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Caps on credit insurance, interest rates may sink some microlenders

The credit taps just got tighter.

JOHANNESBURG – Published by the Department of Trade and Industry (dti) just one week after the release of final regulations limiting interest rates on unsecured loans and at a time when most corporates are preparing for festive season holidays, proposed caps to credit life insurance are likely to come as a double blow to unsecured lenders.

The regulations propose that credit life insurance on both unsecured and short-term credit agreements is capped at R4.50 per R1 000 loan. This is broadly in line with what was anticipated.

Credit life insurance is generally a mandatory part of a loan and provides for the repayment of that loan in the event that the debtor dies, is retrenched or is unable to repay the loan through no fault of their own.

The proposals come just a week after Trade and Industry Minister, Rob Davies declared that the maximum annual interest rate chargeable on an unsecured credit transaction from May 6 2015 will be no higher than the repo rate plus 21%.

At the current repo rate, this makes the maximum rate 27%, which is slightly higher than the initial proposal of 24.78%, but still below the current cap of 32.65%.

Neil Grobbelaar, CEO of Real People, says the combined impact of caps to interest rates and credit insurance could pose a significant survival challenge to lenders that focus on unsecured credit.

“A typical unsecured lender makes a profit margin of about 4% to 6% on its advances portfolio. With the combined impact of these two developments potentially being in excess of 10%, such players would be required to undergo significant restructuring or business re-engineering to remain viable going forward,” Grobbelaar explains.

To compensate for the reduced gross yield earned on loans, lenders will reduce their risk appetites in order to lower the cost of impairments, Grobbelaar adds. This will reduce the availability of unsecured credit to low-income consumers, hurting spending power in the short-term but hopefully reducing debt burdens in the long-term, he says, provided they don’t ‘migrate to expensive short-term credit to try and meet their monthly cash-flow needs’.

Real People exited the personal unsecured loans space some years ago, electing to focus instead on ‘responsible finance’, including housing, education and small business loans.

Ian Wason, CEO of debt counselling firm, DebtBusters has welcomed the caps, saying that DebtBusters’ own research indicates that the average non-bank consumer is charged more than R12 per R1 000 on credit life cover. “Furniture retailers are generally charging the highest rates as multiple insurances are bundled into credit life; in some instances credit life charged exceeds R20 per R1 000 borrowed,” Wason says.

Hennie Ferreira, CEO of microlending industry body, MicroFinance South Africa, (MFSA), says that while R4.50 might be sufficient for a white-collar worker catching the Gautrain to work, it does not account for the risks faced by a mineworker. “The scientific basis on which this number has been reached is critical,” Ferreira says, maintaining that a credit life charge of R4.50 per R1 000 borrowed barely covers the cost of the paper used to do the quote on.

That lenders overcharge on credit life in order to compensate for limits imposed on rates and fees speaks to the need to have all of these caps determined on a scientific basis, Ferreira argues. He questions whether a proper impact assessment has been done and says that clarity is needed on whether credit life insurance falls under the jurisdiction of the dti or National Treasury, as with other insurance products.

The proposed regulations stipulate that individual risk profiles must be assessed before determining the cost of credit life, which can nonetheless be no higher than R4.50 per R1 000 loan.

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Some of the interest rates and charger are ridiculous and morally wrong. You can however not legislate ignorance and stupidity away.

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