Debt levels are becoming a massive concern, which is why consumers should be more vigilant than ever and avoid overcommitment, says Georgina Crouth.
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, given the effects of the devastating drought, skyrocketing food costs, the decision to grant Eskom a tariff increase, the hike in the fuel levy, looming job losses and unemployment at more than 25 percent, prospects for this year are looking grim.
During such bleak times, issues of credit granting are critical because consumers are feeling more exposed than ever. In desperation, people are taking on more debt simply to survive. And they’re turning to unsecured personal loans – in some cases, simply 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 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 coming: the regulator commissioned a study into unsecured personal loans in 2012 – and creditors knew what was coming.
I attended a two-day conference last week in Sandton, presented by the trade department’s 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) 23.45 million consumers are credit-active – 57.7 percent (13.53 million) of them are in good standing, but 42.3 percent (9.91 million) are classified as impaired consumers because they have some form of ‘impaired record’.”
This impaired record could mean anything from being behind on one or a number of payments.
Mortgages – as in asset-building – account for R862.23 billion of that R1.63 trillion debt, but R361.34bn is accounted for by secured debt; R212.04bn by credit facilities; R3.23bn by short-term loans; R32.25bn by developmental debt (student loans); and, worryingly, R161.76bn by unsecured credit.
“The number of accounts listed at the (credit) bureaus at the end of September was 80.6 million, 74.9 percent (60.37 million) were in ‘good standing’ but 25.1 percent (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 credit provider reports that she spent R400 a month on food and had 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 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, 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 overdue. One of the accounts shows a worst position of nine months in arrears. The total monthly instalments on these retail accounts were R4 475. The report shows between October 27, 2014 and October 29 last year, Ms X took out 15 loans. Despite the information on her credit report, her loan application was also approved.
Evidently, these affordability assessments are being flouted by some credit providers.
The regulator conducted more than 110 onsite visits in the 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. Pay slips, bank statements and credit reports are often missing or out-dated. If there is a credit bureau report, its contents are often ignored. In the short-term, 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 also found) overcharging on interest and fees, payment processing fees are passed on to the consumer. Loan splitting is done to maximise returns; and consumer pin numbers are retained in client files.”
Jacqueline Boucher, a manager in the NCR’s investigations and enforcement department, says they raided credit providers in Limpopo and the Western Cape. “(In the Cape) raids were conducted on entities which would generally service farm workers. In Limpopo, eight individuals were arrested. During those raids the suspects were found in with 930 bank and pension cards, and 149 ID books. We’ve also raided debt counsellors running call centre operations to ensure 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… misselling of credit insurance; lending using social grants; debt farming (more add-ons to the cost of credit); illegal wage garnishing; inclusion of prohibited fees in cost of credit; and reckless lending.”
Hetisani said the onus is on the credit provider to ensure the consumer is able to service any new debt. They must “take practical steps to assess discretionary income to determine financial means and prospects”; validate gross income; and consider existing financial obligations.
“Credit providers must calculate the consumer’s existing financial means, prospects and obligations as envisaged in… the act. The minimum living expense norms must be utilised when calculating the existing financial obligations.”
In as much as consumers have rights, they also have obligations to disclose their financial status honestly. But some people are so desperate they will approach whoever is prepared to give them money.
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 only borrow from registered credit providers.
Don’t be greedy: only borrow what you really need. Don’t be tempted to take more than that.
In your interest: avoid spreading payments over too many months as 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 correct any errors. Under the NCA you are entitled to one free copy of your credit report each year. Additional copies cost R20 each excluding VAT.
* Georgina Crouth is a consumer watchdog with serious bite. Write to her at [email protected]. Check out more helpful consumer tips and advice at [email protected]
**Follow Georgie on Twitter: @askgeorgie
The Star