Tackling Over-Indebtedness in South Africa

The National Credit Amendment Act, 19 of 2014 (NCAA), together with the National Credit Regulations including Affordability Assessment regulations (2014) (“the affordability regulations”), which aim to reduce over-indebtedness in SA, came into force in March last year, having been passed into law by SA’s President.

Tim Frost, Africa Product, Consulting & Marketing Head at TransUnion, says by requiring credit lenders to take stricter steps to assess a consumer’s repayment capacity, essentially enhancing affordability assessments, the Affordability Regulations aim to curb unscrupulous lending practices and also to encourage “open and honest disclosure” on the part of the credit applicants.

“There is clearly a big problem to tackle. Unsecured lending in SA has seen significant growth in recent years, from R40bn in 2008 to R172bn in 2014; consumer over-indebtedness is rampant with some 42% of SA’s 23 million credit-active consumers having impaired records; some 30% of the total credit book (40% of accounts) is overdue,” Frost says.

More legislation is in the pipeline - interest rate caps will be introduced across all types of credit agreements later this year – and with tough economic times ahead for most South Africans, he says there may be concerns that the country is heading for a lending drought to mirror SA’s current water drought.

He says with other legislation on the way - data from the National Credit Regulator (NCR) shows a 10.83% year-on-year (YoY) decline in the number of unsecured credit agreements granted in Q3 2015, the drop being particularly marked (20-40% declines) in loans smaller than R5,000.

In the quarter ended September 2015, the gross unsecured lending debt also fell 4.73% to R162bn, and the total number of loans fell 13.28% to 6.6 million accounts.

“There is less unsecured credit in the economy, although the actual credit granted increased 13% in Q3 2015 on a YoY basis.

“There has been no meaningful improvement in the performance of the unsecured lending book through 2015, which remained at around 30% in arrears by value, and 35% in arrears by number of accounts.

“Credit facilities (credit and store cards, overdrafts) saw similar trends to unsecured credit: down 10.82% YoY in agreements granted in Q3 2015, though facilities granted increased 16.5% YoY on store cards and 21.73% on overdrafts, yet declined 11.52% on credit and garage cards.

“The overall credit book grew 7.19% YoY to R212bn in September 2015 with marginal improvements in arrears performance,” Frost says.

Despite the introduction of the Affordability Regulations, short term credit, a particular staple of lower income consumers, saw significant increases in activity, with a YoY book growth of 336% to September 2015, reaching R3.2bn, and a more than tripling of the number of short term credit accounts.

“Possibly too early to read, but even more interesting, was the fact that trends through 2015 appeared to point to an improving arrears position for the short term credit book.

“Many lenders, especially in the retail sector, have been struggling to book accounts as the requirements of the Affordability Regulations have effectively forced them to turn away applicants without the requisite proof of income and expenditure (for example three months’ bank statements and three months’ payslips).

“Bureau enquiry volumes for retail sector credit granting have declined significantly since the introduction of the Affordability Regulations, however overall NCR statistics show a 5.5% increase in overall credit enquiries YoY in Q3 2015 to 15.79 million.

“In short, the jury is still out on the medium term impacts of the Affordability Regulations, and whether the additional affordability assessment requirements are having the desired effects,” Frost says.

He says barring some inconvenience experienced by both consumers and lenders alike in adjusting to the new lending policy, the evidence of a major improvement in lending quality is inconclusive for now.

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