THIS is not the time to splurge on more debt just because it is now more affordable to borrow owing to SA's near 40-year low interest rates. Rather consumers should use the lower debt-servicing costs to repay debt and also save more, according to executives at SA's largest four banks.

The South African Reserve Bank last week unexpectedly cut its repo rate - the rate at which it lends to banks - by 50 basis points to 5%, triggering a similar cut in commercial banks' prime lending rates from 9% to 8,5%.

An equity analyst at Cadiz Asset Management, Adrian Cloete, calculates this cut on its own can potentially reduce the net interest income of the big four banks by up to R600m, although they can make up by expanding non-interest revenue such as fees and commissions.

But with the ratio of household debt to disposable income still uncomfortably high at almost 78%, the bankers are wary of encouraging customers to borrow more even though they have recently been marketing unsecured loans.

Absa retail markets head Arrie Rautenbach says statistics from the South African Savings Institute showing the low level of household savings as a percentage of disposable income are worrying.

The institute says the ratio of household savings has fluctuated between 2,7% in 1991 and -0,2% in the first quarter of this year, with the ratio of debt to disposable income reaching a high of 83% in 2008 and continuing to stay high.

Mr Rautenbach says Absa, which has already cut its prime overdraft and mortgage rates by 0,5% to 8,5%, wants its customers to reduce debts and save. "We should not be deceived by the effect of very low interest rates, and by a lower inflation rate, into believing that we now have a financially strong household sector," Mr Rautenbach says.

"Very significant household financial risks still exist. The lowering of the debt to disposable income ratio and raising of the savings rate, is a key requirement to strengthen household financials," he says.

First National Bank CEO Michael Jordaan also makes the same point on savings, and says economic conditions are tough and will remain uncertain for the rest of the year.

"I would (therefore) not encourage consumers to take on new loans simply because the interest rate environment is benign," says Mr Jordaan. "Economic conditions will remain tight through 2012 and consumers should be wary of new expenses. SA's primary trading markets in Europe, North America and China have shown signs of slowing demand," he says.

Nedbank CEO Mike Brown says the rate cut does not imply an economic boom is about to take place because the global economy is still in trouble. When Reserve Bank governor Gill Marcus announced the rate cut last week, she also revised gross domestic product growth this year downwards from 2,9% to 2,7%, even though some economists say growth will be less than 2%, rising to 3,5% next year.

Mr Brown says Europe's long-term structural problems will take several years to resolve, while other markets are increasingly seeing the effects of the slowdown in the US and the Brics (Brazil, Russia, India, China and SA) countries.

Standard Bank's head of the personal and business banking unit in SA, Peter Schlebusch, says the bank is also urging customers to take advantage of lowered servicing costs to pay debt.

He warns, however, that lower rates might not necessarily mean an immediate effect on impairments, which remain at elevated levels at all the big banks.

"If we see an improvement in economic activity and incomes improve, we could see improvements in impairments," he says.

Mr Schlebusch says that the other side of the coin is that low interest rates can potentially worsen the financial plight of pensioners who depend on investment income for survival.

"Pensioners will be struggling as the interest rate yield on their investments will be low, which means they have to be more discerning at how they can maximise their investment yield," he says.

Multimanagement head at Absa Investments Johan Gouws says investors who have a long-term investment horizon of more than five years and who need to grow their capital, should invest in flexible and regulated products such as unit trusts.

kamhungas@bdfm.co.za