STATE SETS OFF CREDIT bomb

SA’s credit in­dus­try has been mak­ing the case for years that it needs to charge higher in­ter­est. In re­sponse, the dti wants to slash rates and fees

CityPress - - Front Page - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za

The depart­ment of trade and in­dus­try (the dti) and the Na­tional Credit Reg­u­la­tor have set off a bomb in South Africa’s credit in­dus­try.

New pro­posed lim­its on in­ter­est rates and fees were gazetted last week that amount to a kick in the teeth for the un­pop­u­lar mi­crolend­ing in­dus­try, which has been lob­by­ing fe­ro­ciously for higher le­gal rates and fees.

The dti pro­pos­als would in­stead do the op­po­site: slash the rates charged on short and un­se­cured loans as well as store cards and credit cards – all the main av­enues of lend­ing to poor South Africans.

The pro­pos­als are also likely to have a knock-on ef­fect on all credit providers, in­clud­ing large banks, es­pe­cially once the SA Re­serve Bank starts rais­ing its repo rate in com­ing years ( see side­bar).

This will be the first re­view of le­gal rates and fees since 2007, when the Na­tional Credit Act came into full ef­fect.

The largest im­me­di­ate ef­fect of the dti’s pro­pos­als, which are open for com­ment this month, would be on un­se­cured loans – where the max­i­mum le­gal in­ter­est rate would in­stantly fall from 32.65% to 24.78%.

Short-term loans, de­fined as less than R8 000 for less than six months, will re­tain their max­i­mum rate of 5% per month, but that will fall to 3% if the same per­son takes out two loans in a sin­gle year.

Credit cards, over­drafts and the store cards is­sued by re­tail­ers – which are in essence credit cards – have a max­i­mum rate of 22.65%, which would drop to 19.8%.

All these rate cuts would im­me­di­ately change the game for the mar­gins of the credit sec­tor, mak­ing much of their debt books illegal un­less their rates are dropped.

The pro­pos­als also af­fect the ini­ti­a­tion and ser­vice fees that lenders can charge.

Where mi­crolen­ders have been beg­ging for a dou­bling of the per­mis­si­ble max­i­mum ini­ti­a­tion fees to R2 000 per loan, the dti is propos­ing an al­most point­less sym­bolic in­crease of 5% to R1 050.

Where the in­dus­try had wanted the max­i­mum monthly ser­vice fee dou­bled to R100, the dti is propos­ing R60.

The pro­pos­als are an un­equiv­o­cal re­buke of mi­crolend­ing in­dus­try lobby group Mi­cro­fi­nance SA (MFSA), which has been mount­ing a cam­paign to get rates and fees ad­justed in the op­po­site di­rec­tion.

The MFSA po­si­tion has been that, at the very least, the fees should be ad­justed to take in­fla­tion over the past eight years into ac­count.

Hen­nie Fer­reira, CEO of the MFSA, calls the pro­pos­als “dis­ap­point­ing” and says his or­gan­i­sa­tion will not only make a sub­mis­sion on it but en­gage with the dti “to un­der­stand the ra­tio­nale”.

The MFSA’s po­si­tion is that low­er­ing max­i­mum le­gal rates will in­stead drive the mar­gins of the credit mar­ket into the arms of illegal money­len­ders who “are wait­ing in an­tic­i­pa­tion”.

Zodwa Ntuli, deputy di­rec­tor-gen­eral at the dti for con­sumer and cor­po­rate reg­u­la­tion, said the pro­pos­als were the third leg of gov­ern­ment’s at­tempts to fight overindebt­ed­ness.

The first was to amend the Na­tional Credit Act to in­tro­duce more strin­gent af­ford­abil­ity tests. The sec­ond in­volved on­go­ing moves to stop credit providers from mak­ing their money through ad­di­tional, of­ten hid­den, credit-in­sur­ance sales.

The pro­posed changes to max­i­mum rates and fees aimed to “bal­ance ac­cess and af­ford­abil­ity”.

“As much as we want peo­ple to have ac­cess to credit, they must be able to af­ford it. Oth­er­wise, they end up in a debt cy­cle from which they may never es­cape,” Ntuli told City Press.

The Na­tional Credit Reg­u­la­tor’s spokesper­son, Le­bo­gang Selibi, said the pro­pos­als were in­formed by “the growth of un­se­cured credit agree­ments over the past few years, the cur­rent lev­els of con­sumer overindebt­ed­ness and the reck­less be­hav­iour of some lenders in ex­tend­ing loans to con­sumers who can­not af­ford them.”

In the un­se­cured-lend­ing mar­ket, “some lenders tend to lend at the max­i­mum rates”, said Selibi, cit­ing the reg­u­la­tor’s in­ter­nal re­search. This was also ev­i­dent from com­plaints it re­ceived. Ac­cord­ing to the MFSA’s Fer­reira, how­ever, it var­ied a great deal. Some­thing in the re­gion of 18% of short-term and un­se­cured credit would be af­fected by the low­er­ing of rates, he told City Press.

This ef­fect will prob­a­bly be small when it comes to mort­gages. Banks gen­er­ally do not charge the max­i­mum per­mit­ted rates on home loans. With short-term and un­se­cured loans, the sit­u­a­tion is dif­fer­ent. Re­tail­ers also tend to charge pre­cisely the max­i­mum on their store cards.

Rob Jef­freys, MD of con­sul­tancy Econometrix, said that gov­ern­ment had in ef­fect in­tro­duced price con­trol on credit. He had done com­mis­sioned work for the MFSA, which made the case for “sub­stan­tial” in­creases in the max­i­mum rates and fees.

The fee in­creases be­ing pro­posed were “com­pletely in­con­gru­ous”, he told City Press. In­fla­tion alone meant they should rise at least 70%, not 5%, he said. “The max­i­mum in­ter­est rate should go up, not down.”

As much as we want peo­ple to have ac­cess to credit, they must be able to af­ford it. Oth­er­wise, they end up in a debt cy­cle from which they may never es­cape

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