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Cape Town - Regulations limiting fees and interest rates in the unsecured lending space may, like recent visa regulations, have unintended consequences that will affect both lenders and consumers, a loans expert warned on Monday.
The final notice on the “Review of Limitations of Fees and Interest Rates” was published in the Government Gazette on November 6 and the final maximum interest rates were calculated at the current repo rate (RR) of 6%. The regulations will come into effect in May next year.
Interest rates on unsecured loans will then be capped at the repo rate plus 21% - amounting to 27% based on the current repo rate - and 6% lower than current maximum rate of 33.2%. Fees, however, are increased and should contribute approximately 1% additional yield.
Izwe Loans CEO Rayanne Jacobson said that over the past 10 years there has been a significant increase in short-term credit granted. In her view, this trend is set to continue even as the new regulations are implemented. Loans less than six months, for example, are 198% higher than a year ago, while the number of loans over 25 months is down 22%, the recent National Credit Regulator quarterly report shows.
"Credit providers are already finding longer-term loans less sustainable to finance and clients are not qualifying as easily as previously and are moving towards shorter-term loans, often with unregulated lenders," said Jacobson.
"The net result is that lenders will come under increased margin pressure and consumers will find it harder to get loan approval and this could push more people to approach unregulated and expensive informal lenders."
Jacobson also pointed out that the South Africa Reserve Bank (Sarb) has said it is unlikely that the marginal increases in interest rates and fees in some categories of credit transactions will offset the reduction in maximum interest-rates chargeable on unsecured credit and that, if credit is curtailed, it is unlikely that overall consumer welfare would be improved.
In Jacobson's view, the new regulations come on the back of a number of prior regulatory changes - the provision of proof of affordability by the consumer, for example - which may over time, result in an improvement in bad debts. The credit provider also verify the consumer’s expenses from credit bureau data.
"These requirements, although cumbersome from the credit provider’s perspective in terms of re-engineering operational processes to facilitate this, were positive in that they enforced the appropriate approach to ensure responsible lending where the consumer lacks adequate disposable income to fund future repayments on the loan. Naturally, bad debts should reduce as an encouraging consequence,” she said.
At the same time he cautioned that over-regulation or inappropriate regulation can have negative consequences too.
"Following a long period of under regulation leading to the growth of companies like African Bank investments Limited (Abil), the unsecured lending market has undergone a significant correction. Since Abil’s collapse, regulation has increased but the macro-economic impact has been severe," said Jacobson.
"New regulations have tightened the rules relating to credit underwriting on the part of the credit providers, resulting in a contraction of supply by regulated entities. There is, however, still a demand, sending people to unregulated lenders."
She explained that, as volumes and values of disbursements reduces, this places financial pressure on the credit providers to sustain their operational models against a fixed infrastructure platform and may be the reason for a number of such providers opting for business rescue as a last resort.
"The concern is that the most recent regulatory development has been implemented without clear impact studies - as suggested by SA Reserve Bank. Unemployment is 25.5% officially, and economic growth is forecasted at 1.5% whereas two years ago it was 2.5%, 1% of which was believed to be fueled by consumption spending," she said.
Microfinance, done responsibly, is a huge contributor to economic growth, in her view.
"It is also the only way to give many people access to finance in order to grow their businesses or improve their lives. Responsible lending and responsible borrowing lead to increased prosperity and higher economic growth,” she said.
"Education of consumers still has a long way to go, but is crucial in ensuring people do not fall into debt traps brought on by the culture of rampant consumerism and reckless borrowing in the country."
She says she does not doubt that the creation of a macroeconomic ecosystem that breeds responsible actions across the spectrum, and stimulates economic growth, built on the tenets of education, is already evident and has been improved in recent years.
"However, the dramatic response to the inappropriate rules of the past, without knowledge of what the unintended consequences are, may prove to be counterproductive in the end," she warned.
On Monday, DebtBusters also warned that, while the proposed cap on interest rates and initiation fees for credit agreements is a necessary one for consumers, it could have a negative impact on lenders, making it even more difficult for borrowers to obtain loans in the future. Those that have become dependent on short-term loans for survival will surely reach a ‘debt end’ very soon.
The latest stats from DebtBusters' second quarter Debtometer Report confirms that DebtBusters clients with unsecured bank loans has decreased from 64% to approximately 46%, alluding to the fact that banks have already gotten stricter when issuing credit.
“Now, with the new interest rate caps, lenders can be expected to scale back even further on lending to cut back on risks and costs, resulting in even fewer people qualifying for loans,” said Ian Wason, CEO of DebtBusters.
At the same time, DebtBusters welcomed the Department of Trade and Industry's (dti) draft credit life insurance regulations released for public comment. The draft regulations include proposed caps for credit life insurance for the various types of credit agreements.
“In a recent review of credit life charges by mainstream credit providers, DebtBusters uncovered some horrific practices in the marketplace. Findings indicate that although some credit providers, particularly the banks, fall below the dti’s proposed R4.5 per R1 000 of deferred amount, almost all other credit providers are charging far in excess of this, with the average ‘non-bank’ consumers paying over R12 per R1000 borrowed,” said Wason.
