The Portfolio Committee continued with its hearings on debt relief measures, where various stakeholders made presentations on what they saw as the main problems, discussed some of the options and proposed solutions. This day's meeting heard submissions from Standard Bank, ABSA, Nedbank, African Bank, First Rand Bank and Capitec. They all highlighted that they were prepared to understand and help to support customers in distress with debt relief or to consider some form of debt forgiveness although all were opposed to writing off debt, believing this to be contrary to the fundamental principles of loans. They highlighted the importance of responsible lending, not only in order to comply with the National Credit Act, but also because of the effect on the consumers, market behaviour and commercial and economic considerations. Many of the debt relief measures outside the NCA, which included the Debt Counselling Rules System (DCRS) were supported by all. The main concern, and opposition to having new legislation drafted on debt relief, by most of the banks, was that this might give rise to legal uncertainty. All banks stressed that the best arrangements with debtors were those that were totally geared to their individual circumstances, and that there was a need to have sufficient flexibility to come up with the most workable situation for the future. They were no longer using emolument attachment orders. New legislation was not seen as paving the way for certainty, although most banks were in favour of having something that was morally binding and address the crux of the issues. Most indicated that they believed that the National Credit Act had been a positive influence, but also felt that there were a number of other legislative enactments that did not need amendment, but did need to be more consistently or strictly applied.
Standard Bank had set up a dedicated staff unit to give advice and all debt review systems and processes had been updated. It was partnering with outside companies and was concentrating on financial planning and education. It had some personnel in the National Student Financial Aid Scheme to come up with creative solutions. It suggested increased data accessibility and leveraging existing laws more effectively. ABSA Bank put particular emphasis on responsible lending and highlighted the risk factors that are factored into the decision to grant loans. Changes to the system would create challenges for existing loans. ABSA has around 95% of its loans up to date. used to make credit decisions. However, there is a challenge, since these decisions have already been made for customers who have already been given loans. Adding extra debt relief measures into the process would change the basis of how the risk is assessed under the present arrangements. In ABSA, around 95% of the loans are up to date. Any debt relief must be based on both willingness and ability to pay, and debt relief solutions must be geared to the nature of the debt. It observed the growth of debt counselling despite the known inefficiencies.
Nedbank pointed out that just less than half of South Africa’s credit-active consumers have impaired credit records, and this level has remained consistently high for the past three years. Its collections philosophy is geared toward rehabilitating consumers whose accounts are in arrears, wherever possible. It spoke at some length about the advantages of the Debt Counselling Rules Service and Voluntary Debt Mediation Services and strongly recommended reopening discussions on both. Lending must be recognised as a mutually beneficial contract, and could carry benefits to the economy at large. It suggested that a broad debt forgiveness would actually be discriminatory to those consumers who were repaying willingly. The “new” African Bank stressed that it currently applies the DCRS debt consolidation, settlements by using credit life insurance. It did want changes to the legislation, in order to permit credit providers to list any customer who is under statutory debt counselling or participating in any voluntary debt relief process, so that they could not access more credit during this time. Furthermore, it wanted to see limitations on product insurance, and on granting of more than two pay-day loans in a twelve-month cycle.
First Rand also thought that some legislative changes, by promulgating regulations, were needed, to specify what “reasonable costs” would be, and to improve the data reporting to credit bureaux. It specified what assistance was offered in terms of vehicle finance. It suggested that the administration orders under the Magistrates Court Act needed attention, and asked that the Banking Association engage with the subcommittee on solutions. Capitec outlined its own debt relief measures and noted that it offered unsecured lending but not debt consolidation to clients already in arrears. It would support DCRS and rescheduling of loans. It would also hold back on handing over to external debt collectors, and unique circumstances would be taken into consideration, so that Capitec was opposed to legislating for this, adding that it could also disincentivise debtors from paying.
Members asked if the banks purchased debt, and asked for some examples and case studies on moratoriums and holiday payments. They were not entirely happy about the suggestions for access to data, for security reasons. Members asked about the risks that were encountered with mortgages and commented that many banks were still aggressively marketing unsecured credit and enquired about the current uptake. They asked if different criteria applied to the large firms. They wanted particular examples of what happened in relation to sales in execution of both fixed property and cars and what would happen if the banks decided to accept an amount lower than the outstanding value. They asked for more details on debt consolidation, and on the use of debt counsellors, noting the suggestion by one bank that NPOs should be used to offer this service so that it was not a money-making exercise. They wanted more detail on balloon payments, Members asked what products were offered to those on social grants, and asked if banks had done audits of all their outstanding emolument attachment orders, and what redress might be available to those who had paid high administration fees.
Debt Relief measures: proposals and submissions from banks
The Chairperson, in her opening remarks, noted that all banks operated in the same sector and in similar ways, but were able to compete with each other through their different packages and approaches. The Banking Association South Africa (BASA) had briefed the Committee earlier. She highlighted that those speaking today would not be making submissions or presentations on a Bill, but their input would help the Committee make decisions as the Committee was wishing to achieve some debt relief measures which it would propose to the full National Assembly before the end of the term.
Standard Bank presentation
Mr Thabani Ndwandwe, Head: Retail Banking, Standard Bank, gave an introduction to Standard Bank, noting that the bank was firmly rooted in South Africa, and the fortunes are tied of the bank are tied to the fortunes of this country. The bank had certain responsibilities and duties; the most important being to adopt customer centric strategies that yield the best results for all parties involved when customers are in distress. Some solutions already existed – which are legislated debt relief solutions and non-legislated debt relief actions that may be used to complement the legislated debt relief solutions (see attached document).He also highlighted other supportive initiatives such as having a dedicated unit with over 60 staff members to assist customers who are going through financial stress. Their job is to make sure that the bank finds solutions and understand customers’ distress. Recently all debt review systems and processes had been updated in order to ensure that the bank could assist in debt review processes. Standard Bank had received an award from the Debt Counsellors Association, as one of the best banks in this regard. Standard Bank has also been partnering with outside companies, to help struggling customers with financial planning and education. A fund of over R400m was set up, dedicated to enterprise development and this continues to invest heavily in small enterprise. Standard Bank placed senior resources directly in National Student Financial Aid Scheme (NSFAS) to help solve the finance problems for the poor students. It is putting creative solutions in place to help ease the financial burden, by financing poor students who are doing specific subjects and are achieving good results, but whose parents are not able to be their guarantors.
Standard Bank held a view that creating legislation on debt relief, may create some uncertainty in the market and that it may slow down the positive initiatives under way. In finding the appropriate solutions for debt relief, it was important to avoid being too formalistic but instead there should be attempts to find a pact between the organisations, stake holders, government and consumers, to solve matters in a way that would bind the parties to a moral obligation. He urged that it would be necessary to avoid measures that will increase financial exclusions, especially to the poor in the long run, or increase the cost of borrowing. Implementing a hard law, especially on debt write off, will increase costs and create financial exclusion. Standard Bank also did not want to destroy the culture of paying-back legally obtained goods. The Bank agreed that there is a lot of reckless lending and unscrupulous practices in the market, and suggested that this should be dealt through the reinforcement of existing laws, but that there is no need for a new law to deal with reckless lending practices, but instead it was necessary to be tougher on reinforcement. It urged that the country should take existing solutions and make them work better. This could be done by improving the debt review system, especially for the poor customers, adopting the Debt Counselling Rules System (DCRS) and improving it and continuing to engage on bank customer indebtedness initiatives.
Mr Ndwandwe suggested that one point that would make debt relief solutions work better would be having data accessibility that contains information of retrenched/unemployed customers, data that contains information of customers who become employed after retrenchment and data that contains information of students who become employed after completing their studies. He also suggested that it would be useful to provide prescription relief once the moratorium option is granted, co-ordinated credit educational drives, directed to everyone, including government, payments prioritization for debts that have received debt relief, and a system that would be able to identify debts/customers that have received relief from other creditors, to avoid further indebtedness.
He concluded that Standard Bank supports all initiatives to find solutions for over indebtedness and suggests using the existing laws and initiatives that can be leveraged to address the problem in a more effective and coordinated manner.
Mr B Mkongi (ANC) asked Standard Bank if it buys debt; there was mention in the presentation about debt consolidation and selling of debt. He asked the Bank to provide examples and case studies on moratoriums and holiday payments, and to indicate how this operated in the institution.
Ms S van Schalkwyk (ANC) asked about the 60 staff members who were highlighted in the presentation, and whether they were placed geographically in a position to ensure that services reached all customers. She also asked if Standard Bank has any awareness campaigns in place to tell the public about the initiatives and what it is offering, for promoting debt awareness.
Mr N Koornhof (ANC) asked if Standard Bank supported the views that were raised during the last meeting on Tuesday, on the debt counselling presentation.
Mr A Williams (ANC) said that he is a little bit sceptical about the need to get access to data of customers. He recently had an incident where he had needed to approach the National Credit Regulator about private information that was acquired illegally and used by a bank. He noted the point that new legislation would create uncertainty, but asked if there was any legislation that would not create uncertainty. Finally he asked if Standard Bank has savings campaign and creates awareness to encourage savings.
The Chairperson said Standard Bank had said that legislation already exists to assist in debt relief. She asked if there was anything in that legislation around interest, and how it could assist a person who was unemployed and had no income.
Mr Ndwandwe responded to Mr Mkongi, saying that Standard Bank did not buy debt. In relation to the moratorium, he pointed out that customers could come to the bank and say they had financial problems for certain months, and could negotiate with the Bank for a debt holiday or a break, for those months. He also mentioned that in a situation where a client is highly indebted, allowing for a break in repayment of home loans may help to clear the short term loans more quickly, and they would then be allowed to start repaying the home loans later. However, this was based and assessed on individual circumstances.
Mr Ndwandwe said that the 60 staff mentioned are situated at the Head Office in Rosebank in Johannesburg. However there is a direct call centre line which anyone can access. In general Standard Bank is looking into decentralising services in the more remote areas but it is difficult because it is expensive to do. There is an awareness campaign whereby customers are informed through letters and sms messages.
He noted that Standard Bank agreed with some of the views presented on the debt counselling process.
In relation to accessing data, he said that it would assist if the Bank knew the customers who had been retrenched. It would be the responsibility of the individual banks to protect that data, and ensure that it was not used for the wrong reasons.
He agreed that it is difficult to create new legislation without uncertainty, but said that the problem is that once there is a blanket rule it does not solve the challenges of the debt problem. With regard to the issues on the savings campaign, he said that Standard Bank recently launched a “kiddies app” that will encourage savings.
Mr Ndwandwe said that there was no intention to comment negatively on the views of BASA, of whom Standard Bank is a member.
In regard to interest, he pointed out that when a person applied for debt review there are instances where interest may be dropped, and a great deal and a lot had been done for customers, particularly in non-secured debts.
ABSA bank presentation
Mr Jan Moganwa, Chief Executive: Retail and Business Banking, ABSA Bank, said that ABSA is in full support of the principle of responsible lending, not only from a legislative point of view, in terms of adherence to the National Credit Act (NCA), but also its own conduct and commercial considerations. He stressed that the NCA has done a lot for the industry in terms of setting practice and how customers are treated in the process.
The discussion today was not so much focused on reckless lending, but it is largely about relief as a binding contract. The key intent of an organisation is responsible lending, and continuing to strike a balance between the money of the depositors and funding other customers who may not have available funds. He pointed out that since there are already regulative measures to control lending there was a need to be cautious and ensure that additional measures do not drive customers to unregulated organisations. That is a major concern with ABSA. The best outcome is to have “performing loans” which were those where the customers continue to honour their obligations, although it is also accepted that there will also be “non-performing loans”. Both of these are factored into the models used to make credit decisions. However, there is a challenge, since these decisions have already been made for customers who have already been given loans. Adding extra debt relief measures into the process would change the basis of how the risk is assessed under the present arrangements. In ABSA, around 95% of the loans are up to date, and that is a reflection of ABSA's responsible lending. ABSA is of the view that there are enough relief measures catered for in the NCA, including subsequent amendments, and that more can be done in promoting awareness.
Mr Cowyk Fox, Chief Risk Officer, Barclays Africa Group Limited, dealt with the regulated and non-regulated measures that ABSA takes on. ABSA provides more than just legislated debt relief measures. It recommends a mix of credit provider specific and regulated measures, because both of them attain certain benefits (see attached document). He also talked about current practices and opportunities that are offered to customers to try and resolve any financial difficulty (see document). ABSA is not in favour of Emolument Attachment Orders (EAOs). With regard to the regulation provided for in the NCA, he pointed out that debt review is good legislation, but there is also a need for education/awareness and to overcome adoption barriers, and process inefficiencies. The DCRS adoption provides an opportunity, but having a maximum solve term does not allow for customer specific requirements. In regard to non-NCA debt not included in the legislation, there is currently no incentive for good behaviour other than rehabilitation, and no real time update of DC status at credit bureaux, due to process inefficiencies. These would need to be cleaned up. In duplum and prescription are further legislated grounds used. However, ABSA thought that the current legislation was sufficient. It covered a lot of bases, and had great potential, but it is not fully optimised yet so a proper drive is needed, before further legislation is introduced.
Mr Fox went on to discuss the criteria and impact of debt relief measures. Criteria should be based on two principles - willingness and ability to pay. If a customer does not have any willingness to pay it is very difficult to find a solution and the solution is influenced by the ability to pay. Debt relief solutions should take into account the nature of the debt, in order to solve the problems correctly. Any criteria should also be able to deal with changes in circumstances, and criteria should not impact on consumers not requiring debt relief that pose no risk to depositor funds. There was also a need to avoid creating incremental costs that could increase the cost of credit and not cause restrictions in accessibility to credit.
Overall he stated that ABSA supports the debt relief measures which are sustainable, and that is a critical point. He also commented on Mr Ndwandwe's earlier point on what might introduce uncertainty. He noted that sustainability avoids uncertainty because one can plan for it ,but ad hoc or once-off approaches do lead to uncertainty. The impact of optimising existing debt relief measures alone would be material, based on the growth in debt counselling observed despite the current inefficiencies/issues experienced.
Mr A Williams asked what risk a bank takes if someone has a mortgage and defaults after 18 years because of retrenchment, and the house then gets sold for less money that is owed. However the person still needs to pay back the money they owe. The bank is charging interest to cover that risk and so he thought that in fact the bank is not bearing any risk at all at the end of the day.
Mr G Hill-Lewis (DA) asked if the bank incentivises to cross sell debt consolidation products and asked it to give details if it did. He noted that all the banks still aggressively market unsecured credit from ATMs, websites and via sms , and asked ABSA to give an indication of how the sales figures have changed over the last two years, on unsecured credit in particular.
Mr Mkongi asked whether the principle of protecting depositors is the same principle applied when a firm applies for cost capital. He further wanted to know the criterion used for the big firms, since their liquidation would pose a risk to the bank. He wanted to know about the risk management plan, and if the bank plans for a short-term or long-term run, in order to mitigate such issues.
Mr Fox responded firstly on the question of mortgages. He said the difference between secured learning and unsecured learning is that there is collateral in the former, although collateral in itself does not take the risk away. There is still a customer risk on the ability to pay. He pointed out that when a bank lends a mortgage, there is an upfront loan to value calculation depending on the amount of deposit that has been put down. If a buyer puts down nil deposit, the loan to value is 100%. The bigger the deposit, the lower the collateral risk. However the value of the property can go down due to neglect and no maintenance being done on the property, as well as for other reasons, so there is also a risk that the value of the property will decrease faster than the amount still outstanding. That risk is quantified and applied and introduces a risk premium on the pricing. That explains why they bank is still carrying risk.
He added that the valuation of the property, when doing a sale in execution, is critical. There are two ways that the banks worked. Firstly, they used credit-specific solutions called “Help yourself” - essentially, trying to work with customers before they move into the legally-regulated execution process, trying rather to support them. If there is a shortfall against what the sale of the property realises and what is outstanding, a discount is given. Sales in execution are done through an auction process that involves third parties. ABSA has taken certain measures to try and combat collusion, either from the staff or any third parties. A property value is noted, and if the only price offered is lower than that, then ABSA buys the property back from the auction.
Mr Fox then responded on the question of incentives. ABSA does not sell debt consolidation actively and there are no incentives for selling it. His concern with debt consolidation is the same with balance transfers; as both are large issues. ABSA does not partake in balance transfers because this is effectively just moving the debt around by smart customers, instead of addressing the problem. Debt consolidation can work if it is offered to ABSA's own customers, and he agreed that it should be a better deal than having the loans individually.
In relation to unsecured credit lending, he noted that ABSA's strategy today on loans is aimed at existing customers, people who bank with ABSA and put their salaries in their bank. He said it has little or no open market mandate, by selling personal loans to customers that do not bank with ABSA.
Mr Fox said ABSA always plans on short -term and long- term, and need to optimise both. If some of the credit specific relief measures potentially drop into legislation, ABSA would be satisfied with that on condition that they were adding value. This could create space to come up with new ideas.
Mr Moganwa added that when it lent to firms ABSA applies the same strict criteria on affordability because the responsibility of maintaining the risk to depositor funds remains with the bank. Speaking to whether it takes a short or long term view, he said that some of the products will force the Bank to take a long-term view, such as mortgage bonds that have been up to 20 years, which now run for 25 years or more. That was a further reason why certainty was required.
Mr Hill-Lewis made a follow up, noting the comment that ABSA shared the shortfall with customers. He asked if the bank could provide the exact details on how it shared the shortfall and where exactly is the risk or the collateral loss.
The Chairperson said the Bank would have to come back to that question. She asked if ABSA had never sold a house that it never repossessed, where it might have been on the open market for less than 50% of its value. She asked that the explanation on this be submitted in writing.
Mr Fox answered Mr Hill-Lewis' question first. It was not a general rule that the Bank would agree with the customer to share the shortfall when doing the negotiations. This would depend on the customer. However, it does apply to the sale in execution process because in the legislated process, in the case of a shortfall the customer still owed that amount and until it was paid, the bank was still at risk for the amount outstanding. In instances where the customer is willing but unable to pay, that debt will prescribe and a loss will be realised.
The Chairperson also asked whether ABSA would make loans to the unemployed, but asked that this also be answered in writing.
Mr Pragnesh Desai, Senior Manager: Credit Risk Monitoring, Nedbank, highlighted that it was the wish of Nedbank to be Africa’s most admired bank, by aligning what is good for South Africa, for the clients and for Nedbank. There are three pillars to lending. The bank’s credit policies, affordability rules and scorecards allow for a fair, comprehensive and robust credit assessment in compliance with the standards set by both the NCR and the South African Reserve Bank (SARB). Nedbank's success in the retail lending space is largely a result of its robust governance systems and commitment to ensuring portfolio quality. He said that it enhanced a properly constituted and independent risk management of the respective business units. In addition to monitoring the matrix of credit quality, Nedbank will also keep a very strong focus on whether the bank is complying with its obligations.
Mr Desai said Nedbank is very much aware of the statistics that just less than half of South Africa’s credit-active consumers have impaired credit records, and this level has remained consistently high for the past three years. Nedbank’s overall collections philosophy is geared toward rehabilitating consumers whose accounts are in arrears, wherever possible. Rehabilitation is a preferred option, rather than hard legal obligations, and in cases where pressure points have been identified which could be industry/product specific, the bank considers additional steps to assist affected consumers.
Mr Desai considered the debt relief initiatives provided for in the NCA and other legislation. Prescription was particularly important. There is a need to look at rules that tighten this, as put into force last year, as well as the forms of debt relief that have been given. Nedbank had also considered the Magistrate's Court orders granted to a financially distressed consumer whose indebtedness is capped at R50 000, as well as options under the Insolvency Act.
Mr Desai also spoke to the debt relief initiatives over and above the NCA. The Debt Counselling Rules System (DCRS) is an excellent system and should be supported actively. Voluntary Debt Mediation Service (VDMS) aims to address issues in the current debt review process and debt rehabilitation environment, institutionalising debt rehabilitation. This had some benefits of which the biggest would be that the participating credit providers were going to create an institutional mechanism that would, in practice, offer debt mitigation services to clients at no charge, thus benefiting poor consumers. He strongly encouraged the reopening of a proper discussion on these concerns. He added that there are several consumer education drives, and there are also initiatives under way to utilise industry-developed materials to educate clients at key transactional and maximum engagement points, especially during loan applications and collections processes.
Mr Desai also talked about the voluntary debt relief measures that include arrangements, debt consolidation, freezing of payments for an agreed period, suspending or stopping legal action under balance outstanding versus capital borrowed. He also noted the position in deceased estates that resulting in child headed households, and industry adverse events such as strikes. Nedbank would further look at debt restructure, by extending the term and sometimes reducing monthly instalments. This would be made available when a client is unable to catch up missed payments in the short term. Assisted sales are considered a preferable alternative to repossessions, if the client is unable to make any reasonable payment towards paying back the loan. Under these, Nedbank will offer to assist the client, by obtaining offers for the asset, or by assisting with a sale at a public auction.
Mr Desai then spoke to the criteria informing debt relief. He highlighted that, for consumers requiring debt relief measures, Nedbank takes certain factors into consideration in order to achieve a bespoke and equitable solution for each distressed client (see attached document for details). These factors inform the type and duration of the debt relief measure agreed to by the bank and the consumer. Arrangements are generally temporary in nature, whilst the remaining debt relief measures such as assisted sales are more permanent in nature and are based on the financial circumstances of the consumer.
Mr Desai concluded that the primary concerns of Nedbank were based around the high level of over indebtedness. There is need to recognise that lending is a mutually beneficial contractual arrangement between a credit provider and a consumer. If managed responsibly it benefits not only the contractual parties but the economy at large. It would therefore be improper and unfair to penalise responsible credit providers who have demonstrated sound lending practice.
He concluded that the various debt relief approaches highlighted in this presentation had assisted the bank’s clients. Nedbank is of the view that applying a blunt debt forgiveness initiative to targeted populations could be seen to be discriminatory and unconstitutional to consumers who indeed repay their debt willingly.
Mr Hill-Lewis asked if Nedbank refer stressed customers to debt counsellors.
Mr Desai confirmed that it would, as part of the counselling strategy.
Mr Koornhoof asked for confirmation whether, when Nedbank entered into an arrangement or debt consolidation with a client, putting everything under a single agreement and charging a lower interest rate, there was “interest on interest”. He asked if the bank will capitalise the amount and then charge a lower interest, or whether the bank will write off some of the interest and then have the same capital amount originally.
Ms van Schalkwyk raised an issue on freezing of payments. Where customers took home loans and had insurance coupled with the loans, she wondered if they were able to make use of that insurance as a once-off option to assist in times of debt. She also asked another question on restructuring and the numbers of people who benefit through that programme, and whether Nedbank could give a percentage calculation of the number of people assisted in this way.
Mr Williams asked what debt relief measures or debt forgiveness would give the bank more certainty. He asked that all the banks who had presented to the Committee should answer this question, in writing, to the Committee.
Mr Hill-Lewis followed up the question on debt counsellors, and said that currently the regulation does not allow banks to be in contact with debt counsellors because it is a conflict of interest. He asked how Nedbank refers customers to these debt counsellors.
Mr Desai responded that Nedbank does not refer clients to debt counsellors as such, but rather advises the clients to see debt counsellors individually.
Ms van Schalkwyk asked whether Nedbank had any mechanism to track whether rehabilitation was sustainable.
The Chairperson asked if the interest accumulates during the suspension under a debt relief measure. She also asked whether Nedbank has a credit department that deals with situations when the customer has failed to make payments. She cited an instance where a customer had been harassed whilst in hospital by a bank. She asked for an indication of the timeframes involved where customers were unemployed. She pointed out that it seemed that banks were not concerned with protecting their clients, despite the fact that some had been with the banks for some time, given the number of garnishee orders.
Mr Desai explained that consolidation could be related to a credit card or personal loan. If the client came to Nedbank and requested it, Nedbank could consolidate all the loans, and then offer a set interest rate on everything. He cannot to answer whether it is a capital or interest amount, because everything that is outstanding across all loans is effectively consolidated into a new loan.
Freezing of payments is not an open ended arrangement, but is to be done within reason. There will be limitations, just to ensure that the client remains true to the loan repayments and their obligations. In terms of restructures, he would estimate that the percentage of clients mentioned earlier, out of the 30 000 figure, would represent around 10% of the home loan clients.
Speaking to the concept of certainty, Mr Desai said that the sub-committee should look at the numbers available, and see whether there is a need for legislation on debt relief and debt forgiveness mechanisms. He would answer the question on rehabilitation in writing. In relation to the suspension, he confirmed that the interest does accumulate, because when the bank grants a loan it pays funding costs on that loan, so that when “the interest clock is ticking” it will also tick in relation to the interest of the consumer. Nedbank did indeed have credit departments, where the calls were recorded, and monitored actively by the bank’s audit teams.
The Chairperson asked that any remaining questions be addressed in writing.
African Bank presentation
Mr Piet Swanepoel, Chief Risk Officer, African Bank, stressed that this entity was a different one, with a different registration number, to the previous African Bank.
He noted that African Bank currently applies the DCRS and will continue applying it and has no intention to withdraw it. The concessions consist of decreased interest rates (as low as zero), the waiving of fees, and the extension of the credit agreements. This bank provides for debt relief measures not provided for in the NCA (see document). These include the DCRS, and payment moratoriums/restructuring/bespoke arrangements that provide customers with payment indulgences – these are actually a regular feature of African Bank when customers run into financial difficulties. Other measures include debt consolidation with the aim of reducing monthly instalments, settlement campaigns for customers that are in default and retrenchment cover as part of the customer’s credit life insurance cover. He said the Bank proactively encourages the customers to claim this insurance once they are in default or have been retrenched.
Mr Swanepoel also talked about the legal and other challenges in the implementation of the debt relief measures. He emphasised that the debt relief process should be a voluntary process based on prescribed debt relief principles, which become part of a credit provider’s registration. African Bank suggested that the current legislation should be amended to permit credit providers to list any customer that is under statutory debt counselling or participating in any voluntary debt relief process on the credit bureaux, in order to prevent these customers from obtaining further credit while participating in these processes. The current legislation should also be amended so that the product insurance that customers are compelled to pay for in terms of a credit agreement should be limited, and will be included as a charge constituting the cost of credit. Credit providers should not be permitted to grant customers more than two pay-day or per-month loans in a 12 month cycle, because this type of practice creates a debt-spiral for the customers, and also further locks customers into a single credit relationship with a specific credit provider.
Mr Swanepoel talked about the specific debt relief measures. African Bank proposes a voluntary debt mediation service to lower-income consumers who earn less than a predetermined threshold. The maximum period for which the debt relief measure will apply should be five years. Unsecured and revolving credit products should be included in this process, and voluntary individual applications for debt relief should be made by the customers. Debt relief measures will include criteria similar to the DCRS rules, such as the extension of the term. The voluntary debt relief programme should be housed with a non-profit organisation.
Mr Swanepoel highlighted that the impact, consequences and challenges of any measures applied not only to consumers and credit providers, but extended to the cost of credit and the economy as a whole. The fundamental commercial principle of lending is the repayment of the loan. This principle should not in any way be compromised by implementing any debt relief measures. Any debt relief measure that is introduced should not cause a further deterioration to the fragile financial industry and should be implemented in a way that promotes growth in the economy. Repayment of monies lent to customers promotes financial stability and investor confidence in the financial markets. The debt relief measures should be aimed at customers in the lower income sector and aim to provide debt relief to distressed customers. The implementation of any debt relief measures should not result in the expropriation of the rights of a credit provider, but the measures should be based on fair commercial principles which take into account the rights of both the consumer and the credit provider. In addition, ring-fencing the debt relief measures to a defined lower income segment of the market may increase the cost of credit for consumers generally. As a general principle, debt relief measures should only be implemented if there is a larger benefit to the society and the economy.
Mr Swanepoel indicated that African Bank supports responsible lending and discourages consumption lending. Based on the NCR statistics, unsecured lending has reduced significantly since 2012. African Bank also supports the affordability regulations and guidelines, which prevent the granting of credit in a reckless manner.
Mr Hill-Lewis noted that various suggestions had been made by the banks, which would need to be considered seriously by the sub-Committee. He asked if African Bank practised revolving pay-day loans. If so, when the limit was reached, would these be converted to a long-term personal loan or would they simply get revoked. He liked the idea of the voluntary debt mediation process and asked why African Bank thought that counselling should be done by Non-Profit Organisations (NGOs) and not debt counsellors, if it is done at the cost of the credit provider.
Mr Mkongi asked what happened to the debt of the old African Bank.
The Chairperson thanked African Bank for answering all the questions posed systematically in the presentation.
Mr Swanepoel assured Members that African Bank did practise what it preached. It did not offer pay- day loans at all, or one month loans, because it believed that such loans were not to the benefit of the customer.
He noted that the reason why African Bank proposed that counselling should be dealt with by NGOs is because debt counsellors were essentially operating for the money and to make a profit. The banks would already suffer a huge loss when there was a need for mediation.
Mr Swanepoel said he would be able to answer the questions around the old debt in a limited way. The new African Bank manages the residual debt services book and applies the same services in that book as was used by the previous creator, so that the current Bank was still collecting on behalf of that previous company.
First Rand Bank presentation
Ms Hanalie Crous, Head of Credit, FNB Retail Bank, started off by giving a credit industry overview (see document) and saying that it was important to deal with the reasons, not only the consequences or the current situation. At the moment, there is R46 billion worth of debt in the banking industry. The DCRS, which most banks prescribe, applies principles such as interest for over-indebted customers and relief of debt up to zero fees which is not regulated by the NCA. First National Bank still believes that there are some of the debt relief mechanisms still needing to be addressed and changed through legislation.
Ms Crous highlighted an overview of existing industry measures to combat over-indebtedness and provide debt relief, and particularly cited the credit life insurance as an important mechanism. She said credit life insurance does not only cover the life component but also covers retrenchments in many cases. At First Rand there is a product that covers a person who has been retrenched, for six months of instalments, and if the person does not find another job within those six months then the debt will be settled by the insurance. However the credit life insurance is not regulated in the legislation. The NCA simply states that the cost should be reasonable, but does not state how much it should be. First Rand proposes that regulations should be promulgated to cover this point, and give legal certainty to credit providers. She also talked about a project evolution which allows reporting of data to credit bureaux within a shorter period after the grant, of 72 hours. The Bank is currently working to improve quality data so that it can make decisions on more informed and updated data.
Ms Crous also talked about voluntary measures such as the process of claiming against credit life insurance where applicable, bespoke payment arrangements and settlement campaigns (see document for further details). First Rand believes that Emolument Attached Orders should not be used at all as this is seen as an abusive practice. The industry needs to provide a low cost banking initiative that will assist in affordability. First Rand had established a support fund for vulnerable consumers who demonstrate willingness to pay but who may be working in particularly affected industries such as mining. In relation to vehicle finance it offers voluntary assistance to consumers in selling their vehicle in order to alleviate financial stress. If the vehicle is sold through this method and there is a shortfall, a discount will be applied to the shortfall balance, so that the balance will be repaid at a lower interest rate.
Ms Crous noted that many consumers find themselves in financial difficulty due to a number of factors, such as over insurance, unauthorised debt, funeral policies and many other issues. First Rand supports the view that customers should be in control of their banking or income ,with the ability to dispute invalid debt orders. However some customers abuse such mechanisms for “cash flow management purposes” therefore it is important to balance such practices to protect all parties.
Ms Crous also looked at the proposed solutions by the banks, as set out. These included optimising the existing legislation, increasing use of DCRS where customers qualify, finalising and implementing the Draft Credit Life insurance Regulations and others. She highlighted that administration orders in the Magistrates Act need to be looked at. The changes suggested would be of benefit particularly to the low income customers.
Ms Crous also talked about the impact, consequences and challenges of legislating debt relief measures. First Rand was not in favour of debt forgiveness. First Rand was firmly of the view that policy certainty and stability are needed in the financial sector, and additional legislated debt relief measures will negatively impact on the stability of the financial sector and the economy. It is also of the view that the legislated debt relief measures do not enhance responsible borrowing and lending practices.
The cost of the bank failure has been felt across most developed and developing markets and can be severe. In many markets the prevalence and cost of bank failure has been much higher, leading to the significant cost to governments (and taxpayers), significant reductions in credit supply and a significant increase in the cost of credit.
First Rand respectfully requested that industry players such as BASA be allowed the opportunity to engage with the sub-committee in more detail, as a joint partnership with the public and private sector will assist in achieving sustainable solutions.
Mr Hill-Lewis said he was pleased to note that all banks had stopped using EAOs. He asked if First Rand had used them in the past, and how many might still be running. He asked, in relation to vehicle financing, which rule was applied at Wesbank as to the percentage of total income that it would allow car customers to have, by way of car repayment liabilities. e also asked if the bank makes use of any dangerous financial mechanisms, when trying to make customer repayments fit within those caps.
Mr Mkongi asked what kind of assistance First Rand was giving clients who have unauthorised deductions, so that they do not go through unnecessary type of debts. He also asked if the Bank gives loans for consumers who want to buy RDP houses.
The Chairperson asked First Rand to explain what it meant by saying that a client must demonstrate a willingness to pay, in relation to vehicle financing, and what the Bank would accept as evidence of such “willingness”. She asked the bank to explain payment holidays and how this was done without encouraging the consumers to incur more debt.
Ms Crous confirmed that First Rand has no EAOs in place, and those that had been in place have been cancelled. In regard to the “balloon payments”, she said that the criterion was that the Bank would look at the totality of debt commitment, and that all criteria specified under the NCA would have to be met. Over and above that, each and every franchise would have its own criteria as well. It is possible to have instances where the individual may qualify to use more than a certain recommended percentage of their income by way of a car instalment but those are isolated cases. Balloon payments are also used for low risk income consumers as it enables an affordable instalment over a defined period. First Rand specifically looks at a risk profile, similar to what is done with debt consolidation, and would offer the debt to the customers only when it feels comfortable in relation to their risk and affordability profile.
Ms Crous said the assistance that has been given to customers with unauthorised debit/deductions had been able to isolate the fact that a lot of debit order rules are not known to customers. The bank introduced mechanisms to alert customers, through sms, about unauthorised debit orders and also educated them as to how, on the online banking system, they should dispute such deductions. Many customers thought that they should approach the service providers yet failed to get hold of them. They could come to the Bank for assistance. Ms Crous also noted that First Rand would not give RDP house loans because there was no product designed for this in particular.
Speaking to the Chairperson's question, Ms Crous noted that it is possible to tell a client who is serious and one who is not serious about willingness to pay, when communicating with customers.
She noted that a payment holiday would be arranged in circumstances where the customer might say for such a number of months s/he will not have income, perhaps by reason of maternity leave, and during those months interest will be charged but the amounts will not be collected.
Mr D MacPherson asked the difference between balloon payments and what the manufacturers refer to as a “guarantee future value”. He asked if interest was being charged on the balloon payment ,and if a consumer were to choose to refinance it, would the consumer then pay interest from the beginning. He also asked what happens in the case of default on the balloon payment. He asked whether, in the event that a vehicle was auctioned for less than the settlement value, the owner would still have to make up the difference. He also asked if banks should be offering a guaranteed future value and explain the differences. Finally he asked if this was what actually happened.
Mr Hill-Lewis asked what are the highest balloon payment percentages and average payment percentages offered by Wesbank. He also asked what book is now used on personal loans and other forms of unsecured loans, as opposed to vehicle financing, since Wesbank now engages in direct marketing for personal loans.
The Chairperson asked that the responses be communicated in writing.
Mr Jacob Mashiya, Executive: Risk Management, Capitec, said that Capitec acknowledges that clients’ circumstances may change after taking up credit and these changes may lead to distress and create a need for debt relief. Capitec offers various debt relief measures (see attached document).
Capitec offers unsecured lending but it does not offer debt consolidation to clients already in arrears. On the issue of debt relief measures, Capitec supports DCRS, in which concessions beyond what is required by the NCA were agreed to by the credit industry. In terms of rescheduling, he said that clients in arrears, who were not able to settle their arrears through a catch up agreement, can still reschedule their loan. Rescheduling is offered to clients to overcome a temporary loss of income resulting from maternity leave, short time work, strikes and other causes. The type of rescheduling offered will be determined by considering each client’s unique circumstances. Rescheduling does not entail granting additional credit, or an increase in the interest rate. It does entail the amendment of the repayments of an existing loan.
Credit insurance is applied and this was explained as the outstanding loan balance being settled in full if the client was retrenched or lost his or her job, where the unsecured nature of Capitec’s loan products enables full settlement of the outstanding balance.
He noted that debt consolidation is beneficial for the clients if their credit with Capitec and other credit providers is settled with more favourable terms and where total repayment obligations are reduced. Bespoke arrangements are entered into to accommodate clients temporarily. Clients are also held back from being handed over to an external debt collector if there is a willingness to make a minimum payment. Settlement campaigns clients are provided with an opportunity to settle their outstanding credit at a discount, and cases are assessed on individual merit.
Mr Mashiya also talked about debt relief criteria and stated that Capitec considers a client’s unique circumstances to determine the appropriate debt relief measures. Considerations should be given to the current as well as future circumstances, prospects and obligations. By legislating these criteria, credit providers will offset the increased expectation of loss in the event of default, by reducing access to credit targeted groups.
Mr Mashiya also talked about the Impact, consequences and challenges of legislating debt relief measures and criteria. He highlighted the danger that consumers would become dis-incentivised from paying their debt (see attached document). Capitec proposed the DCRS and VDMs, to track, monitor and receive feedback on the implementation of the legislative amendments which have been enacted or are yet to be enacted. He noted that policy on financial inclusion is a specific government programme led by National Treasury, and should be acknowledged within the context of debt relief proposal considerations.
Mr Mkongi asked Capitec what type of products it offered to people who receive social grants.
Mr Hill-Lewis asked how many EAOs Capitec still currently have in place. He also asked the total income ratio that the bank targets for loan products. He also asked if Capitec is still offering the multi-million rand product that it had advertised earlier on in the year. He asked what redress the Bank is offering to those customers that had been offered something in the past.
Mr Hill Lewis asked how Capitec viewed the proposals for voluntary debt review as proposed by African Bank and whether it would support this proposal. He also wanted more detail on the Rustenburg Platinum Belt strike that occurred in 2014/2015. The Capitec Bank had offered loans to those of its customers who had been on strike. He asked how the Bank confirmed their income, in order to give those loans, and what amount and percentage of those loans is currently non-performing.
Mr Mashiya responded that on the issue of social grants, Capitec had not, for some time, provided loans but was providing banking products at a lower cost for those on social grants. It is, however, offering all other products to the customers who are on social grants as it offers to all other clients, and this includes offerings such as fixed deposit savings.
Mr Mashiya answered Mr Hill-Lewis by confirming that although there are some EAOs still outstanding in the name of Capitec, Capitec supported the view that it would not allow any abusive practices in the industry. No maximum instalment on income had ever been applied although Capitec would do a full calculation from the income as shown on the pay slip.
In relation to multi loans, Mr Mashiya said that they had been offered up to September of 2015. However, this product was then stopped because the bank was part of the industry movement that had asked for pay slips. In terms of the voluntary debt mediation, he believed that the industry should pay for this.
MR Mashiya answered the question on the loans offered to customers on strike in Rustenburg Platinum Belt. Capitec had assisted the mine workers, but it certainly did not offer a loan where there was no obligation to pay.
The Chairperson asked Capitec to expand on anything outstanding in writing.
Mr Hill-Lewis asked follow up questions to all banks, saying that it was acceptable to get a written response. Since the Stellenbosch legal aid clinic case, he asked whether any of the banks had done an audit of all their outstanding EAOs that are currently still in place, to see how many of those had been obtained in a magisterial district other than the one where the client is domiciled. He also asked if the bank had revoked those EAOs, and asked to be given a list of all EAOs still in place. He also asked what redress can be offered to customers who were made to pay initiation and administration fees on the multi-million rand loans every month. In terms of the voluntary debt review he asked the banks to provide their formal input in writing.
The Chairperson thanked all the participants and their input and made it clear that the Committee is simply trying to get to a position where it clearly knew what was required. For its part, the Committee would need to concentrate on writing a full report.
The meeting was adjourned.