Our economic woes are well documented and, with the country on the brink of a ratings downgrade to junk status, these issues have never been more pressing.
Finance Minister Pravin Gordhan’s Budget speech might have given consumers some respite, but with the effects of the devastating drought, skyrocketing food costs, national energy regulator Nersa’s decision to grant Eskom a tariff increase, the hike in the fuel levy, looming job losses and unemployment at more than 25%, prospects for this year look grim.
During such bleak times, issues around credit granting are critical because consumers are feeling more exposed than ever. In desperation, people are taking on more debt to survive. And they’re turning to unsecured personal loans – in some cases, just to buy food. Worryingly, many people are so desperate for the funds, they don’t think about servicing the debt, are dishonest in their applications, and suffer under the interest they are then charged. It’s a high-risk business either way.
The National Credit Regulator (NCR) – an agency of the Department of Trade and Industry (DTI) – which regulates credit granting in the country, put the brakes on access to credit on September 14 last year, to protect us from ourselves. These new amendments to the National Credit Act enhanced requirements for conducting affordability assessments. It’s been a while coming: the regulator commissioned a study into unsecured personal loans in 2012, and creditors knew what was coming.
Last week, I attended a two-day conference in Sandton, presented by the DTI agencies – the NCR, the National Consumer Tribunal and the National Consumer Commission – which explored consumer protection in the market.
Ngoako Mabeba, the NCR’s manager for statistics, painted a worrying picture of debt in South Africa.
“Consumers owed R1.63 trillion at the end of September last year. (About) 23.4 million consumers are credit active – 57.7% (13.5 million) of them are in good standing, but 42.3% (9.9 million) are classified as impaired consumers because they have some form of impaired credit record.”
This impaired record could include being behind on one or a number of payments.
Mortgages – as in asset-building – accounts for R862.23 billion of that R1.63 trillion debt, but R361.34bn accounts for secured debt; R212.04bn for credit facilities; R3.23bn or short-term loans; R32.25bn for developmental debt (student loans); and, worryingly, R161.76bn for unsecured credit.
“The number of accounts listed at the (credit) bureaus at the end of September was 80.6 million; 74.9% (60.37 million) were in good standing but 25.1% (20.24 million) accounts had impaired records,” he told delegates.
Building on this, Louisa Hetisani, the NCR’s manager for compliance, looked at the affordability assessments and whether they were being enforced.
Two of her case studies were sobering. The first cites the example of a “Ms Y”, who lives in Mpumalanga. Her net income was reported as R1 300. No salary advice was found in her file.
The affordability assessment form of a credit provider reports that she spends R400 a month on food and has a disposable income of R900. No other expenses were taken into consideration, such as accommodation, medical expenses, transport etc.
A copy of her credit report shows that between August 5, 2014 and November 3 last year, Ms Y took out 15 loans with the same credit provider. She was then granted a loan of R1 300 on November 30, repayable over three months with monthly instalments of R577.45.
The second example is that of Ms X, who lives in the Free State. According to her salary advice, her net salary was R3 066.84. On November 30 last year she applied for a loan of R3 500, repayable over three months with monthly instalments of R1 051.86.
Her credit bureau report shows she had three retail clothing accounts that were all overdue. One of the accounts shows a worst position of nine months in arrears. The total monthly instalments on these retail accounts was R4 475. The report shows that between October 27, 2014, and October 29 last year, Ms X took out 15 loans. Despite the information on her credit report, her loan applications were approved.
Evidently, these affordability assessments are being flouted by some credit providers.
The regulator conducted more than 110 on-site visits in all nine provinces since September last year to assess compliance with the affordability assessments.
Hetisani says they found few cases of compliant entities: “The old way of doing things still applies. Lending is done on the basis of trust – (people are being given loans because) I know this guy. He has been my client for five years and I know where he stays. Payslips, bank statements and credit reports are often missing or outdated; if there is a credit bureau report, its contents are often ignored. In the short-term space, the loans have taken a ‘revolving nature’. It’s not unusual to observe 12 short-term loans on a consumer’s profile for a one-year period – usually from the same lender.
“Loans are often granted to consumers under debt review, administration or where financial distress is clearly evident from the credit bureau report. Expenses seem to be under-declared, with very little use of the minimum expense norms table. In most instances, disclosure of the credit-cost multiple is absent. There is often poor disclosure relating to insurance, and charging VAT while not registered as a VAT vendor.
“(We’ve also found) overcharging on interest and fees, payment processing fees are passed on to the consumer; loan splitting is done to maximise return on fees; and consumer PIN numbers are retained in client files.”
Jacqueline Boucher, a manager in the NCR’s investigations and enforcement department, said they raided credit providers in Limpopo and the Western Cape.
“(The Western Cape) raids were conducted on entities which would generally service farmworkers. In Limpopo, eight individuals were arrested. During those raids, the suspects were found in possession of 930 bank and pension cards, and 149 ID books.
“We’ve also raided debt counsellors running call centre operations to ensure that the provisions of the NCA and debt review were not being flouted.
“(What we’ve found in our raids are high) levels of consumer over-indebtedness, reckless lending and borrowing, the overpricing of credit life; mis-selling of credit insurance; lending using social grants; debt farming (more add-ons to the cost of credit); inclusion of prohibited fees in cost of credit; and reckless lending.”
Hetisani said the onus was on the credit provider to ensure the consumer was able to service any new debt.
Wise up - here's how
KNOW WHAT YOU’RE GETTING YOURSELF INTO: You have the right to a pre-agreement statement and quotation when seeking credit, so you know what is expected prior to signing. If you don’t understand, ask.
BE HONEST: Make sure that you honestly disclose all the information required by the credit provider, and borrow only from registered credit providers.
DON'T BE GREEDY: Borrow only what you really need. Don’t be tempted to take more than that.
IN YOUR INTEREST: Avoid spreading payments over too many months because it will cost you more in the end.
ARE YOU COVERED? If there is credit insurance, familiarise yourself with the terms to avoid surprises when you most need the insurance.
BE REALISTIC: Create a monthly budget and stick to it – work out how much income your family earns and what your total expenses are each month. Will you be able to pay for your new debt once you’ve covered all your expenses?
START SAVING: Always include savings in your budget.
KNOW YOUR CREDIT STATUS: Check your credit report regularly. This way you’ll be able to identify any errors and correct them. Under the NCA you are entitled to one free copy of your credit report a year. Additional copies cost R20 each, excluding VAT.