Banks to review clients' indebtedness

2012-11-04 09:57

Johannesburg – Next year banks will have to review their clients’ loans to determine they are affordable.

The review could possibly affect consumers’ ability to obtain credit in future, but for those who are too heavily indebted it might bring relief.

That’s one of the possible steps ahead after Treasury and the Banking Association of South Africa (Basa) last week agreed to develop a uniform measure to determine whether a client can afford a loan.

The National Credit Act will probably be amended to include the uniform measure as part of an attempt to prevent consumers finding themselves in a debt spiral.

According to Basa head, Cas Coovadia, Basa and the National Credit Regulator (NCR) are in talks about changes and amendments to the Act.

Amendments to the Act are expected to be tabled in parliament before the end of March next year.

Coovadia says the amendments are necessary because there are “inefficiencies”. One of these is the lack of a uniform definition of affordability and of when a consumer is too deeply indebted.

Coovadia says Basa, the NCR and Treasury therefore want to compile a type of index to measure this – a debt-to-income ratio or something of that nature. This would provide the market with greater certainty.

Consumers would also know when they had reached that level and that credit institutions would therefore not continue to lend them money.

Credit providers would then also certainly be aware that it would be reckless to advance money to such individuals.

This is all part of an agreement reached between the big commercial banks, Basa and the National Treasury to improve responsible lending practices and prevent households getting into trouble.

In recent months there has repeatedly been talk of a credit bubble in the unsecured lending market because these loans have increased substantially and more and more consumers cannot meet their obligations.

Coovadia says the parties also agreed on appropriate relief measures for borrowers already in difficulties.

The steps and changes will be completed over the next two months and Treasury and Basa will coordinate the process.

Coovadia says every Basa member will develop guidelines to offer relief to qualifying borrowers who are under pressure by reducing the repayments without the borrower incurring additional costs.

In August and October Basa, Finance Minister Pravin Gordhan and the chief executives of Absa Group [JSE:ASA], Standard Bank Group [JSE:SBK], FirstRand [JSE:FSR], Nedbank Group [JSE:NED], African Bank Investments [JSE:ABL] and Capitec Bank Holdings [JSE:CPI] met to discuss issues in the credit market.

Concern was expressed about the lending practices of certain “unscrupulous” operators who granted excessive loans to households, even to those who could not afford them, thereby boosting their margins with inappropriate credit products.

Even pensioners and people receiving social grants often “qualify” for loans they cannot afford.

The banks also undertake not to use garnishee orders.

According to Coovadia the ideal situation is for the industry to have effective collection mechanisms and avoid garnishee orders. For that reason the banks and other players also agreed on minimum standards for debit orders.

The commitments and agreements apply only to banks that are Basa members. Other credit providers, such as microlenders and retailers, are “encouraged” to adopt good practices as well.

Treasury director of finance Ismail Momoniat says microlenders and clothing stores fall outside the ambit of the agreement, as they are not supervised by Treasury.

 - Sake24

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  • J.Stephen.Whiteley - 2012-11-04 11:20

    Anything to avoid raising interest rates and outlaw garnishee orders. Whose palms are greased this time?

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