The government wants to slash interest rates on personal loans by about eight percentage points, and wants you to pay about three percentage points less in interest on your credit card and store card debt. But there has been a mixed response to the proposal, which is contained in draft regulations on limiting the interest rates and fees charged in terms of the National Credit Act (NCA).
Some say the regulations do not go far enough to help the poor, who pay the most for credit, while others say there is no rational basis for how the rates will be capped.
The regulations propose cutting the maximum interest rate that applies to unsecured credit transactions (personal loans) by 7.9 percentage points and cutting the maximum interest rate that applies to revolving credit facilities (overdrafts, credit card debt and store card debt) by 2.9 percentage points.
Deborah Solomon, a debt counsellor from online debt counselling portal DCI, says the cuts are “not good enough”.
She says the proposals show that the Department of Trade and Industry (DTI) realises that credit providers’ profit margins are too high and that reckless lending and reckless borrowing are rampant in the credit market. In light of this, Solomon says it is a concern that the DTI has proposed only slight relief for consumers who use small, short-term loans (up to R8 000 over six months). Currently, these loans can attract a maximum interest rate of five percent a month. The regulations propose that the maximum rate changes to five percent for the first loan and three percent on subsequent loans in a calendar year.
Not only is this “ridiculously high”, but Solomon says consumers experience the worst abuses when taking out microloans. “They start with a loan of, say, R2 000. After they’ve paid two or three instalments, the credit provider offers the consumer another loan, and what started out as a small loan becomes an ever-growing debt. In this way, the loan is used as a revolving credit facility, at five percent a month, or 60 percent a year.” Reducing the interest rate does not address the “rolling” of loans, she says.
It will also not address the interest charged on credit life insurance linked to loans, or the fact that credit providers charge the maximum service fees or loan initiation fees, all of which affect low-income consumers, she says.
Joan Fubbs, an African National Congress Member of Parliament and the chairperson of the portfolio committee on trade and industry, says the regulations limiting the maximum interest that consumers can be charged constitute an essential piece of legislation, because preventing borrowers from becoming ensared by unscrupulous lenders and stemming reckless borrowing will ensure the social stability of the country.
During engagements on amendments to the Act, the high cost of credit was identified as contributing to the high level of indebtedness. The main issues of concern were the high cost of credit life insurance and the application of the in duplum rule, which includes costs such as collection fees, Fubbs says.
But Anton Alberts, the Freedom Front Plus’s MP on the portfolio committee on trade and industry, says the cost of credit does not inhibit borrowers. “When people are in trouble, they go into debt, irrespective of what it costs, because they’re fighting to survive. People are obtaining credit to cover their living expenses, which is very dangerous – like a Greece scenario.”
The cost of credit can be used as a tool to inhibit the over-supply of credit, he says, but it doesn’t necessarily inhibit conduct. “It can’t be looked at in isolation, either.” It must be viewed in the context of the energy crisis and the high cost of doing business in South Africa. All of these and other factors destroy jobs and force consumers to use credit for survival.
Geordin Hill-Lewis, the Democratic Alliance MP on the portfolio committee, says the proposals are “not pro-poor”. He says it is disappointing that the formula used to calculate the maximum interest rates on unsecured credit has been retained (see table – link at the end of the article).
“This [way of calculating the maximum interest rate] makes it difficult for a consumer to predict if they will be able to pay when the repo rate goes up. Consumers think that when the repo rate goes up by one percent, so too does the cost of credit. But on unsecured credit it goes up almost two percent.”
Hill-Lewis says he has a problem with a formula that has an exponential. as opposed to a direct, relationship with the repo rate. “Why not use a simple formula like the one used to calculate the maximum interest on a home loan?”
The regulations propose a change in the way that the maximum interest on home loans is calculated. Instead of the repo rate x 2.2 plus five percent, it proposes the repo rate plus 12 percent.
Stephen Logan, the chief executive of Fair Credit, which is a non-profit company that lobbies for fair credit, says he would favour a simple formula. “The reality is that most consumers are financially illiterate,” he says.
Consumers fail to distinguish between different types of credit and consequently don’t use credit appropriately, Logan says. “We have consumers using unsecured and short-term loans to buy cars and renovate their homes. The poorest consumers rarely access the cheaper types of credit, such as home loans, and end up using unsecured and short-term loans, thereby paying the most,” he says.
Logan says he broadly supports the regulations, because the cost of credit is too high. “But a lot more needs to be done to improve access to the right types of credit,” he says.
The NCA has failed to level the playing field and help consumers access cheaper forms of credit. Short-term loans are expensive unsecured loans. There is little if any justification for the vast difference in cost between them, he says.
Before the NCA, the banks were careful to avoid taking advantage of exemptions under the Usury Act, but after the NCA effectively legitimised expensive loans, they piled in, Logan says.
Although policymakers should be applauded for wanting to bring down the cost of credit, aggressively pursuing this objective could cause unintended problems in the market, Logan says.
Hennie Ferreira, the chief executive of MicroFinance South Africa (MFSA), says the regulations will adversely affect the turnovers of microlenders by up to 24 percent.
“Credit policy is not business-friendly, and this has an adverse impact on consumers. By making credit cheaper, you do not improve access to credit for high-risk consumers. The opposite happens. You make it more affordable for people with security and low risk. Price is a reflection of risk. If you bring down the cost of credit, only the privileged and the elite will enjoy access to cheap credit. If credit is too cheap, you can’t provide for write-offs. You have to price for risk and the cost of doing business.”
He says the draft regulations will be perceived as a win politically, but they will force those who are financially excluded to use “underground” [unregistered] lenders.
Ferreira says the regulations will force some registered lenders underground.
The MFSA has requested a meeting with the DTI. Ferreira says the MFSA wants to understand how the DTI arrived as its numbers. “We want to engage rationally, and we want a fuller perspective on the table. If we don’t get this right, consumers will be exposed to a booming underground market, which is already thriving, and it doesn’t benefit consumers or the fiscus.”
* Interested parties have until July 24 to submit written comments to the DTI. Address your submission to: the Director-General, Department of Trade and Industry, Private Bag X84, Pretoria, 0001.
DEFINITIONS
Credit facility: the overdraft or the credit available on a store card or credit card.
Developmental credit agreement: a loan for the development of a small business or unsecured low-income housing.
Incidental credit agreement: an agreement whereby goods or services are supplied to a consumer and interest becomes payable only once the goods or services have not been paid for within a predetermined period. An example is interest on an outstanding doctor’s bill.
Mortgage agreement: a home loan.
Short-term credit transaction: a transaction where the amount does not exceed R8 000 and the entire amount must be repaid within a maximum period of six months – for example, a microloan.
Unsecured credit: a credit transaction where the debt is not supported (or secured) by a pledge or other right in property, or suretyship, or any other form of personal security. An example is a personal loan.