Have you been denied credit recently?

SUBMITTING three months’ bank statements or pay slips may be a thing of the past.

A recent high court judgment has ruled that Regulation 23A(4) of the National Credit Act is invalid. On March 16, the Western Cape High Court handed down a judgment which may make the submission of three months’ bank statements or pay slips a thing of the past when applying for credit.

The National Credit Act was promulgated with the purpose of promoting and advancing the social and economic welfare of South Africans, and largely providing for a credit market that is fair, transparent, competitive, sustainable, responsible, efficient and accessible. In balancing the need to make credit accessible, particularly to those who have historically been denied access to credit, the act also aims to avoid reckless credit granting. Reckless credit granting practices can harm the social and economic welfare of people. The National Credit Act therefore obliges credit grantors to assess a consumer’s financial status and ability to repay a prospective debt should credit be granted.

More specifically, Regulation 23A(4) provides that consumers must submit their latest three pay slips or bank statements showing their latest three salary deposits.

For those consumers who do not receive a salary, the latest three documented proof of income or latest three months’ bank statements must be submitted. Alternatively, those who are informally employed or self-employed must provide the latest three bank statements or latest financial statements. These provisions are not unfamiliar and consumers have come to recognise them as standard practice in the credit market.

However, the three largest clothing retailers in SA sought to challenge these requirements on a number of grounds, one of which was that it discriminates against a section of the population that represents the less-privileged. The retailers argued that people who might otherwise have an excellent credit record, would be prejudiced simply because they do not have bank accounts. This will most likely include the informally or self-employed. The court agreed with this argument and thereby set aside Regulation 23A(4).

This does not mean that credit grantors may grant credit without a proper and diligent assessment of credit worthiness. It has, however, given the credit grantor a measure of flexibility in determining how it will assess credit worthiness and documentation to be submitted.

Therefore, the next time you apply for a clothing account, you may not be required to submit a bank statement or pay slips.

The broader implications of this judgment though, are significant. For instance, it may have been prudent for the court to have considered in more detail, the different types of credit. Unsecured credit (which unfortunately is the type of credit normally granted by the applicants in this case) is generally the type of credit for which the credit grantor has no security for repayment of the debt, and thereby attracts a higher interest rate.

This is as opposed to secured credit, such as a mortgage loan agreement or a vehicle finance agreement, where the asset may stand as security. In the case of unsecured debt where credit is granted recklessly, for lack of more stringent credit granting laws, consumers may find themselves indebted in instances where interest rates are significantly higher.

This will definitely not do much to serve the purpose of the National Credit Act.

For more advice on the National Credit Act and how it applies to you, you may contact the offices of Dr Sugudhav-Sewpersadh Attorneys.

— Article written by Dr Prenisha Sewpersadh

from Dr Sugudhav-Sewpersadh Attorneys.

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