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The extent of reckless borrowing and lending in SA

Becoming overindebted, and how to extricate yourself – DebtSafe’s Matthys Potgieter.

WARREN THOMPSON:  Joining me to talk about consumer over-indebtedness and the really dire picture that we’ve been getting from the National Credit Regulator in terms of the number of credit-active consumers who have impaired records, as well as the source of the problem, is Matthys Potgieter, a spokesperson from DebtSafe. He joins me on the line now. Good to talk to you, Matthys.

MATTHYS POTGIETER:  Good evening, Warren. Thank you so much for having me.

WARREN THOMPSON:  Let’s just start with this very poor picture provided from the National Credit Regulator regarding total outstanding consumer credit in South Africa, and the number of consumers with impaired credit records. Just give us the figures, as you understand them, in from the National Credit Regulator.

MATTHYS POTGIETER:  Based on the latest statistics that were given in December 2017, we see that there is more than R1.7 trillion outstanding consumer credit currently in South Africa. That also says more. When we have a look at the amount of credit-active consumers, only around 25 million-plus credit-active consumers actually have this R1.7 trillion credit out there.

But the most dangerous or most interesting and bleak part is that, out of those more than 25 million, more than 9 million consumers reflect impaired credit records. This means that they are behind by one or two or three payments on some of their credit agreements. It shows us that South African consumers are overindebted. They do not make ends meet.

The other thing that it shows is that South African consumers are so dependent on credit that they use credit just to get by at the end of the month.

WARREN THOMPSON:  Okay. You said that of the 25 million credit-active consumers, virtually 10 million – that translates to well over 40% – have impaired records. Just to add substance to that, how many formally employed people do we have in the country?

MATTHYS POTGIETER:  Well, unfortunately I don’t know have that statistic available at the moment. But if we have a look at a broader level, they say that … the consumers who are actively employed are the people who are credit-active consumers. And that is also why in March Pick n Pay and other places went to court to appeal the National Credit Act, saying that informal people, people with informal jobs, who do not have a pay slip, cannot get credit. That is why they [Pick n Pay] went to court with that, and that ruling then got applicable.

But the other side is that the majority of the people who are actually credit-active consumers form only a very small part of the population of South Africa.

WARREN THOMPSON:  Okay. I’m now speaking from memory and under correction here, but I think that we have only as much as 12 million people who have formal employment. This would certainly indicate that we have a lot of people who have been extended credit and are not formally employed. That obviously makes it harder to do because, in your understanding, the Credit Act means that people providing credit need to do what’s called a credit assessment. Just take us through the process in order to be able to extend credit – what that test entails.

MATTHYS POTGIETER:  How it works is – the National Credit Act stipulates quite clearly what should happen when the consumer applies for credit. The first thing that the credit provider needs to do is to do an affordability assessment, which means that they need to make sure that that specific consumer can actually service that credit agreement, whether it’s a credit card, home-finance debt or a personal loan – whatever form of credit it is. Even store credit. That goes to affordability assessment. So you have to supply proof that you have a certain amount of income. Then the credit provider usually has a look at your budget, asking you what your expenses are, and then has a look at this question of income. That is that amount of your net income, minus all your expenses – the amount that stays behind. Is that enough for you to actually service this specific credit agreement? That’s the very first thing that they need to do. That is where something like reckless credit and reckless lending comes in, because sometimes what happens is that credit providers as well as consumers are on the wrong side of that, where they inflate things, where the consumer for instance states that “I do earn this, but my expenses are only, let’s say, not really the amount that they are supposed be, because I need to have that credit.

The same thing goes for credit providers where they sometimes tweak things so that the person can get credit. That is where it becomes quite tricky, and where it becomes a bit sticky when it comes to a thing like reckless credit.

WARREN THOMPSON:  So they do this assessment. I think the gist of it is that it relies heavily on what people provide the credit lender with in terms of some of these subjective expenses that they incur – which are not easily verifiable, let’s put it that way. In many cases, for instance, groceries, people might be spending cash but there is no record of how much that adds up to, month to month. Is that one of the flaws within this assessment that might be problematic for ensuring that the extension of credit is done responsibly?

MATTHYS POTGIETER:  I can definitely be one of the flaws. The other thing that the credit provider also needs to do is to draw a credit report or a credit score for that specific consumer, to see their credit behaviour, to see what they do, how they pay off credit. It’s actually all about that behaviour thing. But if you are someone who knits one, skips one, then obviously you are not a very good candidate for credit and that puts that credit provider in a position where they possibly might not give you credit. So there are a couple of checks. The first thing is to do the affordability assessment.

But then they also have to pull a credit report to see what that person’s credit profile looks like – are they a good paying citizen. And if they’ve got all that information, they can make the assessment.

But what you say is 100% true. When it comes to that budget, there is always this question when it comes to subjective information about how much is spent on transport, how much is spent on groceries, how much on clothing. The thing is, most South African consumers do not actually know themselves. That is why we put in a ballpark figure. That is what we always say to South Africans: try and get control over your finances. Know exactly where your money goes.

So budget is one of the most important  things. The best way to do that is to pull a statement from the first of the month to the last day of the month and start tallying up what you spent, what amounts, so that you can get a better understanding about what’s going on in your personal finances. So when you go into a position where you have to ask for credit or you want to apply credit, you can actually give a true indication of what happens in your personal finances.

WARREN THOMPSON:  One thing that probably needs to be looked that there – because I’m just interested in the type of work you do – is whether the credit extender ever argues that the person may or may not have correctly provided the information and on whose liability the credit sits. If you are in that situation and you are a credit provider, and someone accuses you of reckless lending, you go back to your documentation. What happens in the event where it’s shown that someone has not properly furnished all the necessary expenses when they made the credit application? Is there any way to remedy that situation?

MATTHYS POTGIETER:  That’s where the two sides of the coin come in. As of April 1, as soon as a person goes under debt review, each credit agreement should be investigated for reckless credit. That is part of the law that started on April 1 2018, this year. So what happens is that, as a debt counsellor, we have to investigate each credit agreement to see whether it was reckless or not reckless. Where the consumer can prove or we can prove that that specific credit agreement was reckless at that time, where the credit provider gave money to you that you cannot afford … to actually follow the proper procedures and policies. Then what’s going to happen is that that credit can be completely written off. So that is on the side of the credit provider.

On the side of the credit user or the South African consumer, that is where you, as I said earlier on, have to take control of your finances. You have to know what you can afford. So, do not over-indebt yourself when it come to credit – taking out credit because you need to live like that. That is where South African consumers have to start looking at where are they currently, what is their financial position in a microeconomic [way] and what tweaks they can make. So, to answer your question and just to make sure that I’ve answered it, for the credit provider there are some consequences if they do grant credit that was and can be proved reckless; then that credit can be completely written off.

For the South African consumer, on the other side, they signed for that credit agreement, so they are responsible to honour that credit agreement. That is sometimes where we find that people enter debt review to restructure that credit agreement, to make sure that they can service it and they can pay it off.

WARREN THOMPSON:  Matthys, in your option, are South Africans very credit-addicted?

MATTHYS POTGIETER:  In my opinion, unfortunately, I think that credit becomes a habit in South Africa, and we are so comfortable with it. It happens in the online space as well. If you look up online banking, and you are currently a user of it, you open up your online banking, and immediately what pops up is a notification saying that you can extend your credit card, or there is a personal loan already pre-qualified for you, or this or that. So credit is readily available if you need to take it. The problem is that a large number of South African consumers use credit to just get by at the end of the month. It’s never a good idea to borrow from Peter to pay Paul. People sometimes want to take out a consolidation loan or a big personal loan or an extra [mortgage] on their home, because they want to settle all their other debt. It can work if you make sure that there are a lot of things you have to look at – affordability, making that you have interest rates that correlate, and you are actually not spending more to pay off the money. But, to answer your question, South African consumers are definitely in the habit of living on credit.

WARREN THOMPSON:  Just to add a bit of context, with that amount that you’ve stipulated – outstanding credit in South Africa of R1.73 trillion – that’s obviously through regulated entities, including banks, other stores that are registered with the Financial Services Board. But there is a whole other shadow-lending practice. Do you have any idea how big that is?

MATTHYS POTGIETER:  Unfortunately because it’s not regulated we don’t have data on it. But we cannot say exactly what the number that goes out is. But we do know that there is a lot of informal lending happening in South Africa on a regular basis on an almost daily, weekly, monthly basis. And that is the problem. Because it’s not controlled it is sometimes quite difficult for that specific consumer to manage it, especially when they hint at something like that in counselling or debt review. That is definitely something that is happening in South Africa. I don’t want to use the term, but everyone knows the term “loan sharks”. It’s definitely out there, and people should be quite aware of it.

WARREN THOMPSON:  So give us a little bit of insight now. If someone is really battling to meet their bills and their obligations every month, and they might have missed a few payments, what do they need to do to start getting themselves right?

MATTHYS POTGIETER:  The very first thing is to start communicating. Do not do the ostrich. I always say it’s never a good idea to put your head in the sand and think if you can’t see them they can’t see you. You are responsible for all credit agreements that you have signed. You have to honour them, according to law. So start communicating with your creditors first. Try and make alternative arrangements. Explain to them your situation, see how you can actually reassess the situation by communicating, and see what is possible. That’s the very first thing.

The second thing is to take control of your finances. So what I said early on is make sure that you have a budget. Stick to that budget, plan for it, make sure that you stay within your means. Do not make credit or live on credit to keep up with the Joneses. That is really going to bite you later on. Everything that is obviously part of the National Credit Act and stipulated in the National Credit Act is a safe way to stave off your debt with something like debt review or debt counselling. So that is the alternative for overindebted South Africans. When you feel like you cannot make ends meet, if you’ve skipped one or two payments, there is help out there. First speak to your creditors and, second, know that there are people like debt counsellors who can assist you in the process of rehabilitating you financially.

WARREN THOMPSON:  Using a debt counsellor like yourselves – is that something a consumer can voluntarily do?

MATTHYS POTGIETER:  It is fully voluntary. How it works is that you contact a debt counsellor. The counsellor does an assessment to have a look at your financial position, establish your over-indebtedness. And then on your behalf the counsellor communicates and negotiates with your creditors to lower the instalments or extend the terms, so that you can pay off those credit agreements that you have to pay off, but also leave you with enough cash and enough money for living expenses and for you to have a normal life.

WARREN THOMPSON:  How long typically does the process take? How does it work and what are the benefits of using a debt counsellor?

MATTHYS POTGIETER:  The process is really quite specific when it comes to that individual’s situation. We cannot say that everyone is the same. But anything between three and five years – that’s usually how long it takes. As I say, some individuals can exit debt review earlier and some do take a bit longer. It’s very dependent on that individual’s personal circumstances.

As soon as you enter debt review, you are legally protected by law, which means that your creditors cannot come to you and take away your car and take away your home, because this is a legal process and it is court ordered. You have to honour that court order by paying off that rehabilitation amount on a monthly basis. But you don’t have to have sleepless nights, thinking that the creditors are going to come in and sell your house or remove your car. That is the positive thing – the legal protection – about debt review.

WARREN THOMPSON:  Matthys, you mentioned some changes, first of all, to the National Credit Act, which came into effect on April 1, as well as a potential challenge by Pick n Pay regarding some aspects of the affordability assessment. Just take us through what has changed, and what is being challenged in the courts.

MATTHYS POTGIETER:  The challenge in the courts is that they say that for people with informal jobs, who do not have a bank statement for three months, or do not have a bank cheque or a pay slip, do not have room within the National Credit Act to actually apply for credit. The National Credit Act also stipulates in Section 60 that all South African consumers have the right to apply for credit, and it should be non-discriminatory. So it’s basically saying that the National Credit Act at the moment does show some areas of discrimination because one has to have three months’ bank statements or has to show proof of income in the form of a pay slip. The National Credit Act on April 1 did not change. Some documentation that I read earlier on said that the National Credit Regulator is possibly going to appeal that specific court order that came out in March.

To just make sure that South Africans understand, it doesn’t mean that you can go out and make credit now, and you don’t have to show proof of income. If you do have proof of income, you still have to show that. Also we have to have a look at who brought this case to court. This is not necessarily someone like a bank; it’s a big retail institution that has brought this specific case to the court to have a look at. So we have to have a look at that in context as well, as to why they are doing it, what their strategy is. I also know that someone like First National Bank said that their policies are not going to change. They are still going to ask for payslips and still going to ask for three months’ bank statements. I think that some of the big players when it comes to credit providers will have a look at their internal policies and then use their discretion.

What has changed on the debt review and National Credit Act side – the only inclusion is that there were some changes as to fees, but also that each credit agreement should now be investigated for reckless credit, which is really a good thing for the South African consumer, to make sure that reckless credit is not something that happens in future in our country.

WARREN THOMPSON:  Obviously the risk is if we don’t extend credit to people formally employed there could be a whole range of unintended consequences. What do you think could be the fallout from that?

MATTHYS POTGIETER:  Well, if we have a look at the consequences of that, that credit provider that grants credit to that person who is not formally employed, if they do not actually follow all the rules and make sure that that person will be able to pay that credit, they will be the person [to lose] in the end. So I think the onus is really on those credit providers that are doing the affordability assessment, that are granting that credit, to really make sure that consumers can honour the agreement that they sign.

WARREN THOMPSON:  When the National Credit Act came into existence in 2007, if I’m not mistaken, the industry probably needed regulation. Are we getting to the point now where perhaps the issues that we are facing are not so much around whether there are rules and laws to protect various parties, but it’s more enforcement and that we might have a bit of bureaucratic overreach, so speak?

MATTHYS POTGIETER:  I think it really is about affordability. I think with the National Credit Regulator and the Act, which have been running for almost 10 years, this really could work. And I think we are getting to a point where things are being more regulated for both sides – for the credit provider as well as for the consumer.

But, going back to the point that you mentioned earlier about South Africans who are possibly in the habit of taking on credit, I think that is where it really comes in. And as a company we see that South African consumers need to take charge of their finances. Your personal finances are your personal responsibility. Rules and regulations are out there to protect you as well as to protect the credit provider. But first and foremost, you have to take control for yourself.

WARREN THOMPSON:  Alright, Matthys, we are going to have to leave it there. But I think that last sentence is very important . Obviously people need to understand what they are getting themselves into and be super-conservative in ensuring that they can afford many of these obligations.

Thank you very much for your insights, and we look forward to chatting to you in the future.

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