13 March 2015
Amendments to the National Credit Act (NCA) introduced by The Department of Trade and Industry (DTI) have finally been gazetted by the Government. The new amendments address gaps identified in the credit market that have led to reckless lending and a sharp rise in unsecured lending in South Africa over the past five years.
“Unsecured lending” by definition includes loans for which the lender holds no security by pledge or personal security. The National Credit Regulator has reported growth in unsecured lending from R40bn in 2008 to R172bn in 2014. The vast amount of money lent combined with the ramifications of reckless lending sees many South Africans burdened with over-indebtedness.
The enforcement of stringent affordability guidelines
Banks and other credit providers have been opposed to having Affordability Guidelines imposed on them and have argued that the industry should be left to provide lending at its discretion, using its own risk criteria to assess affordability. Regardless of this, the new Affordability Guidelines now stipulate the following criteria, which credit providers must adhere to before credit can be extended:
- Disclosing the total cost of credit in the pre-agreement statement and quotation. The disclosures must be based on a year of full utilisation of the credit facilities up to the credit limit proposed. The principal debt, interest and initiation fee, if any, must also be disclosed.
- Assessment of the consumersexsiting financial means and prospects; by considering three months of pay slips and three latest months bank statements (or similar credible income and expense verification).
- Consideration of the consumer’s existing financial obligations such as current debt profile and payment history; a calculation of discretionary income, as well as all existing debt repayments and account maintenance obligations must be conducted. Industry standard expense norms must be followed in addition.
- Resolution of complaints regarding the outcome of the assessment must be conducted within 14 days.
What does this mean for the consumer?
Stringent affordability guidelines will have implications on an individual’s ability to access credit. Consumers will be obligated to provide detailed financial information and cannot spend more on their debt repayments than the amount specified by the NCA Guidelines.
As Credit Providers start tightening their lending criteria in response to the new affordability guidelines, it will become more difficult for cash strapped consumers to take out debt. Many South Africans that are already at the end of their credit line won’t meet the new affordability requirements and their loan applications will be declined. Consumers who have a habit of borrowing from ‘Peter to pay Paul’ and revolving credit will no longer be able to do so.
Ian Wason, CEO of SA’s largest Debt Counselling Company, DebtBusters says, “We see this behaviour all the time. DebtBusters clients typically start borrowing from the ‘big four’ banks. However, when the ‘big four’ are no longer comfortable lending to them, they turn to second- and third-tier credit providers at much higher interest rates. 20% of DebtBusters clients have pay day loans, with an average loan size of R3500. As credit providers start implementing the new affordability guidelines, turning to high interest, short-term debt, from alternative lenders will no longer be an option.”