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South Africa: Credit Act Reins in Reckless Lending

Edward West

23 June 2008

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Johannesburg — SOUTH African banks have been successful in implementing the National Credit Act, but some credit extenders, such as some vehicle financiers and credit card companies, are being watched closely by the National Credit Regulator and may be investigated further.

National Credit Regulator CEO Gabriel Davel said last week some of these companies might be trying to circumvent the pre-enforcement requirements, undermining the debt- counselling process, and were not providing the required information.

"In particular, we are watching the information provided when direct marketing is done."

The implementation of the act on June 1 last year affected a credit market of about R1-trillion, close to 17-million credit-active consumers in SA and more than 50-million consumer credit agreements. It replaced a medley of fragmented and antiquated laws such as the Usury Act, Credit Agreements Act and Usury Exemption Notices.

"The act resulted in huge changes in the credit market and huge changes in the business practices and documentation of the banks and other credit providers," Davel said, although the implementation did not cause much disruption in the credit market.

He said most banks seemed to have cut back credit approvals significantly and the act was often cited as an "excuse", but in fact the underlying reasons were that clients were highly indebted, and cost of living and fuel price increases had had a big effect on their debt-servicing capacity. In addition, most credit providers were more cautious in extending further credit.

Davel said the act was having a beneficial effect as, for example, it dealt with issues that were at the heart of the US subprime crisis, such as reckless lending. The US practice of "reduced documentation loans" and similar products, where limited affordability assessment was done, had contributed to the bad lending that took place .

He said the act was also putting pressure on credit providers to renegotiate and reschedule debt when consumers were debt-stressed, which was cutting down on the "rush to the courts". Going to court had a domino effect and often made matters worse.

He said the measures put in place by the banks and others to assist debt-stressed consumers could do a lot to resolve the credit market decline in the least damaging manner.

First National Bank (FNB) head of strategic credit at FNB Home Loans, Dawie Spangenberg, said the bank's approval rates had deteriorated as consumers became more stretched financially, but this would have happened whether the act was in place or not.

He said banks' lending practices had not changed dramatically with the introduction of the act , something that was echoed by Nedbank and Standard Bank.

In fact, Spangenberg said, the bank was able to "amass new business volumes" and claim market share against competitors who had encountered teething problems, as it was able to implement the act a month ahead of last June .

Nedbank's head of credit risk maintenance in the bank's retail business, Pragnesh Desai, said the introduction of the act had been a bigger project than Y2K for Nedbank, even though most of the credit risk procedures were already in place.

He said the act was good legislation as it levelled the playing field with regard to the entire credit provision industry, whereas before, only credit provided by banks was regulated.

Spangenberg said an evaluation of the key drivers of the act -- to reduce reckless lending and borrowing and reduce over-indebtedness -- had become less easy because the interest rate cycle has confused the picture.

The tightening of monetary policy and rising prices had affected household budgets, and middle-income households were experiencing pressure on their monthly budgets. Many credit commitments were long- to medium-term undertakings with a bond running for 25 years and car loans for five years, so it is difficult to see the effect of the act on overall indebtedness.

There were also challenges in implementing debt counselling. "In terms of fair debt mediation, the practical implementation is a challenge for the role players in the industry, since enough debt counsellors need to be trained and practical processes need to be put in place," Spangenberg said.

Debt counsellors often needed to liaise with five or six credit providers, with practical implications such as time delays . "There are consumers who have benefited from debt mediation, but not as many as all concerned would have wanted," he said.

"On the positive side, the (act) has opened the possibilities for finance providers to do detailed affordability assessments before awarding credit."

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