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South Africa’s Debt Relief Programme has Significant implications for Indebted Consumers and Banks

20 August 2020 Shapiro Shaik Defries and Associates
Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates

Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates

When South Africa went into a national lockdown on 27 March 2020, no one fully comprehended the deep, complex and devastatingly profound consequences it would hold for individuals, businesses and entire industry sectors.

South African banks rapidly responded to the imminent crisis facing their account holders, and as at 7 July 2020 had approved more than R30,6 billion in relief to individuals and businesses affected by the Covid-19 pandemic and national lockdown, according to the Banking Association of South Africa (BASA).

According to a report prepared by specialist collections agency Shapiro Shaik Defries and Associates, - Navigating through South Africa’s Debt Relief Programme and the Implications for Indebted Consumers – the debt relief programme, while crucial at the time, has tremendous implications for both previously and newly indebted consumers, and for how banks go about collecting outstanding debt in future as well as supporting distressed customers.

“Given the urgency demanded in the circumstances, the debt relief extended by banks to customers was done on a broad-based account and product level, and not on a customer-specific level. As a result, many bank clients found themselves with more than one payment relief running across different products, all activated at different times, and potentially all with varying terms and conditions. Due to the severity, speed and far-reaching impact of the global pandemic and subsequent lockdown to livelihoods, there was an urgency to provide this relief, with little to no time to accurately assess, vet and address each situation on individual merit and risk assessments. South Africa was not unique in this approach with many of the world’s major economics following a similar approach,” explains Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates.

“While this was entirely outside of the usual and normally stringent requirements of South Africa’s financial services sector, it was an entirely necessary and empathic response to the extraordinary circumstances and existential threat posed to livelihoods by a global pandemic and subsequent national lockdown. However, as banks now try to recover and recoup the outstanding debt, millions of South Africans remain in deep financial distress as these payment holidays come to an end. South Africa’s lockdown, one of the most stringent in the world, is taking a massive toll on business and the economy, with an estimated 7 million job losses in the offing. Families are dealing with retrenchments and reduced work hours, often affecting more than one breadwinner at the same time,” adds Levinsohn.

The big question is, with the initial reaction of providing relief for distressed consumers passed, how will this impact the response and recovery phases for South Africa’s financial services sector, as well as the millions of individuals who continue to find themselves under significant financial duress?

“Banks are now facing masses of clients who are rolling into their collections portfolios phase, and this will be happening on different financial products, and at different times – credit cards, bonds, overdrafts and asset loans. For at least the next six to eight months, the financial services sector will need to implement its recovery stage and understand what exactly is appropriate for each customer given their unique and individual circumstances. Blanket, one-size-fits-all approaches to recovery and collections will not suffice given the changed circumstances,” explains Levinsohn.

Going forward, it will be crucial that bank communication to customers is delivered in a uniform and consistent manner across all divisions and product offerings, and that financial institutions avoid the trappings of siloed approaches. At the same time, Credit Bureau information is retrospective, thus it cannot be relied on to provide insights for banks in these radically altered circumstances that customers find themselves in. Credit history is no longer indicative of what can be expected from consumers going forward. To gauge the future and navigate the way forward with a customer-centric approach will demand that financial services providers engage with each of their impacted customers to obtain current, primary data on their financial position and how they are impacted by COVID-19.

“The value of having a direct line of sight of the primary transactional account to clarify the position of the customer will be crucial in terms of when they expect to return to full employment, and whether there are any extenuating family circumstances or health and related issues that could impact the customers’ ability to financially recover. There is a significant opportunity to arbitrage for efficiencies in the collection and analysis of such primary data.

“A return to individual, risk-based assessment as well as recoveries is also important. While single, unqualified offers were acceptable and necessary given the crisis circumstances when debt relief was provided, as we get deeper into the pandemic and its long-term economic impact, each customer must be managed and engaged on a merit basis. The three-month payment freeze in many instances has created indebtedness to an already vulnerable consumer, and affordability will now most certainly become an issue with the regulator,” says Levinsohn.

Banks also face major challenges in a post-Covid environment as far as collections are concerned. Firstly, in this economy there is a limited market to buy and sell repossessed assets as a means of recouping outstanding debts. Secondly, the landscape has changed dramatically for traditional collection practices. Banks can no longer contract with collections service providers who work solely on a ‘success basis’, and success cannot solely be measured in Rand Collections alone. There are numerous factors to consider, both from a legislative perspective as well as an ethical one. There is a fine balance to be struck - banks and their collections providers need to act in the best interests of the customer given the Covid uncertainty. However, the debts remain exactly that, and must be collected to ensure that financial services providers avoid blanket debt write-offs or any other actions that might place depositors’ funds at risk or otherwise undermine the integrity of the financial sector.

“As South Africa continues to navigate through the pandemic, it is abundantly clear that there has been profound damage to every facet of livelihoods and the economy. The full and long-term impact is still unfolding before us and will continue to do so in the months ahead. While the true magnitude of the financial distress facing both individuals and businesses remains to be seen, it is evident that there is no short-term fix for this Mach1, black swan disaster. It has taken South Africa and its citizenry, and indeed the world, to the wall in terms of plummeting household income, soaring unemployment, widespread business closures and crippling consumer indebtedness. For our financial services sector to navigate through the post-Covid economy will demand that a new approach is developed, and as such, there must be a readiness to restructure, with a more customer-centric, empathetic approach driven by current, forward looking customer data and analytics based on people’s changed realities,” concludes Levinsohn.

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