Over-Indebtedness: National Treasury & National Credit Regulator

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Trade, Industry and Competition

14 June 2017
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The National Credit Regulator (NCR) and National Treasury briefed the Portfolio Committee on Trade and Industry on over-indebtedness in South Africa and debt relief measures under consideration.

Briefing by the National Credit Regulator on over-indebtedness

According to NCR, as at 31 December 2016, there were 24.31 million credit active consumers, 40% (9.76 million consumers) of which were classified as impaired consumers. The 24.31 million credit active consumers had 82.42 million consumer accounts, with 75.7% (62.41 million accounts) being in good standing and 24.2% (20 million accounts) being impaired at the end of 2016. This meant that every credit consumer has an average of 4 credit agreements at a time.

The impaired accounts are due to accounts falling in areas or judgments being given against consumers. Debt counsellors are individuals registered with and regulated by the NCR and assisted over-indebted consumers. There are currently over 2 000 registered debt counselors throughout the country, with 800 noted as highly active. The monthly applications for debt counseling have been increasing steadily since 2014 with the December period recording the lowest number of applications.

The TransUnion Consumer Credit Index (CCI) indicated improving consumer credit health in the first quarter of 2017. This was due to more consumers being able to pay back their debt. The index had improved to 52.4 from 49.7 with 50.0 being the break-even level. However, with the recent recession there may be a decline.

Most of these over-indebted consumers are within the ages of 36-45 with the males being affected the most with over 50% of them being over-indebted every year; 67% of these consumers are Black African, followed by whites at 16%, coloureds at 13% and Asians at 4%. Teachers have been identified as the most affected by debt, followed by the police and local government (municipality), the central government, nurses and then provincial government. 

Members wanted to know how much distribution agents and debt counsellors cost the consumer when paying back the debt to creditors and how distribution agents operated as intermediaries between the consumer and the credit provider. The Committee wanted more in depth reasoning behind the debt statistic and race and if there was a recourse mechanism to cover the category of consumers who are currently not being covered by debt counselling and therefore stand at risk of future indebtedness.

Members also wanted statistics on employees in the private sector and voiced concern that, according to the statistical analysis, it was the people earning more than R15 000 that were mostly over-indebted. This was beyond the objective of the debt relief initiative since the initiative was targeting the poorest of the poor. Members questioned whether debt counseling was as effective as it could be and whether there was a need to amend the National Credit Act since it seemed not to address the core issues of debt relief.

Briefing by National Treasury on over-indebtedness

National Treasury wanted to find new ways to change borrowing behavior and not just focus on the cycle of debt relief. The interventions going forward will be focused on reckless borrowing and saving. The extinguishing of debt should only apply to unsecured loans with a focus on the low income groups. Treasury will, to the greatest extent feasible to protect a borrower’s asset provided in secured loans. Mortgages account for about half of the debt, with 1.8 million accounts covering about R875 billion as of 2016. Personal loans are the most impaired followed by short term credit. Store and credit cards account dominate the impaired accounts

 Looking at the first amnesty intervention, data on 600 000 consumers showed that 64% of individuals who benefited from the amnesty subsequently opened accounts; 74% of individuals who had obtained credit had bad or adverse accounts and 19% had judgments five years thereafter. Treasury was doing behaviour analysis to have a more accurate understanding of consumer spending behavior. First time borrower patterns indicated that retail apparel accounts dominated as the initial credit product preferred by consumers. The options for over-indebted consumers are debt review, administration or voluntary sequestration.

Other supporting interventions would be the lobbying for the Personal Insolvency Bill through the Department of Justice and strengthening of the debt review process by proposing additional reforms to DTI’s proposals that support better governance.

The Committee wanted to know whether Treasury has had discussions with the retailers on the proposed debt relief interventions; how interventions could be tailored to be more consumer-centered; and whether the Treasury will oversee the market research done by the banks. Despite people having different reasons for borrowing, the root cause of over- indebtedness was poverty. There needed to be research on banks’ lending behavior on secured credit to help people have more secured loans rather than unsecured loans.

The meeting with National Treasury will continue on 20 June 2017 with the Department of Justice. 

Meeting report

The Chairperson thanked the members for their contributions during the dinner with the British High Commissioner and said the Committee was committed to expanding and deepening South Africa’s trade with Britain post-Brexit. The committee was also committed to visiting Wales to get a better understanding of debt relief measures applied there.

Briefing by the National Credit Regulator on over-indebtedness

Ms Nomsa Motshegare Chief Executive Officer (CEO), National Credit Regulator (NCR) said that there was a total of R1.6 trillion relating to the different credit products extended to consumers in as far as the Debtors Book was concerned. An analysis of the Debtors Book showed that most consumers would rather pay their mortgage or vehicle loans before they pay any other credit types and hence such credit facilities performed better than other credits facilities and unsecured credit.

On the percentage distribution of disbursement per credit type, the total disbursement as at 31 December 2016 was R123 billion. The secured credit extension has surpassed mortgages. Secured credit was mainly driven by vehicle finance which contributed R42.2 billion. Credit providers submitted information to credit bureaus on a quarterly basis. As at 31 December 2016, there were 24.31 million credit active consumers, 40% (9.76 million consumers) of which were classified as impaired consumers. The 24.31 million credit active consumers had 82.42 million consumer accounts, with 75.7% (62.41 million accounts) being in good standing and 24.2% (20 million accounts) being impaired at the end of 2016. This meant that every credit consumer has an average of 4 credit agreements at a time.

The impaired accounts are due to accounts falling in areas or judgments being given against consumers. However, there is movement regarding the statistics relating to the judgments since the consumers are paying. On debt counseling trends, debt counselors are individuals registered with and regulated by the NCR and assisted over-indebted consumers. Over-indebted Consumers may approach them so as to get assistance in negotiating new terms with their credit providers. There are currently over 2 000 registered debt counselors throughout the country, with 800 noted as highly active. The monthly applications for debt counseling have been increasing steadily since 2014 with the December period recording the lowest number of applications.

Credit providers assist consumers under review and negotiate new terms with credit providers for more comfortable terms of payment of their credit. In effect, this has given rise to an increase in the number of consumers who are actively paying, since 2014. Consumers are thereafter required to pay the payment dissolution agents (PDAs) registered by the NCR. PDAs are various companies that get money from the consumers and distribute it to the various credit providers the consumers owe money to. Payments to the agents have been on the rise with the month of March 2017 recording more than R800 million being distributed to the various credit providers.

The TransUnion Consumer Credit Index (CCI) indicated improving consumer credit health in the first quarter of 2017. This was due to more consumers being able to pay back their debt. The index had improved to 52.4 from 49.7 with 50.0 being the break-even level. However, with the recent recession there may be a decline.

On debt counseling statistics, 2014 had 177 800 applications received with only 52% accepted, 2015 and 2016 had 205 400 received with 58% accepted and 234 700 received with 55% accepted respectively. Most of the consumers under debt review earn over R10 000 and less than R15 000. Most of these over-indebted consumers are within the ages of 36-45 with the males being affected the most with over 50% of them being over-indebted every year; 67% of these consumers are Black African, followed by whites at 16%, coloureds at 13% and Asians at 4%. Teachers have been identified as the most affected by debt, followed by the police and local government (municipality), the central government, nurses and then provincial government.  

Discussions:

Mr A Williams (ANC) asked who were the other credit providers indicated in the presentation and how much do distribution agents and debt counsellors cost the consumer when paying back the debt to creditors.

Ms N Ntlangwini (EFF) asked in what provinces distribution agents are located and she requested for clarity on how they operate as intermediaries between the consumer and the credit provider. She expressed her concern on the statistics of the over-indebted black people and said that black people are still being oppressed.

Ms C Theko (ANC) asked how prevention measures can be implemented so as to prevent further indebtedness. There should be more information explaining the reasons behind the racial statistic to explain how or why Asians had the least debt.

Mr G Cachalia (DA) asked whether there was any recourse mechanism to cover the category of consumers who are currently not being covered by debt counselling and therefore stand at risk of future indebtedness.

Ms S Van Schalkwyk (ANC) noted that the presentation only covered employees in the public sector and not the private sector. She requested for the statistics of the private sector employees. She expressed her concern with the fact that, according to the statistical analysis, it was the people earning more than R150 00 that were mostly over-indebted. This was beyond the objective of debt relief initiative since the initiative was targeting the poorest of the poor.

Ms S Sithole (ANC) commended the presentation and noted that it was sufficiently detailed. The debt relief initiative will assist South African who cannot be accommodated by the banks and also families affected by financial adversities. She asked what influenced over-indebtedness.

Ms Van Schalkwyk expressed her concern on the fact that, according to the analysis, the people going for retirement are part of those who are over-indebted.

The Chairperson expressed her concern regarding the police being over-indebted and said such pressure may leave them susceptible to corruption. She wanted more details on the credit extended to those earning between R0-R1 500.

Ms Matshegare responded and said that debt counsellors are normally approached for assessment by credit consumers who believe that they are over-indebted. In the event, the counsellors process and analyse the application and find the applicant was not over-indebted; the applicant shall pay a rejection fee of R300 to cater for the cost of assessment. In the event the assessment confirmed over-indebtedness, the counsellors negotiate for either extension of the credit period or even, in some instances, for a reduction of the interest rates. The first payment installment goes to the payment of the debt counsellor fees which can go up to a maximum of R6 000. Thereafter, the consumer will pay an after-care service fee which catered for the debt counsellor’s compliance monitoring. The consumer was not required to pay back the debt through the counsellor but is obliged to pay through the PDAs. Currently there are three that are registered and regulated by the NCR. However, over-indebted consumers are not obliged to use PDAs and it was only encouraged for more convenience for the consumer.

There are consumers who are unaware of the existence of debt counselling as a service and there are others with such a low income that they cannot afford to pay debt counsellors fees. However, the NCR does not have the statistics relating to employees in the private sector and will need time to collect it.

The NCR has begun a study so as to understand better the reason behind the over-indebtedness by consumers under debt review. It will also detail the types of credit applied for from a racial angle. Despite the challenge of reaching out to consumers in rural or remote areas, the NCR is conducting consumer education to help in preventing further over-indebtedness on the part of consumers by sensitising people on their rights and responsibilities regarding consumer credit.

Mr Lesiba Mashapa, Company Secretary, NCR, said the other credit providers contributing to R 171 billion of the debt, constituted mainly of micro lenders. The fees paid to the PDAs are published in the Affordability Assessment Regulations with the payment fees depending on the amount set for distribution. There are currently on three PDAs, all of which are based in Gauteng, however, there was a new application process to register other PDAs.

Ms Van Schalkwyk enquired whether there was any kind of monitoring mechanism to see whether the payments being made have any impact on the debt or whether such amounts would only make the consumer indebted for life due to the debt repayment existing throughout the life span of the consumer.

Mr Williams asked how much money the consumer paid to the debt counsellor and whether debt relief really was in the interest of debt counsellors considering the fact that they get paid follow up fees for consumers’ debt.

Ms Ntlangwini said that the debt counsellors are not helping consumers but rather only benefiting from them. The payment to the debt counselor was an additional expense to the consumer’s debt obligations and it only continued to impoverish them. The Committee should also be provided with the names of the PDAs.

Ms L Theko (ANC) said that people on debt relief cannot acquire more debt since they are on a watch-list. She asked whether there was a need to amend the National Credit Act since it seemed not to address the core issues of debt relief.

Ms Matshegare said that the duration of the debt depended on the amount of the loan and also each individual’s capacity to pay off the loan after the renegotiation of the new terms. Credit providers cannot take legal action against any consumer under debt review; such consumers are flagged on the credit bureaus’ records in accordance with the affordability assessment regulations. The consumer cannot as well take any more credit until he has been rehabilitated. Consumers have a choice of either paying off their debt in person or through the accredited PDAs; DC Partner (Pty) Ltd, Hyphen Technology (Pty) Ltd and National Payment Distribution Agency (Pty) Ltd. However, debt counsellors are registered by the NCR as individuals and not as companies.

Mr Mashapa said that it was indeed possible for debt relief measures, such as loan write offs, to counter the interest of debt counsellors.

Briefing by National Treasury on over-indebtedness

Ms Katherine Gibson, Chief Director: Financial Sector Conduct, National Treasury, said that Treasury’s presentation built on the NCR’s presentation by analysing where the debt was most prevalent. The Committee should take note that despite the debt relief system having its challenges; it should not be scrapped as it still played a vital role that just needs fine tuning to assist more consumers.

National Treasury wanted to find new ways to change borrowing behavior and not just focus on the cycle of debt relief. Changing consumer behavior will entail sensitising South Africans to save for future expenditures rather than borrow for immediate consumption. Borrowing should also be targeting acquisition of assets and wealth rather than centered on temporary materialistic items. The interventions going forward will be focused on reckless borrowing and saving.

The extinguishing of debt should only apply to unsecured loans with a focus on the low income groups. Treasury will, to the greatest extent feasible to protect a borrower’s asset provided in secured loans. Such responses should be a collective response throughout government departments and the retailers and microlenders in the private sector. On the market overview, mortgages account for about half of the debt, with 1.8 million accounts covering about R875 billion as of 2016. Personal loans are the most impaired followed by short term credit. Store and credit cards account dominate the impaired accounts

Ms Matshegare said short term loans are the loans below R8 000 repayable over a period of 8 months. Interest rates are 5% per month and reduce to 3% for the second loan.

Ms Gibson said that, the estimated debt stock by income category showed that majority of the debt are in the hands of those earning R15 000 and above. Statistics depicting the prevalence of the emolument attachment orders (EAOs) in the public sector showed that education has the highest percentage at 66.61% in the NCR salary band of R15 000-R30,000, Health leads by 38.25% in the R10 000-R15,000 category followed by SAPS with 53.44% and 35.61% in both categories, respectively.

Looking at the first amnesty intervention, data on 600 000 consumers showed that 64% of individuals who benefited from the amnesty subsequently opened accounts; 74% of individuals who had obtained credit had bad or adverse accounts and 19% had judgments five years thereafter. Treasury was doing behaviour analysis to have a more accurate understanding of consumer spending behavior. First time borrower patterns indicated that retail apparel accounts dominated as the initial credit product preferred by consumers. The options for over-indebted consumers are debt review, administration or voluntary sequestration.

As an option, the loans could be consolidated, eliminate all fee charges related to the loans and apply a 20% debt servicing: income ratio ceiling over 3 years and extinguish the rest on pro-rata basis or extinguish the aggregate debt up to a ceiling of about R2 000 on pro rata basis or extinguish all the debt. The second option would be to go on an aggregate debt ceiling and extinguish up to a R2 000 limit for people with no income and no assets. The third option would be to extinguish all the debt in the category. Each option has its own merits and will bear the burden differently across the credit providers. However, in the case where the debt was extinguished, the consumer may never be able to get credit again since the credit culture will render the credit providers to be more risk averse to lending. Option 1 and 2 are the most feasible in developing a sustainable credit culture. There should be a financial education and wellness program so as to create awareness to consumers and correct borrowing behavior.

Other supporting interventions would be the lobbying for the Personal Insolvency Bill through the Department of Justice and strengthening of the debt review process by proposing additional reforms to DTI’s proposals that support better governance.

The Chairperson said the Committee had run out of time and the Committee will continue the meeting on Tuesday, 20 June 2017 with Treasury and the Department of Justice.

Mr Williams asked whether Treasury has had discussions with the retailers on the proposed debt relief interventions. He also wanted to know how interventions could be tailored to be more consumer-centered and whether the Treasury will oversee the market research done by the banks.

Mr Cachalia said the Committee should invite Treasury back when they have the necessary market research.

Ms Ntlangwini agreed that more research needed to be done on how many people have been under debt review and how many have returned into debt. Amnesty and debt review are borrowed models from other countries and did not speak to South Africans’ root causes.

Mr A Alberts (FF+) agreed said that despite people having different reasons for borrowing, the root cause of over- indebtedness was poverty. There needed to be research on banks’ lending behavior on secured credit to help people have more secured loans rather than unsecured loans.

The Chairperson noted that the Committee had run out of time and Treasury will be allocated adequate time for better engagement with the Committee the following week. The Committee will be visiting Wales in September and therefore needed as much information as possible.

The meeting was adjourned.

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