BANKING clients struggling with ballooning debts could face a further blow in the new year.
The courts look set to review legislation which places a cap on the amount you have to pay back.
The in duplum rule, which means double the amount, has always been part of South African common law and traces its roots back to Roman law.
It means that you never have to pay back more than double the unpaid capital borrowed – even if more interest has been running up.
Say you borrow R100 and don't pay the debt. With interests and charges, the R100 soon balloons to R200.
If you pay off R50, the banks would classify it as a payment to settle part of the interest, and then charge interest and fees on the remaining R150 until it reached R200 again. That would happen every time you made a payment which did not settle the capital amount.
Basically this meant you would never get out of debt, says Luke Hirst, managing director of DebtBusters.
Take an administration order where you have a debt of R6 000, with interest of 15% per annum, and where the court has said you need to pay back R100 a month because that is all you can afford.
"The client is only paying the interest, which means charges can then accrue again and the client takes many years to become debt free."
The old rule's only benefit was in limiting interest while no payments were made, says Stephen Logan of Logan Attorneys in Johannesburg.
But in 2007, the new National Credit Act (NCA) attempted to place a real cap on debts.
It imposed a fixed limit on the total amount of interest and charges on unpaid debt, so that you will only ever owe double the unpaid capital amount.
If you borrowed R100, and interest amounted to R300 but you had paid R50 of the capital, you would only owe R100 – double the unpaid capital of R50. More interest and charges cannot be added as you make payments.
In 2009, following opposition from the banks, the National Credit Regulator (NCR) made the high court confirm that a ceiling is in place.
The effect on the banks is huge, as the higher the interest rate the faster you will reach the in duplum ruling, says Hirst.
"We are in a low interest cycle at present, but what happens if interest rates reach the dizzy heights where consumers are paying 18% to 20% or a bond?
Banks move in to scrap the cap
"Also, for microlenders who are allowed to charge interest at up to 5% a month for a loan of under 12 months, any defaults would quickly hit the in duplum ceiling."
All four of the major banks are now appealing the judgment, says Peter Setou, NCR senior manager for education and strategy.
A date has not been set, but the matter will probably be heard in the Supreme Court of Appeal in the first half of 2011.
The current appeal is being brought by the main banks under the auspices of the Banking Association of South Africa, says Marthinus van Rensburg, head of Absa's legal department.
"The in duplum rule has always been part of our common law and has therefore always been part of Absa's way of doing business.
"Absa's interest in the appeal is to ensure that the interpretation of the in duplum rule in the context of the NCA is clear and unambiguous. This will ensure legal certainty, consistent application and the avoidance of opportunistic abuse."
According to First National Bank spokesperson Bongolethu Futuse, the banks are not opposing the in duplum section in the legislation or the principle involved. However, because of the significant remaining uncertainty (after the 2009 ruling), FNB and the other banks decided to lodge an appeal.
It is hoped the appeal will give the necessary "juristic certainty" on the correct interpretation and application of the rule in the various credit asset class categories.
"Due to this uncertainty, there are various interpretations of this section being applied in the market and the impact on the business of credit providers as well as consumers cannot be defined with any certainty until the ruling from the Supreme Court of Appeal is obtained.
"In the interim, consumers are therefore likely to experience different treatment under (the in duplum) section of the act by different credit providers, depending on their interpretation of the section."
However, local legal and debt management experts contend that the banks are in fact moving to scrap the cap.
Should the pending application in the high court be granted, it would mean that interest and costs will accrue on default facilities ad infinitum once they commence repayment of the default amount, says Robyn Hersch, an independent debt management consultant at Gauteng-based Debt Comm.
"This may have the effect that the consumer in default will pay towards an ever-moving target, if all he can afford to pay is the minimum monthly instalment agreed upon.
"A facility that was initially granted for a period of 60 months, for example, will be drawn out based on what the consumer can afford. Ultimately, the consumer will pay far more towards the facility than anticipated by either the credit provider or himself."
It will be a significant and unconscionable setback for consumers, adds Logan.
"If the NCA is interpreted contrary to the intention of parliament, to give consumers only what the in duplum rule did, consumers will face the old prospect of having interest added as they repay their debt.
"Credit providers, debt collectors and collection attorneys will be afforded endless opportunity to top up consumer's glasses with interest and charges as they repay their debts."