MARIAM ISA, Johannesburg | Thursday
THE government says it will allow financial firms to continue making direct deductions from civil servant payrolls for existing loans, but is to modify the system to help them pay their debts.
Kuben Naidoo, head of personnel policy at the Treasury, says the government is putting limits on the amount of deductions allowed and prescribing lower interest rates to help around half a million state employees escape from a punishing debt trap.
”There is no doubt that companies will lose out but we feel that civil servants have been exploited by their use of PERSAL (deduction system) to make deductions without passing on the benefits in the form of lower interest rates,” he said.
”A lot of civil servants have been in a debt trap and this will help them – the companies will still make a profit, this is a compromise between the industry and ourselves,” he said.
Earlier, the government had said it would halt all direct payroll deductions from June 1, sending shock waves through the micro-lending industry, which provides credit to the country’s low-income mass market.
Analysts said that microlenders were still likely to suffer, although their share prices initially showed little reaction to the news. The insurance index was down 1.20%, outperforming a 2.50% fall on the overall bourse.
”There is still a lot of risk inherent in this industry – maybe even more than had the microlenders moved out of the system completely,” SG Securities analyst Greg Goeller said.
A Treasury statement said that the new conditions, which would take effect from April 1, would limit payroll deductions for insurance policies to 15% of an individual’s basic salary and to 25% for other types of credit.
The total of 40% compares with an average rate of about 50% of annual salaries that 497_000 civil servants pay to lending institutions at present, Naidoo said.
More importantly for the credit institutions, existing loans – which amounted to about six billion rand in the middle of 2000 – would be consolidated into one for each employee.
For amounts exceeding R10_000 – which Naidoo said was the case for most of the debtors – the interest rate would be cut to an annual rate of 22% versus 42-45% now.
Naidoo said he expected the measures to reduce the amount of salaries that civil servants lose through payroll deductions to fall to about 25% from 50% at present. – Reuters