New credit rules will tighten lending

2015-03-23 08:00

Updated legislation will prevent consumers from robbing Peter to pay Paul, writes Maya Fisher-French

Last week, the department of trade and industry gazetted amendments to the National Credit Act, which will have a material impact on how much money creditors will be allowed to lend their clients.

The new affordability guidelines will force consumers and credit providers to be more responsible with new debt applications, as well as ensure the same rules apply in terms of loan applications across the credit industry.

The National Credit Regulator has reported growth in unsecured lending from R40?billion in 2008 to R172?billion in 2014, and many South African households are simply unable to meet their debt repayments and pay for basic living expenses.

To reduce the levels of reckless lending, stringent affordability guidelines have been introduced that include consumers having to provide detailed financial information and setting a minimum amount for monthly living expenses that cannot be used for debt repayments.

For example, a person earning R15?000 will automatically have R2?000 deducted from his or her affordability as living expenses. The act also requires that maintenance payments be included when calculating affordability – and these must also be listed with the credit bureaus.

This means that, before one can take on further debt, the credit provider will have to assess three months’ worth of bank statements and payslips and can only consider income available for repayments after deducting basic living expenses, maintenance orders and other debt-repayment obligations.

The question, however, is how this will impact on credit providers as well as those consumers who rely on credit to survive.

Ian Wason, CEO of debt-counselling company DebtBusters, believes smaller microlenders will be the hardest hit. Wason says DebtBusters’ clients typically start borrowing from the big four banks.

“However, when the big four are no longer comfortable lending to them, they turn to second- and third-tier credit providers at much higher interest rates. Around 20% of DebtBusters’ clients have payday loans, with an average loan size of R3?500. As credit providers start implementing the new affordability guidelines – turning to high-interest, short-term debt – loans from alternative lenders will no longer be an option.”

Hennie Ferreira, chief executive at MicroFinance SA, says, however, that the decision to extend credit has more to do with risk appetite than affordability levels.

“While there is now a legal limit in terms of affordability, banks are not required to lend to that level. The decision by credit providers to extend loans will depend on other factors, such as their risk appetite as well as the size and length of loans.”

The legal limits, however, along with the requirement to do more financial analysis, will affect the affordability of those who rely on taking out new loans or revolving credit to survive each month, and this could drive desperate people to unregulated lenders.

Paul Slot, CEO of debt-counselling firm Octogen, says enforcement by the regulator on nonregistered credit providers is key. “They need to ensure they have the manpower to take action. If not, underground operators could well flourish.” Slot says the amendments do not solve the problem of existing overindebted consumers, but consumers will be forced to find help if they are unable to borrow further.

“Consumers who are already overindebted still need help, and this will continue despite the provisions of the credit act’s amendments. This requires the proactive early identification of consumers who can do with help and implementing a solution for them,” says Slot.

Wason believes this will be positive for debt counselling. “DebtBusters has experienced more than 50% year-on-year growth in new debt-counselling enquiries and has assisted more than 20?000 customers with debt counselling. We expect these numbers to increase as consumers’ debt-repayment behaviour changes.”

Apart from the affordability limits now imposed by the credit act, the practice of unscrupulous lenders who knowingly issue loans to people who cannot afford to repay them will be stopped.

Ferreira says some credit providers issue loans to people they know only too well cannot afford to repay them, and therefore make their money out of debt-collection fees. The act now prohibits the sale and collection of prescribed debt, which should reduce this kind of unethical lending.

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