Unsecured loans: Minister of Trade & Industry; National Credit Regulator; Banking Association of SA & SA Reserve Bank input

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Trade, Industry and Competition

01 May 2012
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Minister of Trade and Industry contextualised how the Ministry and the Department saw this presentation. The Ministry and Department were very clear that they did not want to cross over into the territory of the prudential regulators of the banking system whose mandate it was to make sure that the banking system stayed liquid or profitable enough, but which had the role of consumer protection in the area of credit. So, when unsecured lending increased by 53% between 2010 and 2011, the National Credit Regulator (NCR) had to be vigilant and make sure that within that broad perimeter, no practices were emerging which were unfairly preying on low income consumers, which were not increasing over indebtedness, and which were not bordering or crossing the line into reckless lending. The NCR had to be engaged and pro-active in identifying and analysing these trends and engaging with them. He hoped the mandate was clearly understood.

When the National Credit Regulator presented its Strategic plan to the Portfolio Committee on 20 March 2012, it expressed its concern over the boom in unsecured credit. The Chairperson of the Committee then asked the NCR to come back and make a presentation on unsecured credit. The research was incomplete although it was substantially done. The NCR picked up that there was a shift in the consumer credit market in the sense that more credit was extended as unsecured credit and there were fewer home loans.  The NCR was concerned and decided that it had to proactively try to understand the phenomenon. To this end it commissioned a study. The terms had extended and the value of the loans had gone up and the NCR would like to review the impact this had on consumers. As part of the current research, the NCR conducted focus group discussions and reviewed secondary data, desktop research to see what information was out there in terms of consumer behaviour. After having submitted the final report, the NCR would then determine the exact action that needed to be taken. For the purposes of this research, the NCR focussed on unsecured personal loans only, because the increase was in this area. The completed report on the research would be presented towards the end of June 2012. Graphs showed that mortgages rose between 2007 and 2009 from 62-3% to 65-6% and at the end of 2011 dipped to 60%. For the same period, unsecured loans rose from 4% to 8%. At 8% it did not pose a threat to the stability of the industry. The larger banks had realised the potential in the market and was targeting it. The second graph under the heading Credit Market Analysis – Unsecured Personal Loans (UPL) showed the number of UPL applications vs approvals. The approvals as a percentage of applications had increased from 55% to 57%, which meant that there was an increase in approvals. 30% of the loans were in the category of less than R15 000. There was a spike in loans of R61 000 - R100 000. This represented consolidated loans. Just more than 11% of the amount to be repaid to the credit provider was credit life insurance. The average interest rate was 23.5% which was lower than the market cap of 32.1%. Smaller loan amounts were charged at higher interest rates than larger loan amounts.

The largest spend were on building and renovations, based on unverified information obtained from credit providers. The graph showing overdue accounts showed that the loans of R30K and less were the higher risk loans and showed the biggest number of overdue accounts. The overdue profile at the moment did not show an upward trend. The credit market growth over the past year was 9%, which was a little higher than inflation, but not exorbitantly higher. It grew from the low base of unsecured loans. There were different credit provider categories and there was differentiation between the issues and behaviours that affected them. To understand the market one had to understand the different categories. There had been a shift in the market; and one had to understand the drivers for that shift. Savings vs credit was a matter to be unpacked. From workshops, the NCR learnt that the savings incentive was not a favourable option from a consumer perspective. This, combined with the consumer behaviour of need gratification, made for a complex market from the consumer’s perspective. Segmenting the credit supply side would make it easier to understand this market. It was important to realise that commercial credit was not suitable for all consumers. Interim findings were that credit was used for consumption and wealth/asset building. Consolidation loans were a significant feature of the market. The loan terms and values had been increased phenomenally. Consumers were generally not knowledgeable about the implications of their decisions and behaviour in managing the loans, and education was needed. Reckless lending had to be watched closely. Consumers did not always tell the truth about their financial burden when applying for a loan. Consumers focussed on whether they could afford the instalment, instead of what they would be paying overall. The research would also shed light on the level of credit life that was appropriate in the different categories of credit provision in order to protect both the consumer and the credit provider. The NCR listed its own to-do list in terms of processes underway, for example, the research process and what it planned to do in order to understand the credit market better so that it could steer the credit market in a positive direction and avoid crises in the future.

The Banking Association of South Africa (BASA) noted that unsecured lending had escalated from R18.3 billion in 2010 to R28.3 billion in 2011. The BASA together with four large and two smaller banks were working closely with the NCR on its research on unsecured credit. The retail credit providers were significant players in the market. BASA felt it was wrong to make assumptions about the impact on households, or factors contributing to the increase, before the research was complete. BASA believed that the current shift had to be seen against the background of the bigger picture. In 2008, the household indebtedness to income was 82%, while it was currently 75%. This meant that the situation had actually improved. In proportion to total credit, unsecured credit was only 8% of the total book. The South African Reserve Bank (SARB) bi-annual Financial Stability Review Report stated that unsecured credit did not constitute a bubble, and did not currently pose any systemic risk to the financial stability of the country. Unsecured credit was being extended to people in the higher income bracket. According to the banks, the average income of the consumer was R200 000 per annum. The reasons for the loans were higher real incomes, household improvements, medical and educational reasons, loan consolidation and consumer expenditure. The loans went primarily to the formally employed. There was a structural shift in the credit market and this was one factor that led to the increase in unsecured lending. There were a number of reasons for this. There had been a shift away from mortgage finance for the following reasons: Increase in funding costs due to regulations, the increase in costs and delays in effecting security, lack of equity in property market, defaulting on home loans and structural changes in home loans, and Basel III implications.  BASA was working closely with the reserve bank on Basel III. At this stage there was no evidence of a bubble. The SA banking system was rated second in the world in terms of stability, after Canada. According to the SARB bi-annual Financial Stability Review Report, the unsecured credit exposure of banks remained at less than 10% of the bank’s total gross credit and did not constitute a bubble. BASA urged the members of the Portfolio Committee not to speculate on the matter, but to await the outcome of the research conducted by the NCR in cooperation with BASA and the major banks. BASA believed that there was no immediate cause for concern, but that the situation with unsecured credit had to be closely monitored.

The South African Reserve Bank's Bank Supervision Department reported on the SARB's survey of six major banks, which included the larger banks operating in SA, who were the bigger players in the unsecured lending market. It had to be understood that one of the tools of the regulator would be capital that the banks had to hold. The SA banking system was one of the best capitalised systems in the world. Under the regulations, the Registrar could also add a capital surcharge, and this was done with banks where the Bank Supervision Department saw a concentration on a particular product. Some of the banks offering unsecured credit would hold capital far in excess of the minimum requirements in terms of what was needed. This underlined and underscored the financial health and strength of the financial banking sector. The SARB wanted to understand why banks were entering this space. What were their policies, what were their procedures, what were their provisioning methodologies and risk appetites for the products? When these questions were answered the SARB would have a better understanding of unsecured lending. Unsecured credit made up 8% of the total credit assets. It increased from R289 billion in September 2010 to R345 billion in January 2012. For the SARB as the banking supervisor, it was important to understand how the processes were controlled within the banks. The boards of the various banks would be doing presentations to the SARB, stipulating their policies, provisioning practices and their procedures and demonstrating whether they as a board were on top of unsecured lending as a product within their total credit range. The SARB would monitor the information it gathered and collate it. It was not currently in a position to give a complete summary, but its view was that, at 8%, unsecured lending did not constitute a bubble and it did not pose a threat to the stability of the banking system.

Members asked what the interest rates on these unsecured loans were, what the defaults rates were on home loans, and why, if the South African Reserve bank had everything under control, there was a shift in the market from mortgage loans to unsecured personal loans. Members also asked what the loans were spent on and what portion of them was spent on education. Members asked why smaller unsecured loans made by low-income consumers had higher interest rates than bigger loans made by better resourced consumers, and why loan applicants who had no existing debt and no credit record were turned away by banks.

Meeting report

Minister's introduction
The Minister of Trade and Industry, Dr Rob Davies, wanted to contextualise how the Ministry and the Department saw this presentation. The Ministry and Department were very clear that they did not want to cross over into the territory of the prudential regulators of the banking system whose mandate it was to make sure that the banking system stayed liquid or profitable enough, but which had the role of consumer protection in the area of credit.

He wanted to read a few clauses from the National Credit Act which he felt defined the role of the National Credit Regulator in regard to the matter to be discussed in this meeting.

Section 3(g) of the Act stated that one of the objectives of the Act was to address and prevent over-indebtedness of consumers.

Section 3(e) stated that the Act served to address and correct imbalances in negotiating power between credit consumers and providers.

Referring to the Task of the National credit Regulator (NCR), Section 15( c) talked about monitoring the consumer credit market and the industry to ensure that prohibitive conduct is prevented or detected and prosecuted.

The Credit Regulator was also expected to analyse and research trends and practices and so on.

He wanted to emphasise that fact that prohibitive conduct had to be prevented, and not only prosecuted after the fact, but it had to identify potentially undesirable conduct in terms of the credit market.

So when unsecured lending increased by 53% between 2010 and 2011, the NCR had to be vigilant and make sure that within that broad perimeter, no practices were emerging which were unfairly preying on low income consumers, which were not increasing over indebtedness, and which were not bordering or crossing the line into reckless lending.

These were the discussions the Ministry and the Department had with the NCR. The NCR to be engaged and pro-active in identifying and analysing these trends and engaging with them. 

The NCR was going to issue notices regarding a practice that had reared its head. Consumers were refused secured loans which they applied for, but were offered instead unsecured loans at a much higher interest rate, under the table by the same dealership. This practice was uncovered in the automotive industry and it was being watched.

This was the mandate of the NCR. It was going to present the product of some research and would indicate further lines of research. The mandate from the Ministry and Department as the executive authority was that it believed that the NCR had to act to ensure that the current trend did not result in over indebtedness, in preying on low-income consumers and did indicate undesirable practices in the form of reckless lending. He hoped the mandate was clearly understood.

National Credit Regulator (NCR) Unsecured Personal Loan (UPL) Market presentation
Mr John Symington, Compliance Institute SA CEO, said when the NCR presented its strategic plan to the Portfolio Committee on 20 March 2012, it expressed its concern over the boom in unsecured credit. The Chairperson of the Committee then asked the NCR to come back and make a presentation on unsecured credit. The research was incomplete although it was substantially done. The NCR would probably have to come back at some point with the results of the completed study. The NCR was happy to be part of the dialogue on unsecured credit.

Ms Nomsa Motshegare, NCR CEO, said a substantial part of the work was done; however the NCR wanted to understand the consumer angle in this. The NCR picked up that there was a shift in the consumer credit market in the sense that more credit was extended as unsecured credit and there were fewer home loans.  The NCR got concerned and decided that it had to proactively try to understand the phenomenon. It commissioned a study in order to understand what the drivers were.

Previously under the Usury Act, one could get a loan for R10 000 to be repaid over a period of 36 months. Through the introduction of the National Credit Act (NCA), one saw loan amounts of R200 000 to be repaid over a period of 60 months or 72 months. The terms had extended and the value of the loans had gone up and the NCR would like to review the impact this had on consumers.

As part of the current research, the NCR conducted focus group discussions and reviewed secondary data, desktop research to see what information was out there in terms of consumer behaviour. After having submitted the final report, the NCR would then determine the exact action that needed to be taken. The NCR was in the meantime also investigating the potential reckless lending behaviour in the market place.

The study focused on unsecured personal loans. There had been articles in the newspapers on unsecured loans, which included credit card facilities, store cards and overdraft facilities. For the purposes of this research, the NCR focussed on unsecured personal loans only, because the increase was in this area.

The NCR had advertorials and articles, panel discussions and live interviews across the mass media to make consumers and credit providers aware of the fact that the proper affordability assessment had to be done to determine whether a consumer qualified for a loan. The NCR sensitised many role-players in the industry to these issues, including Treasury and the Department of Trade and Industry (DTI).

To gather the information, the NCR conducted the consumer focus group discussions, it had internal workshops, it did desktop research, in had interviews and meetings with credit providers, including the banks, but it still needed to do more. It had discussions with the Microfinance Association of SA, BASA and the SARB. It referenced other surveys and analysed other recognised data. The final research would be presented towards the end of June 2012,

Mr Symington unpacked the key features of the unsecured credit lending growth. (See presentation for the graphs).The graph under the heading Credit Market Analysis depicted the following information. Mortgages and credit was shown as a percentage of the Total Lending Book.

Mortgages rose between 2007 and 2009 from 62-3% to 65-6% and at the end of 2011 dipped to 60%. For the same period, unsecured loans rose from 4% to 8%. At 8% it did not pose a threat to the stability of the industry. The larger banks had realised the potential in the market and was targeting it.

Under the heading Credit Market Analysis, the graph showed that both the rand value and the number of accounts was growing, but the rand value was growing faster than the number of accounts. This was due to two reasons. The first would be consolidation loans, which was a feature of the market. If a consumer had three loans, he took a consolidation loan from a fourth credit provider, settled the debt of the three loans, and only paid off the one consolidated loan. This practice had features which were positive for the consumer and other feature which the NCR would want to monitor. One loan had less administration costs and a lower rate could be negotiated. The second reason was that there were larger amounts being granted in unsecured personal loans. Previously a typical personal loan would be paid off in three years and less. Currently the amounts were bigger and the periods to pay it back longer, for example five years.

The second graph under the heading Credit Market Analysis – Unsecured Personal Loan (UPL) showed the number of UPL applications vs approvals. Between March 2010 and September 2011 the applications grew from 1.9 million to 3.4 million. The approvals as a percentage of applications had increased from 55% to 57%, which meant that there was an increase in approvals.

The next slide showed that 30% of the loans were in the category of less than R15 000. There was a spike in loans of R61 000 - R100 000. This represented consolidated loans.

The next slide showed that just more than 11% of the amount to be repaid to the credit provider was credit life insurance. The average interest rate was 23.5% which was lower than the market cap of 32.1%. Smaller loan amounts were charged at higher interest rates than larger loan amounts.

The next graph showed that the largest spend was on building and renovations.

The next slide showed overdue accounts. The graph on the left showed that the loans of R30 000 and less were the higher risk loans and showed the biggest number of overdue accounts. The graph on the right showed the income groups of the overdue accounts. The overdue profile at the moment did not show an upward trend. It was a key statistic which needed to be monitored going forward.

Ms Darrel Begin, NCR Chief Information and Research Officer, said that the credit market growth over the past year was 9%, which was a little higher than inflation, but not exorbitantly higher. It grew from the low base of unsecured loans.

There were different credit provider categories (see presentation) and there was differentiation between the issues and behaviours that affected them. To understand the market one had to understand the different categories.

There had been a shift in the market; and one had to understand the drivers for that shift. Savings vs credit was a matter to be unpacked. From workshops, the NCR learnt that the savings incentive was not a favourable option from a consumer perspective. This, combined with the consumer behaviour of need gratification, made for a complex market from the consumer perspective. The NCR managed through this process to align the different overlapping regulatory bodies and there was agreement on them cooperating in order to address the matter as a whole.

Segmenting the credit supply side would make it easier to understand this market. It was important to realise that commercial credit was not suitable for all consumers. At this stage the solution to that problem had not been formulated.

Interim findings were that credit was used for consumption and wealth/asset building. Consolidation loans were a significant feature of the market. The loan terms and values had been increased phenomenally.

Consumers were generally not knowledgeable about the implications of their decisions and behaviour in managing the loans and education was needed. The total financial burden on the consumer had to be considered, not only the debt burden. Reckless lending had to be watched closely. Consumers did not always tell the truth about their financial burden when applying for a loan. Consumers focused on whether they could afford the instalment, instead of what they would be paying overall. Disclosure improved following the NCA, but was still not ideal. The research would also shed light on the level of credit life that was appropriate in the different categories of credit provision in order to protect both the consumer and the credit provider.

The regulatory tools at the disposal of the NCR were listed in the presentation. The NCR listed its own to-do list in terms of processes underway for example the research process and what it planned to do in order to understand the credit market better so that it could steer the credit market in a positive direction and avoid crises in the future.

It planned to build on the NCA mandate, enhance its supervisory approach and address loopholes in reckless lending. It was building a risk-based framework as well as cooperation with other stakeholders. It planned to review the regulatory framework, prioritise consumer surveys, enhance consumer education, and initiate a national conversation regarding lifestyle spending and consequences of over-indebtedness.

At this stage there was no crisis in the credit market.

Banking Association of South Africa  Unsecured lending Presentation
Mr Cas Coovadia, BASA Managing Director, presented. He said unsecured lending had escalated from R18.3 billion in 2010 to R28.3 billion in 2011, as shown in the first graph. (See presentation)

BASA, together with four large and two smaller banks were working closely with the NCR on its research on unsecured credit. Other unsecured credit providers were micro lenders, furniture stores and other retailers. He thought the retail credit providers (CPs) were significant players in the market.

He believed that it was wrong to make assumptions about the impact on households, or factors contributing to the increase, before the research was complete.

He believed that the current shift had to be seen against the background of the bigger picture. In 2008, the household indebtedness to income was 82%, while it was currently 75%. This meant that the situation had actually improved. In proportion to total credit, unsecured credit was only 8% of the total book. The SARB bi-annual Financial Stability Review Report stated that unsecured credit did not constitute a bubble, and did not currently pose any systemic risk to the financial stability of the country.

There was a plethora of legislation that banks had to adhere to when extending credit and they did. Most consumers were existing clients of the various banks, which meant that their financial histories were known to the banks and thus factored into their assessments to determine their creditworthiness. If banks did not adhere to the legislation they had to be acted against.

Unsecured credit was being extended to people in the higher income bracket. According to the banks, the average income of the consumer was R200 000 per annum. The reasons for the loans were higher real incomes, household improvements, medical and educational reasons, loan consolidation and consumer expenditure. The loans went primarily to the formally employed.

There was a structural shift in the credit market and this was one factor that led to the increase in unsecured lending. There were a number of reasons for this. There had been a shift away from mortgage finance for the following reasons: Increase in funding costs due to regulations, the increase in costs and delays in effecting security, lack of equity in property market, defaulting on home loans and structural changes in home loans, and Basel III implications.  BASA was working closely with the reserve bank on Basel III and it would be implemented. It was probably going to make long term lending difficult and expensive and banks were reacting to it.

At this stage there was no evidence of a bubble. The SA banking system was rated second in the world in terms of stability, after Canada which was first. According to the SARB bi-annual Financial Stability Review Report, the unsecured credit exposure of banks remained at less than 10% of the bank’s total gross credit and did not constitute a bubble.

The preliminary NCR report of the NCR showed that there was no evidence of a bubble and the unsecured credit book was performing well. Borrowers were generally managing their debt well.

In summary, he said that, historically, the majority of South Africans were unable to accumulate assets, which meant that unsecured credit had to be an important tool to extend credit to people. Unsecured credit was not necessarily bad. The extending of unsecured credit happened in a prudent way. The current data showed no evidence of an impending bubble.

In conclusion, he urged the members of the Portfolio Committee not to speculate on the matter, but to await the outcome of the research conducted by the NCR in cooperation with BASA and the major banks. BASA believed that there was no immediate cause for concern, but that the situation with unsecured credit had to be closely monitored.

South African Reserve Bank Credit Exposure of Selected South African Banks to Unsecured Lending Mr René van Wyk, Registrar of Banks, SARB, said the Bank Supervision Department, under his direction, chose flavour-of-the-year themes to focus on and this year unsecured lending was one of the themes it decided upon, in order to understand it better.

The SARB had done a survey of six major banks, which included the larger banks operating in SA, who were the bigger players in the unsecured lending market. It had to be understood that one of the tools of the regulator would be capital that the banks had to hold. The SA banking system was one of the best capitalised systems in the world. Under the regulations, the Registrar could also add a capital surcharge, and this was done with banks where the Bank Supervision Department saw a concentration on a particular product. Some of the banks offering unsecured credit would hold capital far in excess of the minimum requirements in terms of what was needed. This underlined and underscored the financial health and strength of the financial banking sector.

The SARB wanted to understand why banks were entering this space. What were their policies, what were their procedures, what were their provisioning methodologies and risk appetites for the products? When these questions were answered the SARB would have a better understanding of unsecured lending.

He was aware that there were other players in the field, but from the six banks the SARB surveyed, it found that unsecured credit made up 8% of the total credit assets. It increased from R289 billion in September 2010 to R345 billion in January 2012, a year-on-year increase of 13.9% and a month-on-month increase of 3.1%. The loans greater than R30 000 showed the greater percentage increase.

For the SARB as the banking supervisor, it was important to understand how the processes were controlled within the banks. The boards of the various banks would be doing presentations to the SARB, stipulating their policies, provisioning practices and their procedures and demonstrating whether they as a board were on top of unsecured lending as a product within their total credit range.

The SARB would monitor the information it gathered and collate it. It was not currently in a position to give a complete summary, but its view was that, at 8% it did not constitute a bubble and it did not pose a threat to the stability of the banking system. The SA banks were capitalised well above the minimum requirements.

Discussion

Dr W James (DA) remarked that private companies were sitting on a lot of cash. They did not invest, because there were no good projects to invest in. The Government was under pressure to spend more money and had to borrow. The amounts borrowed increased. It could not borrow against the nationfs savings and pensions, because South Africans were not saving enough. The highest spending of the banks were on bonds and there was a category gOtherh. He asked what gOtherh was. Consumption expenditure was high compared to spending on education. The country was heading in the wrong direction. Secured loans were decreasing and the current trends and practices did not augur well for the future financial health of the nation.

Mr B  Radebe (ANC) referred to the BASA presentation where it stated that a certain part of the population - black people in the broad sense – could not accumulate assets under apartheid, and thus had no security to offer when taking out a loan. The availability of unsecured loans made it possible for these people to obtain loans. What he found contradictory was that these same low income earners, when taking out unsecured loans, had to pay punishing interest rates. Was BASA really helping people who were disadvantaged by apartheid? Richer people, who qualified for secured loans, had lower interest rates. This still maintained the old system.

Mr X Mabaso (ANC) asked how banks related to rural areas and whether there was a bias of urban vs rural.

Mr G Selau (ANC) thought it was very important, in the light of market changes and the trend of the growth in unsecured loans that the NCR did research to study the impact on the consumer, and also in order to inform its decision on which direction to take. He noted that the SARB was in the process of setting up a Committee to research the current phenomena. He asked what the impact would be of the latest petrol price increase on the public. How would they handle it in the face of the picture portrayed by the presentations?

Mr Coovadia replied that Dr Jamesf conceptualisation on the financial health of the country was indicative of a broad mandate. People were under pressure already financially, and then there were petrol and electricity price increases. The banks were owed lots of money by defaulting consumers.  Members asked why the banks did not lend more money to poor people and people in rural areas. A discussion was needed on the health of the banking sector and the real challenges it faced.

Banks were not monolithic structures. They were competing for customers. Consumers had to shop around for banking services to see where they could get the best deal.

Historically black people were stopped from accumulating assets. This needed redress. From the banks' point of view, the majority of people considered risky were black. It was not a racial bias. If the country wanted to maintain a healthy banking sector, what was needed was a conversation about the challenges of the banking sector, and what it had to do to remain healthy. The existing and emerging markets had to be looked at and the banking sector had to develop products and services to provide for those markets in a profitable way. If the markets worked, the banks would lend to them. Mr Mabaso asked whether banks were approached by cooperatives to assist them with funds.

Mr Coovadia replied BASA had established an Inclusion Committee with banks. Banks were looking at how to work with cooperatives.

Dr James asked what was the average interest rate was of a secured loan compared to an unsecured loan.

Mr Trevor Bailey, NCR  Chairperson, said interest rates varied across unsecured and secured loans. The statistics showed that the rates varied. Mortgage loans interest rates were in the region of 8-9%. Unsecured personal loans they were not all the same. One had to understand the market of supply and demand. The providers supplied different markets. Unsecured loans interest rate was in the vicinity of 11-13%.

Dr James asked BASA what the default rate was, as well as what the trends were for repossessions and auctions.

Mr Mabaso told the meeting about a family who had a home loan from a particular bank and had a 28 years long relationship with this bank. The breadwinner lost his job and the bank repossessed the house, ignoring the history and the loyalty that the family had to this bank

Mr Bailey replied if consumers defaulted, the provider could not charge fees more than double of what the consumer owed at the point of default. This created uncertainty for the credit provider.

Mr Coovadia said the banks worked very hard in the last few years to not repossess houses. Who could they sell these houses to? The banks had to spend a lot of money on security to protect the houses. They bent over backwards to help people to keep their houses. They worked with the relevant department to restructure the loans. There were rules to agree to and it made sense for the banks to follow this route. The banks were doing a whole range of things to address the problems of clients.

The Chairperson said the NCR made several comments about the lack of knowledge about consumer protection. The best way to protect consumers was to empower them. Consumers were vulnerable and not empowered currently

Mr Bailey replied that consumer education was important. Most consumers were ignorant about the overall cost of loans and were more concerned with the affordability of a monthly instalment.

Ms Motshegare agreed that more needed to be done to empower consumers. Unsecured loans could be expensive. More needed to be done in the area of education.

The Minister added that he wanted pro-active engagement from the NCR. It was responsible for consumer protection. The NCR uncovered unsavoury practices, like consumers being denied secured loans and then being offered unsecured loans at higher rates, repeat disbursements of the same loan, with initiation fees charged every time, pin number fraud, etc. These practices had been uncovered ahead of the research. The Regulator had to be proactive. He would make sure that these practices did not proliferate on his watch. He admitted that there were weaknesses in the NCR.

Mr  Radebe said that the NCR was looking at the National Credit Act and the loopholes in it. What were the loopholes? People looked at the Act as a panacea to fix all that was wrong, only to hear that there were still loopholes.

Mr Bailey replied that sometimes the problem was not only loopholes in the Act, but reckless lending itself. Credit providers may not lend to consumers who could not repay loans. There had to be best practise guidelines. Consumers provided information to credit providers which were not always true.

Mr Radebe said in the West, where the bubble did burst, the people were also told that everything was OK, until everything collapsed. He asked the SARB, when would unsecured credit become a problem?  Which tools were employed to make sure that the bubble did not burst?

The Minister replied that the banks in SA were liquid and solvent. There was no impending systemic crisis in the sector.

Mr Van Wyk said there was no scientific answer to the question: When did the bubble become too big? One had to look at the economic growth. Banks needed capital to remain liquid. It had to match-up the balance sheet. There were other factors which played a role. It was a situation that needed to be read and monitored.

Mr Selau asked whether it was possible for the banking sector to deal with unsecured loans in isolation from credit cards, overdraft, etc. It came down to the same thing, which was: using money you did not have. It had the same impact.

Ms Motshegare replied that the spike (sharp increase) was in personal loans. This was why the NCR decided to focus its attention there.

Ms S  van der Merwe (ANC) thanked the presenters as well for cohesive, coherent presentations. She said South Africans could be pleased with a banking sector that was capitalised and had a high standing in the world, but the unsecured lending book increased, while there was a decline in home loans. This decline was due to the fact that people could not get loans to buy houses. It was fundamentally important for people to get home loans, because it helped the economy to grow and it helped people. She wanted the NCR to investigate in its research: who was getting home loans and who not? Also, what did it cost in terms of interest?

She disputed the statement that the interest rate was not high. She wanted to know what the repo rate was. Why were banks charging another 2% to extend loans?

She told the story of a hypothetical couple living in Gugulethu in their parentsf yard, who wanted to buy a modest flat which would cost R300 000. They did not have any debt, because they were saving up for the flat. They applied for a loan, but were turned away, because they did not have debt.

She wanted to know why people without debt and a credit record, were seen as a liability by banks, resulting in them being turned away when applying for a home loan.

The bank charged 11.7% for a loan. This caused the cost of a house/flat to more than double over the twenty years it would take to pay it off.

They saved R10 000 for a deposit. This meant that they did not have the full deposit, which meant that they would have to make another loan to be able to pay the full deposit.  Now they would have to pay the 11.7% interest on the loan as well as the loan for the deposit. In the meantime the petrol price went up. This put the consumer under a lot of pressure. Banks had to consider people, not only profit.

Questions were raised about consumer behaviour. Advertisements for loans were ubiquitous and people were tempted continuously.

The Minister replied that Ms Van der Merwe raised the issue of not giving credit for productive activity. There remained a huge lacuna (gap) in the financial market.

Mr Symington replied that the story Ms Van der Merwe told about the hypothetical couple from Gugulethu was true. It was a recurring pattern. 60 000 people defaulted on their mortgage bonds by more than three months. Who would the banks sell these houses to? What caused the shift in unsecured lending? The next phase of the research would also look at secured lending.

He added the granting of credit required a multidisciplinary approach. There was a need for a new social contract to deal with the issue.

Mr Bailey replied that people with stable incomes could get home loans.

Mr Coovadia said there was a housing market called the gap market. These people earned too much to get a Reconstruction and Development Programme (RDP) house and too little to get a home loan. The banks and Government made a plan to service this market. It was not the fault of the banks that they could not lend to certain markets.

Ms Van der Merwe said that one of the things that had to go into the Financial Services Charter was access to financial services for poorer households. She was looking forward to the completion of the research to see the complete picture.

The Minister replied that the period for public comment on the Financial Services Charter was over. The next step was for it to be gazetted. It would create access for the lower income people to mortgage finance.

Mr Mabaso asked how the Bank encouraged borrowing for capital expenditure vs consumption expenditure. If SA wanted to narrow the gap between rich and poor, the banks had to influence where the funds were spent. There had to be support, for example, for Small Medium and Micro Enterprises (SMMEs).

Mr G McIntosh (COPE) complimented the presentations and said that the financial institutions and the NCR were on top of its game. What the SARB said was important, which was that all the hype was exaggerated, and everything was under control.

It was important that such senior people from the institutions as well as the Minister were present. He hoped the Minister would have a talk with a certain other minister whose utterance had damaging effects on the financial and economic image of the country.

Mr McIntosh said there were informal moneylenders all over the place especially in townships. In business this was called the ggrey marketh. He did not like the Financial Intelligence Centre Act (No. 38 of 2001) (FICA), because it was full of gromp-slomph (red tape). He wondered whether this red tape did not drive people to an easier way to lend money, the informal money-lender or loan shark.

If the SARB said the situation was under control, why the increase in unsecured loans? The Usury Act protected consumers, so there was no cause for concern. What did the banks think was causing the shift to unsecured loans?

The Chairperson replied that FICA had to be studied to be understood.

The Chairperson said that BASA had a critical role to enable the consumers to start changing the world in relation to challenges.

The Chairperson said to the SARB that in its presentation it stated that it did not have a definition of unsecured lending. She was becoming worried. In the absence of a definition, what was being discussed then?

Mr van Wyk replied that  there was no doubt about what unsecured loans were, but it was made up of different sub-sets. Certain products behaved differently.  Unsecured loans to SMMEs were not bad. One had to make sure about where it was focused.

Mr Coovadia said that regulation was a factor. Consumers shifted to unsecured loans. The sector had to look at appropriate regulations.

He agreed with the Minister on clamping down on bad practice. One also could not assume that all credit providers were bad. The sector had to be proactive and partners in the sector like BASA and Government had to collaborate. If bad practice was detected, the sector had to clamp down on it.

The Chairperson said the presentation made mention of the Basel III Liquidity Consideration. This was not the Finance Committee. It seemed that this was quite a challenge to factor in. (BASEL III was a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010/11).

The Minister said that the National Credit Act was cited as the main reason why there was no crisis in SA. This emphasised the need for the NCR to act pro-actively. It had to identify undesirable practices, and protect and defend consumers against credit providers.

Dr James asked whether it was possible to let Government share in the risk for first time home buyers. George Soros had given an amount of money to this end.

Dr James was very curious to know what was going on in spending on education. He wanted to know whether a breakdown could be provided so that one could see how much was spent on private school and university fees. He suspected that lower income people were borrowing money to put their children into private schools. This was a symptom of the poor state of education in the country. Government had to provide schooling.

Mr Bailey replied that statistics currently looked at where consumers spent. Consumers told credit providers what they felt would increase their chances of securing the lone, which was not always the truth. It sounded better if the reason for the loan was given as home improvements or education, but a significant part of the money in reality did pay for education.

Mr Symington added that this report was an interim one. The scope of the current study did not have the breakdown that would show how money spent on education was spent and whether it was used to pay for private schooling.

The Chairperson said that it would be constructive if the Committee could get further information.

Ms Motshegare said that the final report would be available at the end of June.

The Chairperson said that most people had about five different sets of principles. They would do things at work that they would never do at home. Abuse was happening in the financial sector. Each role player had to ask what it could do to make sure that the existing policies were vigorously implemented. Journalists reporting on financial matters also needed to be sober and prudent. The different partners each had to play their part to nurture the fabric of society. This would happen if people applied similar principles in the workplace to what they applied at home. This would ensure that South African society would be able to reach its full potential. If something was damaged, it had to be repaired. The principle had to be effectively implemented.

The latest buzzword was conversation. There had to be dialogue to arrive at a positive position.

The meeting was adjourned.

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