Credit record rules ‘may limit competition’
REMOVAL of adverse consumer credit information from South African credit bureau records would moderately increase credit risk but in the long term could limit competition in the banking sector, Fitch said on Friday.
The ratings agency said risk would be mitigated because all lenders would still have access to borrowers’ payment histories, while banks could keep and use their own records. “The risk should remain manageable, although it may push up the price of consumer credit.”
The regulations for the removal of adverse credit information and information relating to paid-up judgments came into effect on April 1.
About 1.6 million consumers who have “default listings” will benefit from what is wrongly called “amnesty”.
From that date, credit bureaus have two months to remove this information. Once removed, the information cannot be retained on the register of a credit bureau, nor can it be given to credit providers. This includes “subjective classifications” of consumer behaviour such as “delinquent”, “default”, “slow paying”, “not contactable” and “absconded”.
Fitch said the removal and restriction on use of adverse credit information would increase risk in the system as lenders lost more detailed information on why payments were not made.
“The additional risk will depend on how accurately historical borrower delinquencies can be inferred from the borrowers’ payment history. Credit scoring models may have to be redesigned, and be less effective at identifying credit risks, depending on the extent to which they incorporate adverse credit information.”
It said the impact would be greater for credit products for which large-scale lending decisions were largely based on model results – such as unsecured loans, vehicle loans and, to a lesser extent, mortgages.
“In the long term, the regulations could limit competition in the sector, as potential new entrants would not have access to adverse credit information via credit bureaus. The enforcement of the regulations may be a source of conduct risk for lenders.”
Last week TransUnion said consumers’ ability to pay off credit remained weak. It said if rising inflation led to further interest rate hikes, millions of consumers “on the edge” would be in financial difficulty.