What happens to Zuma’s loan now that VBS is under curatorship?

The South African Reserve Bank announced this weekend that VBS Mutual Bank – the lender that provided former president Jacob Zuma a home loan to pay for the security upgrades to his Nkandla homestead – would be placed under curatorship.

The reason the for the move falls on ‘severe liquidity issues’ at the bank, the Reserve Bank said, after its senior management failed to successfully handle the group’s rapid growth, and meet its debt obligations.

According to Reserve Bank governor, Lesetja Kganyago the bank started hitting increasing liquidity challenges over the last 18 months, which put the group under intense regulatory scrutiny.

“The liquidity challenges emanated from the maturity of a large concentration of deposits from municipalities and was exacerbated by the termination of other sizeable deposits and the inability to source sufficient funding timeously,” he said.

At the core, the bank collected a large number of short-term municipal deposits, and lent the funds out over a long-term, which was an incredibly risky move. When municipalities came to collect their money, the bank could not pay.

VBS was granted a mutual banking licence in 2000, and has been operating for 25 years. It came into the national spotlight when it granted Zuma a R7.8 million loan to pay off debt for security upgrades done to his Nkandla home in 2016.

What happens to the loan?

When a bank enters into curatorship in South Africa, section 69 of the Banks Act gives the curator extensive (but still limited) powers to turn the business into a functioning operation again.

Kganyago has insisted that it will be business as usual at VBS while the curators try and turn things around, but there are measures that can be taken to help the process along – one of which is cancelling agreements.

The minister of finance, in appointing curators, can empower them at his discretion, but the main goal is to restore liquidity – this can be done by suspending or reducing the right of creditors of the bank to claim or receive interest on money owed to them, or to make payments to creditors in any manner they deem fit.

Notably, a the curators can also cancel any agreement between the bank and any party, or to cancel or extend any facility if it is deemed by the curator to not be adequately secure, or would not be repayable.

Regarding Zuma’s loan, the question of security and repayability has been raised before.

Financial experts raised their eyebrows when then-78 year-old Zuma was granted a loan for R7.8 million, questioning whether he would be able to pay the loan off at all.

While the terms of the loan were not publicly disclosed, financial advisors crunched some numbers and found that the amount, even paid over 20 years on a presidential salary, would be a risky contract, requiring Zuma to pay over half of his monthly take-home salary to service the debt.

However, Kganyago said that, for now at least, loan collections will continue as normal.

“VBS will remain open for business. The curator will ensure that all loans are collected as part of a normal collection process‚ but also‚ importantly‚ that lending and transactional banking continues.”

Read: Why your credit profile is so important

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What happens to Zuma’s loan now that VBS is under curatorship?