South Africa: A country drowning in credit
High levels of consumer debt have caused the national treasury to consider bold moves to tighten lending regulations and abolish garnishee orders. This would mean that only maintenance payments could be deducted from salaries.
The days of reckless lenders appear to be numbered because the government can no longer ignore the debt problem and intended safeguards, such as the National Credit Act and the Magistrates Act, have proved ineffective in saving consumers from lenders and themselves.
Late last year the treasury and the Banking Association of South Africa agreed to discuss several measures to improve responsible lending, including a review of loan affordability assessments, appropriate relief measures for distressed borrowers and reviewing the use of debit orders.
The treasury told the Mail & Guardian that it is "co-ordinating a process to complete the work identified" and is also having discussions with the department of justice about the possible restriction of mechanisms such as garnishee orders.
The moves appear to have been sparked by a report from law firm Edward Nathan Sonnenbergs, who last year found that in a company of 45 000 employees there were 27 000 garnishee orders. More than half the orders were deemed irregular or invalid and 39% of the deductions were being made against loans that had been paid or did not exist.
Even the state's employees have fallen victim to severe debt problems and some take home very little after deductions (see: "Public servants engulfed by tsunami of debt").
The National Credit Act was supposed to encourage responsible borrowing and discourage reckless lending. It requires that financiers adhere to certain limits as far as interest rates and service charges are concerned. Even so, these costs can reach high levels. In a recent advertising campaign, the National Credit Regulator encouraged consumers to think twice before borrowing because interest ensures that "you always end up paying back almost double the amount".
Appreciation of the risks
The lender is required to do an affordability test to determine the consumer's general understanding and appreciation of the risks and costs of the proposed credit, the rights and obligations of a consumer under the credit agreement, debt repayment history as a consumer under credit agreements, and the consumer's existing financial means, prospects and obligations.
The Act states that the regulator may draw up affordability guidelines, which it is still in the process of doing. But lenders are not obliged to adhere to these as long as their own affordability calculations are reasonable.
Unsecured lending is a problem in South Africa. According to the regulator, in the year to September 2012 consumer loans not backed by assets increased 39% to R140-billion and accounted for 10% of consumer credit.
The Reserve Bank's September 2012 Quarterly Bulletin shows that the ratio of household debt to disposable income remains high, at 76.3% in the second quarter of 2012. These levels of debt have begun to worry financiers. Bloomberg recently reported that Capitec, a major player in unsecured lending, is concerned about the rising number of indebted consumers and that Nedbank would be comfortable with losing market share in this sector. This week, Moneyweb reported that African Bank will slow down its growth in advances – to about 23% for the financial year ending 2013, from levels of about 35% in 2012 and just under 40% in 2011.
However, given its high growth off a low base, the South African Reserve Bank has said it is not concerned about the current levels of unsecured lending, at least not as a threat to South Africa's banking system.
Hlengani Mathebula, head of group strategy and communication at the Reserve Bank, said garnishee orders pose a risk because emphasis is placed on debt repayment rather than a thorough risk assessment of the client, including affordability.
"The Reserve Bank is working on a project to reform the collections process. It will strengthen the mandates of debits or deductions to ensure that the payer is put in control of what is deducted from their accounts. As part of this process, the national treasury has agreed to review the regulatory environment relating to payroll deductions to ensure that only a limited category of deductions are allowed from the payroll."
Although the legislation was written to protect the consumer, experts say implementation works differently. Debt collectors have found loopholes in garnishee legislation and the National Credit Act. But simply abolishing garnishee orders will make it harder for lenders to recover unpaid debts and may result in less ease of access to credit, said Frans Haupt, director at the University of Pretoria's law clinic.
In the absence of a garnishee order, the old way of debt collecting and obtaining court orders to attach indebted parties' moveables may return.
However, given the costs and administration involved, Haupt said that neither the credit provider nor the consumer would benefit from a sale of execution.
Hennie Ferreira, chief executive of MicroFinance South Africa, said the real problem is the administration of the law. "The truth is that garnishee orders are not very well managed at a policy level" and the lack of departmental co-ordination also makes it harder to ensure garnishee orders are administered properly.
He said there is a need for garnishee orders because some people take on debt with the intention of running away from the system. If scrapped, it may create room for another kind of lending practice or people may move into the underground market.
International best what?
Until recently, data on how South Africa's credit system and debt collection weighs up against international best practice has largely been nonexistent. And even the National Credit Regulator admits it has "not conducted any studies that specifically address this issue".
But growing concern over the abuse of garnishee orders has prompted the law clinic at the University of Pretoria to look outside the country to see how debt collection is done.
The ongoing research had so far identified two glaring differences, said Frans Haupt, director of the clinic.
First, there was a maximum limit for garnishee orders and the remainder was "unattachable". Second, there was often an order of preference. For example, in the United States, deductions such as student loans, taxes and child or spousal maintenance would be taken off salaries first.
"The other amazing thing we've come across is that, even in other countries where they have more or less the same system as ours, they don't have the same problems – in that people are just more honest and stick to the law," Haupt said.
Regarding the National Credit Act, many countries didn't have maximum fees and other costs, and instead operated as free markets. But South Africa had not fared well with that kind of system and the Act had gone a long way in curbing some exorbitant fees, Haupt said.
"Prior to National Credit Act, it was common to have 35% interest [charged] per month. In short-term loan agreements, we even came across 100% per month," he said. – Lisa Steyn
Public servants engulfed by a tsunami of debt
The government has recently become concerned about the increasing levels of consumer debt, and even its own employees are not safe. George Dlamini (not his real name) is one such worker. A public servant working for the Tshwane municipality, Dlamini's total earnings usually exceed R15000, but on some paydays his bank balance can reflect as little as R900 in net salary.
Dlamini's payslip in March 2011 shows a number of deductions. Tax, medical aid, union fees and debt to First National Bank all take a sizable chunk – some R4 700.
Thereafter, five garnishee orders amounting to more than R1800 also come off. On top of this, Dlamini regularly borrows money through Propratt Loans and his repayments during this particular month in 2011 were R6300, which is automatically deducted from his salary.
Fast forward to November 2012 (a bonus month) and Dlamini's financial problems have evidently not gone away. His five repayments to Propratt accounted for R12 000 of his R25 000 earnings.
Dlamini's is one of several City of Tshwane employee payslips seen by the Mail & Guardian, showing garnishee orders and payroll deductions eating into the majority of their salaries. But this is above board, as far as the National Credit Act and the regulator are concerned.
Francois Eicker, chief executive at Propratt, said its repayment schedule is in line with other market participants such as Capitec and African Bank. Propratt is registered with the National Credit Regulator and conducts its business within the parameters of the Act, he said.
All interest, administration fees and other costs are in line with the Act and the affordability criteria are "very strict", Eicker said: "Propratt grants loans with total instalments of not more than 30% of clients' net salary, and the maximum exposure on the loan amount is not more than the client's monthly gross salary."
But at the Tshwane municipality, Dlamini is just one of many who are deep in debt. "Unfortunately, the level of indebtedness of municipal employees is quite high. This is evident by the number of garnishee orders served to the City of Tshwane for implementation," said Nomasonto Ndlovu, the metro's strategic executive director.
The South African Municipal Workers' Union said it cannot comment on the indebtedness of its members as it has not done research in this regard.