Protecting the consumer from himself
The National Credit Act comes into full effect on 1 June 2007. Ironically, this piece of legislation is being referred to as the law that will 'protect the consumer from himself'.
The average South African consumer has an insatiable desire for credit, and the Act will regulate the behaviour of the thousands of lenders who service this need.
We have reported on the National Credit Act in the past. The Act was so extensive that it was enacted in three parts. The final part regulates how credit is sold to the consumer. Credit lenders will have to make changes to how they grant credit, and to the techniques they employ in marketing their credit products.
Policing credit provision comes at a cost
Banks have had to make significant adjustments to their systems to accommodate the legislation. They are also likely to incur additional administrative costs in meeting various provisions of the Act. Lenders will have to ensure that their customers understand the product they are purchasing. They are also required to provide information in local languages if required. The Act places a large burden of responsibility on lenders not to extend more credit to the consumer than the consumer can afford.
Experts estimate that changes to banking systems and administrative processes will cost the big banks in the region or R1.5 billion this year. We believe the tighter focus on credit extension policies should save banks well in excess of this amount - so the sunk cost is probably justified. But before you feel sorry for the banks, you can be sure they will recover most of the additional administrative costs associated with providing credit from the consumer.
New process takes longer
Consumers can expect to wait longer for lending decisions to be finalised. The Act requires a specific process to be followed to ensure that credit lenders act responsibly.
All consumers applying for credit will receive a quotation from the lender. This quotation has to show the full costs of the credit applied for, including the ruling interest rate and management fees and interest charges for the life of the agreement. This quotation will be valid for five days from date of issue - allowing the consumer time to shop around for better deals.
Credit providers have to keep records of all consumer credit applications. The Act also requires that records of all credit agreements be forwarded to a central Credit Bureau.
Just in time for the next interest rate hike?
The National Credit Act has probably arrived just in time for an interest rate hike. Unfortunately the bill cannot protect consumers from the general economy, and does not prevent credit agreements from allowing for interest rate movements. The maximum lending rates provided for in the legislation are derived from the prime lending rate. In other words, if interest rates go up, the maximum rate that lenders may charge on their loans goes up too. And, of course, the interest rate applicable to an existing loan will also move higher.
Major drivers of inflation in the domestic economy at the moment are food and oil. You would have to be blind not to notice these pressures as they impact consumers on a daily basis. There is little doubt that food price inflation is currently well in excess of the 6% upper limit set by the South African Reserve Bank.
Oil is putting tremendous pressure on the entire transport sector - which in turn drives the prices of almost every consumer good higher. Further price pressure in coming years will stem from government's huge social spending plans and spending on stadium construction and other related infrastructure upgrades in the run up to the 2010 Soccer World Cup. And of course we have a massive public service strike looming. If government's current 6% wage hike is unacceptable, you can be sure that the threatened mass action will only be stymied if an increase in excess of CPI is offered.
While many analysts feel the Reserve Bank will sit on the fence at the next Monetary Policy Committee meeting and leave interest rates unchanged, there are those who think the governor will be forced to take stronger action. We could be faced with another interest rate hike when the committee meets on the 6 June 2007.
Editor's thoughts:
Existing loans and credit contracts are not covered by the Act. Consumers with existing agreements will have to honour the repayment terms they signed when they took out the loan. Do you have any horror stories about lending practices that you would like to share? Send your story to [email protected].
