Granting Credit in terms of the proposed new national credit bill

1 Section 80 of the proposed National Credit Bill sets out new parameters with regard to assessing whether the grant of credit to a consumer was made on a reckless basis. The subjective nature of the grant of credit has for many years troubled retail institutions and companies running their operations based on their target customers receiving credit from such organisations.

2 The provisions of the bill will impact on each and every company engaged in the grant of credit and which will require businesses and companies engaged in the provision of credit to keep themselves informed and updated relevant to this new legislation and its future impact and development in the South African economy.

3 The aim of the bill relating to the grant of reckless credit, is to ensure that consumers are not drawn into applying and agreeing to the provision of credit when they will not be in a position to service that credit line in the future and which will result in a situation where such consumer becomes over-indebted.

4 In terms of section 79 of the Bill, the consumer would be over-indebted if he or she would be unable to meet, in a timely manner, all obligations in respect of all credit agreements entered into by such consumer with credit providers.

5 In terms of section 79(1), a consumer would be over-indebted -

"If the preponderance of available information at the time a determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, having regard to that consumer's -

(a) financial means, prospects and obligations; and

(b) probable propensity to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, as indicated by the consumer's history of debt re-payment."

6 The evaluative measures which each credit provider will have to consider in due course, may be pre-approved by the National Credit Regulator or, in time, could follow non-binding guidelines issued by the National Credit Regulator.

7 Section 78(3) defines what is meant by "the financial means prospects and obligations" with respect to a consumer. An assessment will have to carefully be made in respect of the consumer's monthly income, or any right to receive income, regardless of the source, frequency or regularity of that income and will include income earned by other adult persons within the consumers immediate family or household. In addition, section 78(3)(c) will deal with the situation where a consumer applies for credit for a commercial purpose and which will require the credit provider to assess the reasonably estimated future revenue flow from that business purpose.

8 The "financial means test" would require a consumer to provide proof of income, expenses, budgets for household and general expenses, SARS returns, a list of assets and liabilities and of all existing credit agreements.

9 The Courts will in time determine whether or not there has been a realistic and fair assessment when assessing whether or not there has been a grant of reckless credit.

10 Section 80 determines when the provision of credit has been reckless. In terms of section 80(a), such credit would be deemed to be reckless when the credit provider failed to conduct an assessment, as required by section 81(2), irrespective of what the outcome of such an assessment might have concluded at the time. In terms of section 81(2), the credit provider must not enter into a credit agreement without first taking reasonable steps to assess the proposed consumers general understanding and appreciation of the risks and costs of the proposed credit, and of the rights and obligations under such credit agreement. In addition, the debt repayment history of such consumer under credit agreements will have to be assessed.

11 In terms of section 80(b) the credit agreement will be deemed to be reckless if the credit provider, having conducted an assessment and despite such an assessment, enters into a credit agreement with the consumer despite the fact that the preponderance of information available to the credit provider indicated that -

11.1 the consumer did not generally understand or appreciate the consumers risks, costs or obligations under the proposed credit agreement; or
11.2 by entering into that credit agreement such consumer would become over-indebted.

12 In terms of section 85, a court may declare and relieve over-indebtedness by -

12.1 referring the matter directly to a debt counsellor with the request that the debt counsellor evaluate the consumers circumstances and make a recommendation to the court in terms of section 86(7);
12.2 declare that the consumer is over-indebted and make any order as contemplated in section 87. In terms of section 87, the court may rearrange the consumer's obligations, alternatively, declare that a credit agreement is reckless.

13 In a recent report of the World Insolvency Organisation, INSOL, it is stated -

"Financial literacy can be taught; it is essential for successful functioning in our world's economy, where money is the key factor and a lack of money is regarded as a failure. Education is therefore an integral part of a genuine fresh start, as it enables the debtor to function more effectively in society."

14 Unfortunately, in South Africa, for a lengthy period of time too many people with too little money have been given too much credit. This ultimately leads to a position of over-indebtedness and which results in a never ending circle of frustration for the consumer who can never repay his debts.

In my view, the bill introduces new parameters for the grant of a credit in South Africa which will in the long term ensure that consumers will be in a position to relieve over-indebtedness and avoid the grant of reckless credit.