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Government moves to reduce interest on unsecured loans

Risky borrowers could see credit taps tightened further.

JOHANNESBURG – High-risk borrowers will see their access to credit curtailed if proposals by government to reduce interest charges on unsecured loans are approved, according to those in the industry.

After being lobbied by MicroFinance South Africa (MFSA) for six years to review rates and fees on loans, the National Credit Regulator (NCR) submitted draft recommendations to the Department of Trade and Industry (dti) at the end of last month.

The dti published these recommendations, which include proposed charges on everything from mortgages and credit facilities to unsecured loans and developmental credit, late last week for public comment.

Among the most significant proposed changes is the nearly eight percentage point decrease in the maximum prescribed rate on unsecured credit transactions.

Currently at 32.65%, the NCR proposes this be reduced to 24.78%.

Initial predictions by the MFSA suggest that larger lenders might be looking at a 20% to 24% haircut on turnover, while short-term lenders could suffer an 18% impact on turnover.

Both African Bank and Capitec say the impact of the proposals is still being assessed. “Our initial view is that we are concerned that the proposed reductions in the interest rate caps, notably for unsecured lending, may well create a reduction in the availability of credit to that segment of the market, which is arguably already under-served by a well regulated banking sector,” a spokesperson for African Bank said.

CEO of the MFSA, Hennie Ferreira says the association is in the process of communicating with the dti to gain clarification on a number of confusing terms and clauses in what he describes as a “disappointing document”.

He says proposed changes have not taken into account the increased cost of granting credit, which has risen exponentially since the National Credit Act (NCA) was first published in 2005 and the caps on rates and fees put in place.

Unintended shock waves

Since unsecured credit accounts for the bulk of credit supply in the lower income market, any reduction in yield on this type of credit will likely lead to an overall reduction in supply, particularly among higher risk customers.

At the end of the first quarter, the total amount of outstanding unsecured credit (gross debtors’ book) had fallen more than R6 billion year-on-year to a not insignificant R166.6 billion. This is around 10% of the total R1.6 trillion gross debtor’s book, according to the NCR’s quarterly Consumer Credit Market Report.

Neil Grobbelaar, CEO of Real People, believes that if the proposals are implemented as they currently stand, either loan amounts and loan terms will be reduced, or certain classes of customer will simply no longer qualify for credit.

A reduction in the rates chargeable on unsecured loans should be done gradually, Grobbelaar argues, as lenders need time to implement these changes and adjust their business models and operational infrastructure accordingly.

“Shocks to the system in terms of credit supply have got knock-on consequences,” he warns, suggesting that the unregulated industry will fill the gap.

Ferreira agrees that where customers are deprived of formal credit, a flight to the underground market will ensue. This says nothing of the potential impact on jobs or broader investment in the financial services sector, he says.

“We are hugely concerned on the broader impact,” Ferreira says. “We need to get down to a rational basis [for these proposals]. Until we do that, we will not come up with solutions ensuring sustainable, responsible and affordable credit.”

The unfortunate reality is that in many instances, credit providers do charge eye-watering interest on unsecured loans, so that borrowers can pay up to three or four times the initial capital amount in interest.

Grobbelaar maintains that a united effort between business, government and the regulator is needed to bring down default rates, which drive the cost of credit, while not starving the market of credit supply.

He says that defaults are often a function of financial illiteracy and failing to fight the temptation to borrow what you can’t afford.

An August solution unlikely

In terms of the court order that initially forced the NCR to review loan fees, the industry has until August 5 to comment and the dti has until the end of August to publish the reviewed rates. Ferreira believes this is too soon to ensure a decent implementation process and guarantee consumers access to credit on the one hand and sustainable businesses on the other.

To add to the complexity, next week’s judgement in the case centring on the constitutionality of the way that emoluments attachment orders are administered will have implications for the way that unsecured credit is collected on, while long-awaited draft regulation for credit life insurance has yet to be released and will also impact on the cost of credit. “We believe there is a lot of work missing,” Ferreira says.

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“The unfortunate reality is that in many instances, credit providers do charge eye-watering interest on unsecured loans, so that borrowers can pay up to three or four times the initial capital amount in interest”.
Hanna, I think the “in duplum” rule limits interest to the principal amount.

But it’s the same old story about unintended consequences – look at one side of the account and not the other – typical Davies commie thinking. Just like Gigaba and the child trafficking vs tourism debate. And the worst thing is that they are never big enough to admit their mistakes.

Sorry Hanna, I misread the article. The in duplum rules only comes into play when arrear interest equals the principal outstanding at the time of default.

Hi Phil! No problem. Indeed you are right, in duplum comes into effect only once a consumer has defaulted. Although even then, it’s not clear whether it actually limits the amount that consumers ultimately pay… Some credit providers seem to find ways and means of getting around it.

1. The MFSA says the DTI document is “disappointing” and “confusing.” What has the DTI EVER produced that was not confusing and sub-standard? Recent BBBEE Codes fiasco was just another usual DTI mess-up that makes doing business in SA most unpleasant and frustrating.

2. “In terms of the court order, the industry has ….” Which court order? The journalist might be referring to an order in the Western Cape High court in the matter between Stellenbosch University law clinic and parties involved in admin of emolument orders? Would help if the reader knew which court order the article refers to.

Thanks for your comments Louise. And also for pointing out the confusion around the court order. I’ve updated. It refers to the court order that led to the rates and fees on loans being reviewed at all. The Stellenbosch matter will be heard next week. Watch this space!

Fears by the industry, absolute crap, how do you justify charging a poor person 32% on a loan. Forget the risk bullshit. This is one long whine to try and maintain their ussary and negligent lending malpractices.

The bankruptcy of Abil proved that the interest they charged, was way too low relative to the risk of non-payment of loans. If government forces interest rates lower, three things will happen.
1. The risk-profile of micro-lenders will increase, prohibiting access to credit for individuals.
2. The shebeens that charge 100% per week will benefit, for they are not regulated and their competition is wiped out.
3. The lender who needs a loan will now pay 100% per week.
This is the law of unintended consequences the naive communist politicians know nothing about.

Hi Sensei, thanks for your comments. You raise some interesting points and there is definitely a danger of the underground market flourishing unfortunately. When it comes to Abil though, there do seem to be more complex issues around potential reckless lending, the fact that it only began to define consumers as being in default after they had missed three or more loan repayments (as opposed to one, which is the industry norm), and then provisioned accordingly (clearly insufficiently). Having said all that, you make good points and there clearly needs to be some kind of balance in order to make the industry sustainable!

Thanks for the reply to my comment. I agree with you all the way.

The sad fact is that there will always be somebody to exploit the individual who do not have prudent financial discipline. No government on earth can protect a person against his own stupidity. I agree though that government should at least try.

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