A member of Parliament’s portfolio committee on trade and industry has slammed as “too high” the maximum interest rates on credit agreements set out in the new regulations under the National Credit Act (NCA) and has asked the committee chairperson if the committee has the power to change the regulations.
Following a meeting this week briefing committee members on the regulations by the Department of Trade and Industry (DTI), ANC member of Parliament Joan Fubbs, the chairperson of the committee, has sent a letter to Parliament’s chief legal adviser seeking opinion on the committee’s power to amend regulations that have already been finalised.
Fubbs’s letter says the committee is of the opinion that the regulations under the NCA require further amendments “to ensure that the constitutional principle of equity be observed and that … human rights, as reflected in the Bill of Rights in the Constitution, also be taken into account”.
The regulations are the work of the DTI and the product of consultation with all stakeholders in the credit industry.
The decision to review interest rates was made in Parliament in 2013 after public hearings on the NCA. This is the first review of the maximum interest rates under the NCA since 2007, when the Act came into force. The final regulations, presented in Parliament this week, become effective on May 6.
According to the DTI’s presentation to MPs this week, research showed that “very high” interest rates played a role in the over-indebtedness of consumers.
In the case of some forms of credit, the maximum interest rates will decrease in May. But Dean Macpherson, a Democratic Alliance MP, says the rates are “totally unacceptable”.
“Who negotiated these rates with the financial institutions? As a base, banks make 3.5 percent off the repo rate. How do the banks cost and structure their credit? The massive difference between the prime lending rate [currently 10.25 percent] and 24 percent [the maximum interest rate] on unsecured credit can’t be risk and overheads.
“What are reasonable limitations in a developing economy? Whether it’s secured or unsecured credit, 33 percent is unacceptable. I agree that unsecured credit needs to be unattractive, but credit to finance assets or a developing business should not be unaffordable.”
In response to the charge that the maximum rates are too high, Siphamandla Kumkani, the director of credit law and policy at the DTI, described them as “a work in progress”.
“We had to perform a balancing act to ensure that businesses don’t close and jobs aren’t lost. We’ve agreed [with industry] on a phased-in approach, but the aim is to bring rates down,” Kumkani said.
On the maximum rates for developmental credit (credit for a small business and low income housing) and mortgages, Kumkani said they are “quite steep” and that the DTI is looking at reducing them gradually. “But we also don’t want banks saying, ‘The developmental [credit] section is closed down because interest rates are too low’. So we had to come to a compromise. But we concede we need to take them down.”
Lesiba Mashapa, the company secretary of the National Credit Regulator, said government needed to balance the interests of consumers and credit providers. “There was a substantial reduction of the interest rate on unsecured credit – on short-term credit the current five percent a month gives you an annualised interest rate of 60 percent. That is reducing by 22 percentage points [to 38 percent].
“We had to take into account the cost of funding by credit providers, because some have to raise funds in the capital markets. And they have operational costs. If we had introduced radical proposals, it would have meant that some would have to close down. But we take into account that the cost of credit is still very high. Any further reductions will have to be phased in so that we continue to protect industry too.”
But Macpherson says the reasons provided by government officials are weak. “To say ‘banks have overheads’ is weak. And I don’t think it’s acceptable to say ‘we had to meet half-way’ and phase in reduced rates. I don’t accept this reasoning. We need to speed things up.
“There are more credit-active consumers in South Africa than there are people who are employed. People are indebted, with no ability to pay back their debt, and the statistics show only the debt owed to registered credit providers.”
Anton Alberts, a Freedom Front Plus MP, said there was a need for regulatory impact assessment to ascertain the likely impact [on industry when cutting interest rates]. He asked that the committee be shown a report on this issue by Dr Penny Hawkins before it meets again on the interest rate regulations. Hawkins is the managing director of Feasibility, an economic policy and research company.
McDonald Netshitenzhe, the acting deputy director general at the DTI, said government’s responses should not be perceived as “defensive”. “We would like to be pliable [when it comes] to the committee’s concerns,” he said.
The regulations on interest rates form part of “a package of solutions” to address the problem of over-indebtedness in South Africa, Kumkani said.
Other solutions include:
* Draft regulations on credit life insurance, capping this insurance on all forms of credit to between R2 and R4.50 per R1 000 of the deferred amount, depending on the credit agreement. These regulations also stipulate what the credit life cover must include.
* The requirement on all credit providers to register with the regulator. Previously, the requirement to register as a credit provider was that you had at least 100 credit agreements on your book or had a total outstanding book debt of more than R500 000.
* The implementation of the National Credit Amendment Act, which tightened up certain aspects of the NCA.
* Tightened regulations on affordability assessment.
NEW MAXIMUM CHARGES ON CREDIT
The final notice on the limitation of fees and interest rates regulations was published in the Government Gazette in November last year. These are the final regulations that MPs are now seeking to amend. They come into effect on May 6 and will affect only new credit agreements entered into on and after the effective date. The changes are as follows:
* Unsecured credit: the maximum rate decreases from 32.65 percent to 27 percent (repo rate plus 21 percent)
* Credit facilities (overdrafts and credit card debt): the rate decreases from 22.65 percent to 18 percent (repo rate plus 12 percent)
* Short-term credit transactions (micro-loans): the rate remains at five percent a month for the first loan but has been reduced to three percent a month for subsequent loans taken in the same calendar year.
* Mortgage loans: the rate increases from 17.65 percent to 18 percent (repo rate plus 12 percent)
* Developmental credit (credit for a small business and low income housing): the rate increases from 32.65 percent to 33 percent (repo rate plus 27 percent)
* Incidental credit agreements (outstanding payments on services bills): the rate remains unchanged at two percent a month.
* Service fee on credit agreements: the fee increases from R50 to R60 a month (excluding VAT).