14 September 2009

South Africa: Bad Debt Judgments Likely to Increase

Johannesburg — AMID all the talk about recovery, figures due out this week are likely to be a reminder of how grim the economy remains for many South Africans.

The number of summonses issued and judgments taken out against people for unpaid debt in July are likely to show a rise, according to one attorney who specialises in debt counselling.

"We're going to see judgments increasing or staying at a high level for some months to come. They'll only come down in the early months -- I mean April -- of next year," said Stephen Logan, a Johannesburg-based attorney.

While summonses issued for bad debt lead to judgments, not all summonses result in judgments. In June, the number of judgments against bad debtors, an indicator that lags summonses, rose 11,8% from May to 64126. How much worse this figure will become, remains to be seen.

"Anything over 70000 is bad. Over 90000 is awful. Anything over that ... we regard as very, very bad news," Logan said.

Despite interest rate cuts totalling five percentage points since December and signs that banks are willing to increase their lending -- both Standard Bank and Absa this month said they had loosened lending rules on cheaper homes -- rising job losses are preventing people from repaying debts.

Reserve Bank figures earlier this month showed that household income and consumption fell at their fastest pace in two decades in the second quarter. Household debt as a proportion of disposable income stood at 76,3%, down from the record-high 78,2% of the first quarter of last year, but still high.

Until the economy improves people are not going to be able to unwind their debt problems, Logan said. "The income of people has been so severely affected, we're waiting for the economy to improve so income improves, so payments can be made."

Uncertainty about the duration of the downturn makes creditors keener to bring judgments to secure repayment, he said.

"If they can ... get their judgment, then they know that means they will be paid. It's about getting to the debtor as fast as possible when there's any sign of default," Logan said.

Standard Bank spokesman Erik Larsen disagreed, saying banks were not rushing into legal action.

"Trying to list somebody is a last resort. There's a lot of effort in trying rehabilitate debt first. That's in the best interest of the both the customer and the bank," he said.

Business confidence in SA slipped last month, the Bureau for Economic Research's business confidence index showed last week. The index dipped three points to 23, its lowest level in 10 years.

Analysts said the decline did not mean that SA's recession had deepened in the third quarter of this year, although it did not bode well for a widely expected recovery.

The central bank's latest quarterly bulletin, released earlier this month, shows the longest downturn in the post-war economy to date lasted 51 months, from March 1989 to May 1993. The longest upturn, stretching 99 months, lasted from September 1999 to November 2007. The bank dates the current downtown from December 2007, putting it at 21 months so far, including this month.

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