First Quarter Performance: briefings by Department of Trade and Industry & Companies and Intellectual Properties Commission; Unsecured Personal Loans: briefing by National Credit Regulator

Meeting report

Briefing from the Department of Trade and Industry (the dti)
Mr Lionel October, Director General, the dti, reported on the Department’s strategic outcome-oriented goals, key achievements, expenditure versus budget and key challenges.
He outlined the following 5 strategic goals (SG):
●Facilitate transformation of the economy to promote industrial development, investment, competitiveness and employment creation
●Build mutually beneficial regional and global relations to advance South Africa’s trade, industrial policy and economic development objectives
●Facilitate broad-based economic participation through targeted interventions to achieve more inclusive growth
●Create a fair regulatory environment that enables investment, trade and enterprise development in an equitable and socially responsible manner
●Promote a professional, ethical, dynamic, competitive and customer-focused working environment that ensures effective and efficient service delivery
Thereafter, he provided details on the Department’s achievements for each strategic goal. In respect of SG 1, he highlighted that the Department had completed the Special Economic Zone (SEZ) fund proposal, launched the Manufacturing Competitiveness Enhancement Programme (MCEP) that would be administered by both the dti and the Industrial Development Corporation (IDC) and finalised first draft of the Special Economic Zone (SEZ) incentive framework. Regarding SG2, the Department informed Members that it had facilitated exports of R1.3 billion (52% of export sales facilitated was from key developing countries of the South of which 15% were from Africa and the Middle East, 32% from Asia and 4% from South America) and assisted 179 companies financially, of which 39 (22%) were emerging exporters. On SG5, it was reported that the Department had exceed the People With Disability 2.4% target and surpassed the compliance requirements of 30 days for the payment of creditors by finalising 90% of payments within 14 days and the remainder within 21 days.
The Departmental expenditure versus the budget was discussed with year to date expenditure at 10.7% of the yearly budget, leaving 89.3% remaining for the rest of the year; this was a full 10% below targeted expenditure for the quarter. Expenditure of the same period in the last financial year was R1.5billion compared with R1.6billion currently despite a 30% increase in the dti budget.

A notable area of under spending was Industrial Development and Incentive Administration where the dti followed a policy of co-investment with the private sector to ensure the viability of businesses; private firms would not investment money without a guaranteed return. A large roll out of incentives for Black business and film was expected in the coming quarter.

It was emphasised that the financial crisis had taken a major toll on expenditure in South Africa. Although the debt overhang was not as critical as in the US and UK, consumers were sitting on their cash and even with interest rate reductions large numbers of people were only paying off loans and not propagating new spending.

Key challenges were noted as a need to diversify markets as there had been an 11% drop in exports to the EU and the UK, which were South Africa’s biggest markets for manufactured products. Commodity exports to Asia were also down. As a first step to the resolution of this problem the opening of new strategic offices in high growth markets was envisioned but this had been delayed due to a lack of funding. There was also a move to undertake greater partnership arrangements with the private sector and the provinces. DTI was developing a package with export councils in an attempt to build confidence in the private sector as the low uptake in incentives remained a major area of concern.

Discussion
Dr W James (DA) asked about the high variance (52%) of spending between this year and last. On the key challenges described by the Department he asked for a better explanation of the poor uptake of incentives.

Mr B Radebe (ANC) asked about the issue of 12(i) incentives. He asked if it was so bad that no one was interested, given that NT had identified it as key in driving the industrial revolution. If there was zero when it came to the up take of that, where could be the problem?

Mr October replied that the interdependency applied both to the domestic and global economies. The presenter had cited an example of the catalytic converter industries and highlighted that Anglo American’s share price had fallen by up to 25%. Also the platinum price had fallen by the same margin. SA supplied 10% of the world catalytic converters and had created a substantial industry in that sphere. That industry was in serious trouble. Just under half the platinum production in SA was used in the automotive industry and the bulk of the products were exported to the European markets.

There had been a dramatic decline in the purchase from Europe; there was currently an oversupply to European market. This decrease in the market of catalytic converters impacted the mining sector. All of a sudden mining had to cut on employment and investments. Anglo American had stopped one of its capital expenditure programmes in the platinum sector. SA was still largely dependent on mining. This was the interdependent nature of the challenge.

The way out of this problem, as also recently alluded to by fruit exporters, was to look towards the continent. Russia, China and the Gulf States also bought a lot of South Africa’s products. Only those companies that were in the new markets were confident. He cited Oceana in the processing industry that had a footprint in Asia. There were programmes to assist entrepreneurs with the cost of doing business, but they need to be persuaded.

The dti undertook a trip to China and promoted 10 products during the Forum on China-Africa Cooperation (FOCAC) in June. China had committed to buy more manufactured products from South Africa. As a result, he was confident the dti would be able to reach the targeted spending over the course of the year. Moving to the December period manufacturing was predicted to improve its outcomes.

Mr Radebe agreed with the DDG on his statements surrounding the current global financial situation. The contagion was increasing, especially with SA’s traditional markets like the US and China struggling. The Department needed to be efficient internally so as to leverage available funds.

Mr Radebe said the Committee appreciated the tender that was awarded to the pharmaceutical industry. At the same time the industry still imported generic medicines that doctors were too scared to prescribe to patients. Composition ingredients of medicines were changed by mother companies, without the knowledge of doctors. Doctors could be easily sued for wrong prescriptions especially when patients reacted negatively to treatment.

Mr October replied pharmaceuticals represented the third largest area of imports after oil and machinery. There was also a challenge of generics being imported. That had been turned around. Last year the Department did the antiretroviral (ARV) tender- the bulk of this was produced locally. The oral service dosage was mainly imported before. The Department of Health (DOH) was busy with that tender and it would boost local manufacturing sector. In agreement with DOH, the dti would procure a lot more locally.

Mr Radebe asked how the Department ensured efficiency when it came to standards, so as to counter such illegalities as changing composition of medicines. If SA’s health practitioners were scared to prescribe medicine that would certainly lead to economic stagnation. Consumers would doubt the product that was put out on the market.

Mr Radebe said he was happy that the Department had prepared a position paper on Preferential Procurement Policy Framework Act (PPPFA). For long, treasuries in different countries tended to be states within states. Could the Department explain the kind of frustrations it experienced from National Treasury on the implementation of the PPPFA? Decisions were taken far back, on certain products that could benefit the historically disadvantaged individuals.

Mr October replied that the dti cooperated very well with NT and conceded that a lot of persuasion and work needed to be done on localisation. Since December, NT had promulgated all of the regulations on this. Local procurement had been approved and this was the boost that the industries were looking for. When the demand fell, government stepped in as a buyer and that could help.

Mr X Mabaso (ANC) asked what percentage of the unemployed constituted people with disabilities. This was the area that the Committee needed to focus on.

The dti replied that the issue of disabilities needed to adhere to departmental targets. The Department had established relations with disabled persons associations and institutions of higher learning to establish the pool of potential employees with disabilities. This would make it easier for departments to recruit.

Mr Mabaso requested that the manufacturing incentives be explained in detail. What was this, and what did it entail?

Mr October replied that 12(i) was a tax incentive that related to big projects. The range of projects that were approved for the incentive would normally be on the range of R200 million to over a billion rand in investments. There was a slow down in the country, and experience had been that bulk projects were few. One could only get so much in a quarter. Although in the current quarter there were a couple of projects that the Department was looking at, but was better if they remained undisclosed. Within 112(i) the details were reflected upon.

The low up take was due to the general uncertainty among business community about demands domestically and international trading partners. The other thing that affected the financial performance this year was the launch of the new incentive (Manufacturing and Competitiveness Management Programme) in the middle of the first quarter. It normally took a few months before the private sector could develop an interest into a particular programme. The Department did not expect to see a linear increase; traditionally one would start slowly and then grow.

The Department would be working closely with the Export Council. In the first quarter the Department went on road shows, and introduced the MCMP to all provinces. In the second quarter the Department would do a much broader marketing campaign. Businesses took time to learn about new markets; and new opportunities. Growth would no longer be coming from the traditional export partners but from Africa and emerging markets. Businesses might not know about that. One of the things that the marketing campaign would be doing was to make businesses conscious of the new markets, and introduce them to some of the success stories of the new incentive programmes. Through that the Department hoped to increase the up take of the incentives, and get firms to learn much faster about the new markets.

Mr Mabaso asked if the budget would be spent. The worst thing would be not to spend, and return funds to NT while there was an outcry that government was not adequately funding job creation. This question ought to be asked earlier, because it was undesirable that the government would be rushed into dispersing funds.

Mr October replied that all the funds would be spent and the dti would be able to reach its targets by the end of the financial year. Regarding 12(i), there were no approvals in the first quarter but there were applications coming through.

Mr Mabaso asked if the Department was satisfied with spending patterns on SMEs and Cooperatives, and especially whether an adequate proportion was allocated to the SMMEs up to now. His question was taking into consideration rural and informal settlements in particular because there was a lot of potential in those areas.

Mr October replied that broadening participation involved moving the scheme to the black townships and rural areas. The Department was rapidly expanding the number of people it helped in these areas. The dti would meet, and possibly exceed its targets in this area. As part of creating an inclusive economy, one had to provide support to the previously marginalised co-ops and small businesses. The take-up was strong in this area.

Mr Mabaso asked which big agencies had underspent, and what corrective measures would be undertaken. He wanted to know about payment to SMMEs, especially when the Department paid late. Although it was good to know that 90% of payments could be made in a certain time, it would be bad to have the rest of the payments not being made in a reasonable time.

The Chairperson also sought clarity on the incentives payment. The Department indicated there was a challenge; could the Department say if applications were not being made, or this issue related to incorrect information being provided in the applications. What was the main challenge that the Department faced with these applications.

Mr Kumaran Naidoo, Group CFO, the dti, replied that the Department had made all of its payments within the 30 days. It never exceeded that, payments were made on time and this was ensured through a very strict monitoring process. There was no issue with payment of suppliers, this was monitored daily. With respect to agencies there were a couple of issues that related to the under-expenditure.

With respect to the agencies a couple of issues contributed to effecting payments. DTI had in this financial year re-looked at its memorandum of understanding with agencies in order to ensure compliance. The Department could only transfer a certain percentage of incentives until a PPPFA was signed.

Because of the lag in the financial year, commitments were made at the beginning of the year. There was a lag before invoices were sent through. Some agencies took the money when they needed it in July, as opposed to when it was projected they would need it in February.

Mr Naidoo said that the dti was concerned about cash management at one agency, and had thus taken a decision to do transfers on a monthly basis. These were basically the three issues that contributed to the underspending.

The Chairperson noted the reference to the synchronised slowdown of global financial markets, particularly in Europe. It had been said by economists that one way of overcoming this was increasing competitiveness in the economy and efficiency. What was the dti doing to encourage competitiveness among various sectors?

The Chairperson wanted to know the impact the surtax on foreign imported goods would have on the trade relations SA had with Zimbabwe. SA had a high volume of trade with Zimbabwe. How would this influence exports there?

The Chairperson asked if it was still the case that trade ministers attached to diplomatic missions were on the decline, if so what caused this and why was it still happening. Had there been a policy that resulted in this situation? She said the norm had been to attach a minister to missions abroad. What was the challenge?

Dr James said an observation had been that the take up of the incentive had been caused by the financial slowdown in the Euro-zone. He said this was not a sufficient explanation. Could the DG say if he thought the incentive structure also contributed to the slow up take? Should SA provide more incentives? Should it be smarter and target it in a particular way?

Mr James remarked that 70% of all new British investments were made in Western Cape, and noted that other provinces did not have platforms to receive investments from countries like India and China. There was no plan to intervene in a province like the Eastern Cape. The dti could be doing well nationally but local conditions were not able to receive investments. Could the DG give an analysis why it was that SA was doing badly, nationally at this time, on the architecture of incentive aspect and the platform to receive investments?

Mr Mabaso voiced dissatisfaction with the response received on the disability targets. Members had heard that sort of response before and had been hoping for real statistics- he hoped that the Department would submit these later. They could only honestly address the issue if they were aware of what the actual figures were. Many people with disabilities did not feel the impact of being in jobs. He warned the Department that it did not want to be embarrassed at the end of the financial year on this aspect.

Mr Mabaso said some provinces were so rural and the dti needed to clearly identify the areas it worked on and the kind of projects it undertook. In that way, the country could be seen in totality when it came to impact. This was just posed as a challenge.

Mr Radebe said he failed to understand the synchronisation aspect of the incentive structure. Did the Department engage the industry timeously, or companies were allowed to drag themselves into the system. If such an engagement was done it would make a significant difference.

Mr Radebe said the dti I owed the Committee a report on industrialisation, especially as it related to iron ore and the Tripartite Free Trade Agreement. He said agreement was very important and would improve infrastructure between the agreeing countries and promote trade. He asked if the Department was putting enough resources to ensure that the agreement was being implemented. There was a High Commissioner from Kenya who did not have facts on what was happening with regards to the agreement.

The Chairperson sought clarity on what SA was doing to counter the effects of market slowdown as it related to catalytic converters.

Mr Tumelo Chipfupa, Deputy Director General, The Enterprise Organisation, the dti, replied that one of the best solutions to the financial malaise and lack of investment would be to encourage competitiveness. Competitiveness was a very broad issue that encompassed skills, education, and inside firm operations. This included how firms organised production; the use of new technology; and work processes. This was what was targeted in the manufacturing competitiveness enhancement programme.

Mr Chipfupa said the budget for incentives had increased to R 5billion. The philosophy behind the incentive programme was that it needed to be market conforming; the dti worked with the private sector to identify failures. This would ensure that the funds were directed to areas of need. Collabration would be arranged in outlining guidelines and working closely with the private sector.

The dti ensured that the architecture of the programme was availed to the private sector last year, and that clear vision was spelt out on how it would look like. There were administrative issues that had to be taken into consideration. An IT system was put in place to receive applications. A R5.8billion programme to run over the next 6 years was initiated. The dti believed it responded adequately in ensuring that the incentives were disbursed to the private sector.

Mr Chipfupa said there was dependency on the past as to where investments went in the automotive industry. Most of the automotive incentives were spent mostly in the EC, KZN and Gauteng as the three provinces hosted the biggest assemblers in the country. South Africa's past affected the patterns of investment. The Department would try and break that pattern by the SEZ programme. The Department believed in placing infrastructure in areas with high potential would break that past tendency where only three provinces accounted for the bulk of the investment that came into the country.

Mr October noted Mr Mabaso’s comment on increasing targets when it came to hiring staff with disabilities. When the Department came to present the next quarterly report it would indicate what steps and efforts were done to improve on this aspect.

He indicated that the Minister was equally “galled” by the deadlock in negotiations between ArcelorMittal’s South African arm and Anglo-American’s Kumba Iron Ore on the extension of a pricing deal on the cost of ore. Although there had been an attempt by the Minister to resolve the problem, people argued about the split of profits when there was a strong need to expand economic activity. A mediator had been appointed and the government was set to meet to make a final decision on the pricing of iron ore.

On the issue of the Tripartite Free Trade Agreement, he was surprised that the South African High Commissioner was not fully attuned. Kenya and the East African Community (EAC) were pushing strongly for the trade agreement compared to the other regional economies - the Southern Africa Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA). There was an agreement to adopt the free trade SADC model, and it was emphasised that sensitive industries, would need to be protected. However on the whole negotiators were looking at opening up zero tariffs on 80-90% of all products.

More importantly the north-south corridor-road and rail project from Dar Es Salam to Durban-was picking up very fast. An interdepartmental committee had been established to look at the infrastructure project that linked ten countries. The project offered massive opportunities to construction and manufacturing firms in SA especially that they would be required to supply cement and steel. The countries that would survive would be those that were competitive.

A fundamental point was raised on the need to come up with a plan to enhance competitiveness. In many countries subsidies were adopted for inefficient industries but the DTI programme was not trying to incentivise uncompetitive industries and thus a classic Keynesian problem arose where no demand was driving down prices. In SA's case the Department was not trying to prop up industries that were inefficient and uncompetitive.

It was not an issue of being able to produce the performance in terms of the provinces as 2011/12 saw the economy grow at 3 percent and add 300 000 new jobs. As well 2010 Direct Foreign Investment of R10billion had completely recovered in 2011 to R40billion. The expansion of the automotive industry and the Toyota assembly plant in KZN was also mentioned.

The Chairperson spoke on the Department’s legislative mandate asking for clarity in terms of the strategic document, giving the example of the Estate Agents Act and asked if it was still under DTI’s administration. She asked the Department to come back to the Committee on several issues in writing as the quarterly budget exercise was supposed to divulge glitches.

Briefing from Companies and Intellectual Properties Commission (CIPC)
Ms Astrid Ludin, CIPC Commissioner, stated that the first quarter had been devoted to planning and trying to align the budget with the business plan. In parallel there was a focus on meeting business level standards.
The organisation mentioned the following 8 priorities for the year:
●Organisational transformation – new structure, new policies, new code of ethics;
●ICT infrastructure implementation;
●ICT governance;
●Data cleansing;
●Debtor management;
●Service standards monitoring and improvement;
●Call Centre;
●FNB Collaboration

The operational overview focused on company registrations with 52000 companies registered in the first quarter from April-June. The annual projection was 200 000 companies and the organisation was on track to meet this target. Service delivery standards were improving as the amount of time needed to register a company was falling with 90% of online application registered within 3-5 days if all supporting documents were provided.

5000 Cooperatives were registered in the first quarter, in line with the upward trend in the last financial year, an increase by a factor of 2, as the average in 2010 was 2 250 per quarter. CIPC had an annual target of 22 000 Cooperative registrations. 54% of applications were registered within 15 days, in other cases investigations would be made into whether standards were being met or not.

The upgrading of CIPC’s search engine was impeding the speed with which intellectual property could be analysed. All trade mark, patent and design official application numbers were issued within 5 working days. 80% of copyright official application numbers were issued within 2 working days. 9 237 total trade mark applications 56% domestic, 2544 patent applications 28% of which were domestic , 568 new design applications (39% domestic), and 24 film copyrights were made in the first quarter (18% domestic).

An area of concern for CIPC was that of call centres. Under achievement had been experienced in call resolution rates. Decentralisation had been introduced in March but performance had not changed substantially as a result. Sweden provided an excellent model and CIPC would be visiting with the Swede’s to study their best practises in the hopes of resolving call centre performance issues.
The budget was currently being reviewed as there was a need to realign it with the business plan as the previous budget did not adequately reflect actual fiscal numbers. Revenues were as projected.

In conclusion the emphasis in the first quarter was around service delivery and planning for implementation. As an organisation there was now an established methodology. In the second quarter CIPC aimed to ensure all processes were in place to conclude the organisational design process by the third quarter, data cleansing was ongoing, and databases were being migrated as the organisation.
Discussion
Mr Mabaso asked if there was a way to deal with the lost 80% of calls at call centres. Could applicants be broken down into different provinces and municipalities so that an understanding could be developed on where progress was being made?

Mr Voller replied that the whereabouts of applicants could be ascertained through the applications. Gauteng had the largest amount of activity; Northern Cape for example was very small and accounted for only 2% of the geographic spread. A study was undertaken to determine registration per province. The study gave CIPC an indication of where to focus its education campaigns. Gauteng was followed by the Western Cape and kwaZulu Natal.

Ms S van der Merwe (ANC) noted that it was heartening to see the landmarks that had been achieved. At the same time, she noted the existing hatred towards call centres due to the disembodiment of the services provided. Was there any way of extrapolating what the lost 80% of callers were phoning about? How was call centre staff dealing with calls and were they spending too much time on one call and therefore missing the others?

Mr G Hill-Lewis (DA) asked for comparative data from previous years so that the current numbers could be better understood.  He noted that if business owners failed to make contact via the phone they may then attempt contact via email. He thought that R44million had been overspent in 2012 and asked how the over spending was being funded.

Dr James asked what the longest, shortest and average times to register companies were in CIPC’s experience.

The Chairperson asked about information for operations within peak hours and how peak hours were assessed. She also asked for a better breakdown of cases being investigated and noted what happened when businesses being rescued could not remunerate service commission officials for services rendered.

Mr Rory Voller , Deputy Commissioner, CIPC stated that email addresses were listed on the CIPC website and were seen as a fall back for contact failing a phone call as there was an escalation model in place where emails would be passed up the chain of command. There was no backlog for emails as there were no ‘calls being dropped’. Emails were useful as they provided CIPC with greater insight into the needs of businesses as they often presented similar queries and CIPC engaged with this data by making necessary changes to the website for greater customer clarity.

The longest application period would be 25 days as this was defined by the service delivery standards. The shortest period would be 3 days but the average was not tracked. There was an attempt to measure against this service standard, and the current turnaround time for manual applications was 10 days. Therefore the

Ms Ludin said the reality of a customer’s experience was sometimes different from the reality within the organisation. For instance if a manual application was lost and later found, the date of entry for CIPC would vary greatly from that of the customer. There was still much to be improved in terms of service delivery and there was a hope that this would be achieved through the course of the year.

The system was further constrained by the telephony system. There was knowledge of what customers were calling about but this changed frequently. System related issues were high as were issues around passwords, there were not many general questions but rather very specific issues that required exacting solutions. Another issue was that people sent multiple emails as people got more and more frustrated resulting in high levels of duplication.

Ms Ludin replied that underspending was an issue, and as the organisation became better able to implement it would need to come up with a plan of cutting back.

Ms Ludin replied that June had high call volumes of 68 000. Waiting times varied from 5 minutes to 1 hour 30 minutes. There were two peak periods daily from 10am-1pm and from 2-4pm. CIPC had not thought of additional resources to increase staff capacity to better enhance service during peak.

Ms Ludin replied there were 70 cases in June brought forward; 26 new investigations were received 25 of which were finalised.

Mr James commented that most jobs were created by small business enterprises. It was vitally important that it was made easy for people to be able to register their businesses efficiently. He asked how, those people who were not well equipped on e-filing processes and other modern means of communication, could be supported.

Mr James said a report was submitted to the Minister of Science and Technology (Ms Naledi Pandor) and it contained comparative statistics on registration. South Africa lagged far behind to similar middle income countries such as Brazil in terms of the number of patent applications per year. The problem with volume was not new.

Ms Van der Merwe clarified her question and asked if it was possible for CIPC to extrapolate from those 22 calls answered, and make an analysis of what the calls could have been about.

Ms Ludin replied that people prefer to transact with CIPC online. A lot of registrations were intermediary companies. Applicants registered online, but came in to the offices to hand manual documentation. If one registered online, and had all the documentation, there were agents who got registration done speedily because they were close to CIPC. The manual applications were from Shout companies who did not want to capture large volumes of applications on their own. They passed on that cost to the state, and reaped the benefits in high fees. Generally, there were not that many applications from smaller companies. When it came to patent applications the country needed to ask itself a lot of questions.

Ms Ludin said that the CIPC was organising a round table later in the month to bring departments together to talk about the cost of substantive examination. This was a policy decision that had to be made. She said the country lagged behind in the industrial design area. There was a lot SA could do in industrial design.

Ms Ludin replied that the issues listed were received from the 22 calls, and most of these were repeat calls. The organisation needed to find better ways to address concerns.

Mr Mabaso asked if it was the view of the Commissioner that the number of intermediaries visiting the CIPC signalled the extent to which exploitation occurred; and how it was left unregulated.

The Chairperson asked how the client knew when the CIPC had received their application, apart from knowing only in 25 days. She requested that the information regarding patent applications and industrial design be all availed in writing to the Committee. She said that the visit to the Swedish Corporate Registry should be beckoning fairly soon.

Ms Ludin said there was a need to be more accessible to people which was not a new problem for the CIPC. The organisation realised that less than 10% of clients came in through partners and that was why a bank was thought to be an excellent partner as 15% of clients on the CIPC database were FNB clients.  There were more innovative ways to reach people noting that in India people were exploring mobile phone technology and its use in this area.

Ms Ludin said clients were alerted with a tracking number via an automated email response and that the study trip to Sweden was planned for early September.

Mr Voller said that an automatic email receipt with a tracking number was issued for online applications and manual applications were date stamped in CIPC offices. On the issue of regulating intermediaries he observed there was a need to do a lot of homework and establish terms of conduct within the application process itself.

The Chairperson said she was looking forward to the second quarter report and asked CIPC to advise the Committee through the committee secretary of any progress. She thanked the CIPC for their presentation.

Briefing by National Credit Regulator (NCR) on Unsecured Personal Loans
Ms Nomsa Motshegare, CEO, NCR, stated that the presentation in May had focused on the suppliers of credit. A lot more work had been done on the consumer or the demand side. From the returns submitted by credit providers, NCR noticed a shift in the consumer credit market in that more money was extended to unsecured credit as opposed to mortgaging. The institution started to engage with the banks individually, to try and understand the drivers behind this trend. But also the Reserve Bank and National Treasury were alerted to the issue.

Ms Motshegare said unsecured credit was not necessarily bad, but depended on how it was extended. This was dependant on whether affordability assessments were conducted, sufficient disclosure to make the consumer aware of what it was getting into, and the rate at which it was being extended. It had facilitated increased access to finance. The NCR was worried with some of the practices it noticed in the industry especially pertaining to the level of indebtedness.

Investigations and raids were carried into this aspect with the police and a number of micro-lenders were arrested for keeping pension and bank cards. In addition, areas of reckless were picked up on part of some lenders. Education to conscientise the community would be carried out. The NCR was concerned with consumer protection.

SA was not entirely cushioned against the effects of what was happening in Europe. This had already impact in the construction and manufacturing industries where people had lost their jobs. Some of those consumers had already been granted loans. Although the interest rates had gone down; it was still early to say there was an improvement.

Inflation rate was coming down and implications of that needed to be guarded closely as 46% of the consumers had impaired records. Although there was competition in costing of the loans, there were those that cost their loans at the margins. These were the people that needed to be watched very closely.

Ms Mpho Ramapale, Compliance Analyst, NCR, said there were factors contributing to an increase in unsecured personal loans. The interest rate was low; credit active consumers benefited from this because repayments were lower. There were credit returns for savings, and returns were low. There were also regulatory requirements.

When one was under debt-review it did not make any difference between secured and unsecured lending. She said when re-arrangement was made creditors did not look at the assets. There was a demand for this and credit providers were willing to fund for this. Term of the loans increased with the value of the loan. Most of the people who received the loans were the middle and lower income. This was the group that earned between R3000 to R30000 a month. The NCR was worried about the consumer creditors and the level of indebtedness.

Ms Ramapale said the South African consumers were financially vulnerable to economic conditions. The information that was used to draw these conclusions was in the public domain, and some information was received from Trans Union. The credit health was improving.

There was a need to categorise consumers and providers. While the lower income group relied on unregistered lenders, the middle income group relied mostly on the banks. There was competition out there. The market was predominantly dominated by African Bank and Capitec. The major banks had lost their share and were now attacking that space. The major banks had indicated that they would increase on capital loans to make up for the lost territory.

Ms Ramapale said it was a weakness that consumers did not compare the loans prior to taking them out. This was an area of concern that the NCR needed to do research and further education. The NCR was monitoring and enforcing compliance despite the lack of resources. There were elements of improvements especially when it came to disclosures on credit agreements, and also affordability assessments. These vary significantly across credit providers.

She said the majority income for the credit providers came from interest. Unsecured lending was profitable compared to the secured lending where providers could charge interest at around 9%. She said it needed to be born in mind that there were two kinds of consumers; the one that was instalment focussed and the one that focussed on the cost of credit.

Ms Ramapale explained that there was an issue with ATM loans. Information was not recorded to the credit bureau. Credit life was a significant aspect of the revenue stream for credit providers. The level of overdue for the unsecured loans was very high. Credit providers indicated that they did not always asked consumers as to what the loans would be used for.

She said that consolidation, where consumers took loans to clear debt, could be good or bad. In cases of loans that charged initiation fees, it was good as that would bring the initiation cost dramatically down. However, consolidation was a problem for those consumers who had a clean debt record.

Mr John Symington, Director, Compliance & Risk Resources Pty Ltd, said that good credit where facts were disclosed was good for consumers. The tendency of consumers was to not look at the cost of credit, but whether they would afford the instalment. The underlying cause of such behaviour needed to be unpacked. Unsecured personal loans while providing access to finance had also increased over indebtedness.

For every loan that was taken out where consumers were incentivised that would be beneficial. Generally, consumers used unsecured personal loans both for consumption or employment creation. The level of indebtedness and the 3.6 million consumers whose credit record were deeply impaired needed to be unpacked. On the macro level one could look at how borrowing affected the country as a whole. Consumer education had been successful, but the NCR need to join hands with credit providers to encourage healthier consumer behaviour.

The quickest way out of the level of debt was efficient focus on governance. One could engage with credit providers and look at how they provided assurance that they complied with regulatory requirements. On site and compliance reviews, and engaging with credit providers in meetings would take resources that were not there. Where there was no clear guidance on an aspect of regulation one could have varied types of responsibility by credit providers. The recommendation was a truth-based guideline as opposed to rules-based.

Discussion
Mr Hill-Lewis said the level of over indebtedness among the working class in SA was becoming increasingly concerning. He asked if the NCR had any indication of defaulting rate on payments. An indication of the number of garnishee orders would be a good measure of how unhealthy the UPL market was. In some cases half of monthly salaries were being taken by lenders from workers prior to the salary being paid.

Mr Hill-Lewis said lenders were sneaky in how they operated. Lenders were coming up with increasingly complex products which consumers did not understand. He asked if it was possible to make it compulsory for the total cost of the credit agreement to be declared and boldly displayed at the credit agreement. He said the hidden cost with a number of multipliers was confusing to people.

Mr Hill-Lewis commented that trends could be sub-categorised into three: an increase in the amount of loans; an increase in the term of loans; and an increased reliance on consolidation loans. Even though the trends show small improvements they took longer to pay, and led to more debt. The situation was becoming more urgent.

Mr Mabaso congratulated the NCR on the quality of information that was compiled. He said if the work was taken to the nation there would be rewards, especially if the information was availed in a booklet form. What the lenders tend to hide, officials should struggle to disclose. He asked if the NCR was well equipped to cover the country doing research and educational work sustainably. The product that NCR communicated should at various levels be appropriate to constituencies especially on the issue of language.

Ms Van der Merwe said it was alarming that 9.1 million consumers in South Africa had impaired records. The NCR’s recommendations needed to be much stronger as the situation as described by the presentation of people continually relying on debt for consumption; saving less; and defaulting on bonds, was a nightmare. This should be the other way round.

Ms Van der Merwe said banks needed to be engaged on the matter especially that they tended to add on prime. The Committee was interested in having people borrow money to buy houses. A substantial amount of money should be spent on buying a home.

Ms Van der Merwe said the statement that consumers did not compare prices was worrying. Consumers might not be shopping around because banks only offered similar products. It was worrying that all five banks offered the same thing.

Ms Van der Merwe said South Africa had an inbred culture of borrowing and no culture of saving. The NCR in its education programmes should put that at the top of its agenda. There was a need for an investigation of individual banks; the products they offered; and interest on loans. One of the biggest questions was what were people spending borrowed money on.

Mr Radebe asked if the National Credit Act (NCA) was strong enough to address challenge of inconsiderate lenders and living on debt. He asked if it was not the right time to make matshonisas (slang for unregistered money lenders) illegal, and breakdown the cartels in the banking industry.

The Chairperson said the situation was akin to economic bondage. She said South Africa saw itself as reasonably secure and apart from Europe and the US but the jargon used in the presentation was eerily similar to that of the subprime problem in the US.

The Chairperson said NCR’s endeavours were appreciated but there was a severe need to dig deep into the bottom of the problems. NCR’s recommendations amounted to little more than a slap on the wrist for predatory credit lenders when there was a dire need to punish people and protect consumers from unsecured lending.

The Chairperson asked why lenders were allowed to repossess items from borrowers when a loan was unsecured for example; was this not a criminal act.

Mr Hill-Lewis interjected and pointed out that big banks made consumers sign garnishee orders before they took the loans. If consumers ever default, they did not have to go through a court because they had a voluntary stop order. Surely that was not lawful.

The Chairperson said that she was unaware that loans could be accessed through an ATM. It was alarming that credit was so easily accessible. She asked if the NCR’s legislative mandate was limited or constrained and what proposals could be made to remedy the situation. She would allow the NCR to prioritise the questions and answer those that it thought were important, and prepare written replies for the rest.

Ms Motshegare replied that NCR did not have the information on default rate. For the 46% statistic, the NCR relied on information submitted by the credit provider to the credit bureau. Regarding the total cost of credit there was a pre-agreement quote. This was a one pager where the credit provider had to fill the information around the loan, including the actual amount, the interest paid, and the repayment period. She said the multiple repayment factor was missing and needed to be accommodated in the form. That would help. Consumer behaviour was another issue that needed to be looked at with a view to encouraging consumers to shop around.

Ms Motshegare said there were education officers who worked with provincial affairs offices to disseminate information. The officers worked closely with trade unions and employers, but a lot more needed to be done.

Ms Motshegare said the NCR would focus on investigations and communication this year. The NCR wanted to make sure that the common man in the countryside knew who the NCR was and that they would not be taken advantage of. There was indeed a legal process that credit providers needed to follow before they could repossess.

Mr Lesiba Mashapa, Company Secretary, NCR, reported that the National Credit Act outlawed blank processed documents (these were extra documents that the credit provider required the consumer to sign at the time of signing the agreement). There was a specific clause that outlawed that conduct. The Act prescribed a debt enforcement procedure whereby before one could even issue a summons there were forms that needed to be completed and issued to relevant parties.

Mr Symington said one of the contributors to the study linked making changes to any component of the law or the structure of it would have unintended or unforeseen consequences. It would be massively complex if the dynamics were altered.

The Chairperson said the NCR needed to take away the Committee’s comments and that it was going to review how things were done.

The meeting was adjourned.