Nompumelelo Magwaza
DEBT Busters, one of the country’s largest debt management companies, has projected a drastic decline in the amount of credit granted, specifically by retailers, over the next four months.
The organisation, which has over 20 000 customers under debt management, said yesterday that the National Credit Amendment Act published last week would oblige credit providers to apply stricter criteria through an affordability assessment.
Debt Busters is part of Cape Town-based company, Intelligent Debt Management (IDM), which was founded in 2004. Since its inception, IDM has assisted more than 35 000 consumers struggling with debt.
Debt Busters is one of three sub-divisions in the group, together with BondBusters and Insurance Busters. Its main function is to provide debt management services.
The National Credit Regulator raised an alarm about the country’s state of consumer indebtedness caused by reckless lending and consumers not fully disclosing their affordability status. Now retailers and banks will have to make it their responsibility to check on consumers’ affordability.
Unsecured lending was also blamed for the collapse of African Investment Bank, which saw the closure of furniture stores such as Ellerines and Geen & Richards among others.
The furniture retail industry has also been the hardest hit in terms of consumers’ struggle to repay their debts.
But stricter credit-granting criteria applied by credit providers such as Absa, which bought the credit books of clothing retailers Woolworths and Edcon, have had a negative affect on retailers’ sales, particularly those of Edcon.
Edcon’s credit sales have fallen by 12.1 percent for the 13-week period to December.
The group’s credit sales made up 41 percent of total sales in the third quarter, down from 46.9 percent in the previous period.
Both Truworths and Foschini, which are also credit retailers, have seen a steady decline in their credit sales and an increase in their cash sales.
The Credit Bureau Monitor has reported that, for the quarter to September, of the 22.5 million credit-active consumers, 10.05 million or 44.7 percent have impaired records and are struggling to service their debt.
The National Credit Amendment Act will now demand that credit providers carry out affordability assessments before extending credit. This will include credit providers verifying consumers’ income by checking their last three bank statements and salary pay slips.
Credit providers must also make use of the ‘minimum expense norms’ table in the regulations to calculate the consumers’ existing financial obligations according to their gross monthly income.
About 83 percent of Debt Busters’ clients have retail accounts included in their debt counselling, and have an average of three retail accounts before taking on debt counselling.
Application rate
Some of these consumers have, on average, an amount of R6 400 outstanding on these accounts, paying at least R1 000 on a monthly basis towards their retail account debt repayments.
Kelli Knutsen, the marketing manager at Debt Busters, said the stricter affordability assessments would increase the application rate, as consumers would move from one credit provider to another in search for credit.
She stressed, however, that the rejection rate would also be on the increase as consumers failed to meet the criteria. “We anticipate a drastic decrease in the amount of credit granted by retailers for the first and second quarter of 2015.”
Knutsen said the new affordability tests would stop consumers who did not have the means to service their credit from slipping through the credit cracks due to a lack of affordability assessments.
According
to the latest MBD consumer financial vulnerability index released last month, which measures the state of consumers’ cash flow, consumers remained in the mildly exposed category.