 2001 recession was far milder, yet in battling it the Fed reduced interest rates from a high of 6.5% down to 1%, and felt it necessary to leave the rate there for some time. There is plenty of uncertainty regarding precisely how much cushion one needs between the federal funds rate and the ZLB, yet we can be pretty safe in concluding that roughly four percentage points counts as not nearly enough.

Why is the longer run level going to be so low? There are two contributing factors. One is that the real, inflation-adjusted rate that balances supply and demand in the economy is lower than it used to be–because expectations of long-run growth are slowing, or due to structural factors that contribute to excess saving, or something else entirely. But for any given real rate the nominal rate (that is, the one the Fed actually sets) can be made arbitrarily high simply by changing the long-run rate of inflation that the central bank is targeting.

So lets be clear about this. The central bank can choose the inflation rate it wants for the economy and in doing so can push the longer run federal funds rate arbitrarily high, so there is absolutely no reason why the Fed ought to find itself stuck with too low a full-employment interest rate. Now one could argue that central banks struggle to control inflation when they are stuck at the ZLB, and it would be hard to argue against that given how consistently the Fed has undershot its target over the past six years. In order to maintain control over inflation, then, the better to achieve its mandate and shore up its credibility, one would think the Fed would want to be damn sure to get well away from the ZLB–by, for example, delaying any move to reduce monetary accommodation while growth is strengthening until inflation rises to the desired level.But if we go back to the Feds economic projections, we see that the FOMC is planning to raise its rates steadily over the next three years despite the fact that inflation is expected to stay below 2% over the whole of that period!

The Fed, which desperately needs more inflation in order to get the longer run federal funds rate up so that it can do its job, is planning, publicly and deliberately, to raise interest rates in such a way that its preferred inflation gauge isat most 2% for the next three years.

Again: the Fed is going to intentionally undershoot its inflation target on average over the next three years, thereby ensuring that it returns to the ZLB during the next downturn, thereby ensuring that itcontinues to undershoot its inflation target while also missing its maximum employment target. And one cant be completely sure, but I think the reason they intend to do this is because they fear that setting and hitting a higher inflation target would call into question their credibility.

For more on the bizarre behaviour of the Federal Reserve on this front, see Brad DeLongs excellent post here. There is a long list of reasons to think that tightening policy too fast is far riskier than tightening too slowly: there is strong evidence of considerable labour market slack in America and abroad, there is considerable disinflationary pressure radiating out from Europe and emerging markets, and the number of potential geopolitical shocks seems to grow by the day. The FOMC seems to be living in a different world altogether.

  1. Have family financial conversations often. Discuss short- and long-term goals, debts and challenges.
  2. Create a budget. Make sure its realistic so you can stick to it. Revisit that budget regularly, especially following life changes like the birth of a child, changes to dependent care needs, or a new job.
  3. Focus on small tasks. Start by eliminating debt, like credit card balances. Pay more than your monthly minimum and use the credit card wisely. Consider a lower interest rate consolidation option if you carry debt on more than one credit card.
  4. Meet with a financial professional. Define your goals: maybe its saving for retirement, a childs education or a down payment on a new car.
  5. Check out the Better Money Habits website. You can find unbiased, engaging and informative resources at your fingertips, so you can learn what you want in a way that best suits your goals.
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