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Major retail banks agree not to use garnishees

Major banks agree to review affordability assessments, asks for a neutral payment system.

PRETORIA – While a lot was said in the joint statement released on Thursday by the minister of finance and the chairperson of the Banking Association of South Africa (Basa) that certain practices will be reviewed and relooked, there are some very firm undertakings from the country’s biggest banks as well. The statement was released as a result of a meeting held on the October 19.

One of these is that the signatories to the statement “commit not to use garnishee orders against credit defaulters, as they believe the use of such orders for credit is inappropriate”.

While some of the larger banks might not use garnishees as a form of debt collection, they are still widely used as a method of retrieving bad debt with an estimated 3m* orders believed to be currently affected against SA employees’ salaries. The garnishee system has been widely criticised for its failure to protect the rights of defaulters while a range of garnishee abuses have been identified.

Leon Kirkinis, CEO of African Bank Limited, told Moneyweb that the bank does use garnishee orders at the moment, but that it is a much smaller percentage of the total debt collections than it was in the past. As the company is in a closed period before its results will be released later in the month, Kirkinis did not want to say more than to state that the percentage is in “single digits”.

He said the undertakings made in the statement would not change the way African Bank does business fundamentally.

“Garnishees are not and never were our preferred route to go. There are ways to come to an agreement with customers without going the legal route. In the legal process some customers end up in a deeply delinquent state for a long time,” he said.

The two major players in unsecured lending of the six banks who are signatories to the joint statement are African Bank and Capitec. Capitec declined to comment further and asked that queries be addressed to Basa.

Cas Coovadia, managing director of Basa, told Moneyweb that there are some banks that use garnishees for collection. He said the commitment in the statement comes out in the context of the misuse of garnishee orders. “In the detail of how we implement this, we will try to ensure that we have mechanisms in place so that garnishee orders are used only when there are no other methods available,” he said.

He said that if some of the other commitments that were made by the banks were implemented, the use of mechanisms such as garnishees would decrease over time.

“We can’t stop using them from day one,” he said.

“Basa and the National Treasury will promote and support enforcement initiatives against credit providers that issue pre-signed garnishee orders. The National Treasury will also engage with the Department of Justice about the abuse of garnishee orders and suggest that their use be restricted to maintenance orders,” the joint statement reads.

Absa, Standard Bank, FirstRand, Nedbank, African Bank and Capitec – the signatories to the statement – have also agreed to review affordability assessments. Basa and National Treasury will formulate a standard to measure affordability, which could then be incorporated into regulations as minimum standards. The banks will also help distressed borrowers by reducing their instalment burden. Where currently credit databases are only updated sometimes once a month, leading to unclear credit information on an individual for a lengthy period of time, BASA members have agreed to load payment data onto the various credit bureau systems as soon as is practically possible, preferably overnight in bulk.

With regard to debit orders, and the early debit order payment system, Basa members have agreed to “minimum norms and standards for debit orders to be accepted by banks”, and will work with the National Treasury and the National Payment System Department (NPSD) of the Reserve Bank to develop a framework for regulating debit orders. Where the authenticated and non-authenticated early debit order (AEDO and NAEDO) payment systems were said to perhaps give preferential treatment to unsecured credit payments in the past, the statement indicates that Basa and Treasury will engage the Reserve Bank to effect neutral authenticated and non-authenticated early debit order (AEDO and NAEDO) payment streams.

These commitments and agreements do not, however, cover non-members of Basa, with National Treasury and Basa simply encouraging other credit providers, such as non-bank micro-lenders and retailers, to conform to the good practices committed to by the banks.

Kirkinis told Moneyweb that all credit providers have to have licences to be able to provide credit and that there are discussions underway to see how to make the commitments more broadly applicable in the market, but that in the end he believes voluntary regulation is the most effective.

According to the statement Treasury and Basa will co-ordinate a process to complete the identified work over the next two months. Coovadia said that the association’s members would put in their best effort to attain as much as they can in two months. With regard to the measures of affordability assessment, which will be much more complex, the public will be updated in two months on the progress. He was, however, optimistic, that many of the measures can already be implemented in January.

*The value of orders believed to be currently affected against employees’ salaries has been changed since first publication.

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