Making inroads into consumer indebtedness
The National Credit Act (NCA) has been in full force for just more than a year, having replaced the ‘outdated’ Credit Agreements Act and Usury Act. Over the last three years the National Credit Regulator (NCR) has been working around the clock to ensure that the country’s credit providers and consumers are brought up to speed with their rights and obligations in terms of the legislation. Today the NCA regulates a credit book in excess of R1trn. There are more than 3 200 entities registered with the NCR, covering approximately 29 000 branches.
How familiar are you with the requirements in the Act? Yesterday FAnews Online attended the launch of a new publication: Guide to the National Credit Act which sets out to provide “comprehensive guidance for those who borrow and those who lend.” The loose-leaf publication is co-authored by JW Scholtz, Prof. JM Otto, E van Zyl, CM van Heerden and N Campbell and is available through LexisNexis. In today’s newsletter we focus on some of the comments made by the chief executive of the National Credit Regulator, Gabriel Davel, at the launch.
The nature of the beast
Davel reminded us why it was necessary to implement the Act in the first place. He mentioned the disparate Bills that regulated the industry – laughed about how a simple transaction like a VCR purchase could fall under one or other piece of legislation depending on the product description – and bemoaned the fact that South African banks were charging (on average) 100% interest on micro-loans up to R5 000. The credit environment that led to the creation of the NCA was not a pretty place – especially if you were a consumer.
Under the old system you could create mountains of debt with virtually no checks or balances. As an example Davel mentioned that consumers frequently arrived at the NCR with more than 10 credit agreements. The record held thus far is an individual who had 42 agreements. Reckless lending also allowed individual consumers to rack up huge piles of unserviceable debt. One desperate applicant to the NCR had R17m in debt. Such situations should be avoidable under the new Act.
Credit providers thrived under the old rules. Although they should have been concerned about the ability of clients to repay loans the ‘attitude’ which dominated the industry was to grant credit and worry about consequences later. If the client qualified for the amount by passing the income test (repayments should not exceed 30% of income) then the provider would approve the credit application. These providers took a bet on the client defaulting on one of their other credit agreements. Davel mentioned one major motor retailer that neither completed credit bureau enquiries nor submitted approved credit agreements back to the bureau. This resulted in incomplete data for other lenders – though Davel had some harsh words for the credit bureaus too: “The extent of ‘sloppiness’ in which credit bureaus dealt with the data in their control was amazing…”
Real improvements
Fortunately the gung-ho approach to credit finance has been nipped in the bud. “We may have seen, through hard medicine, a very significant maturing of the credit market in a very short time,” said Davel. Credit providers have been brought in line by the threat of losing their right to make court challenges. The Act determines that should the provider act recklessly in extending credit, they may not be able to obtain a court order against the defaulter!
And although many people feel that the NCA is responsible for the current fall in credit transactions, the reality is that the Act has encouraged real changes in consumer behaviour. A reduction in total credit extended is not only because of an increase in the number of denied applications; but rather because consumers are thinking twice before going to apply for credit. They know that the credit retailer will score them on the basis of income AND total expenditures. And in pausing to consider this fact they are empowered to take the decision not to make the credit purchase...
Pressure on debt counsellors
Another impressive achievement in the year since the National Credit Act came to full force has been the training of some 480 debt counsellors. These individuals completed training before being approved by the NCR. “Over the last 12 months a new profession has been crated, is functional and ready to tackle the biggest debt crisis we’ve seen in the last 20 or 30 years,” said Davel. And their services are in huge demand.
Davel says the NCR has already received 22 000 applications for assistance from over-indebted individuals. This is a huge load for the existing body of counsellors and the number will certainly have to increase in coming years. The NCR estimates as many as 300 000 citizens are in need of debt counselling services – that the NCR will probably receive 50 000 cases by the end of this year – and 100 000 cases by the end of 2009.
Editor’s thoughts:
There are early indications that the NCA has led to more responsible behaviour from both lender and borrower. Even so, bad debt provisions at the country’s large banks are skyrocketing. Are these spiralling bad debts a legacy of the past? Do you think the NCA has been a success? Add your comment below, or send to [email protected]
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