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Delinquent debt tops R40bn

Despite low interest rates and improving economic conditions, debt delinquency is now reckoned to be more than R40-billion in South Africa. Most of this — more than R24-billion — is owed to municipalities for unpaid services such as electricity and refuse removal.

This figure was disclosed last year to Parliament’s local government committee, but is now reckoned to be closer to R28-billion.

“This shows that the culture of non-payment in South Africa is still strong,” says Leon Claasen, a director of CA Ratings, which provides credit ratings for municipalities, banks and other businesses seeking to borrow money.

“Most municipalities have a collection rate of about 90%, but this means that they lose 10% of potential collections every year.”

Micro-lenders are reckoned to have written off debts of R3-billion to R5-billion and retailers a further R2-billion. Reserve Bank figures show banks made specific provisions of about R18-billion last year for debts they do not expect to recover.

Municipalities are owed more than R15-billion in unpaid electricity bills, and a trip to Alexandra township, north of Johannesburg, this week showed why.

One resident, like several of his neighbours, explained that he simply connected an underground cable to the electricity grid and has enjoyed free power for years. The practice appears to be rampant and, because the illegal cables are well hidden, there is little the local muncipality can do about it.

One resident of Lenasia, west of Johannesburg, complained to the local municipality when his electricity bill suddenly skyrocketed for no reason. He later learned that some of his neighbours had tapped into his mains feed.

Despite the apparent growth in debt delinquency, the credit behaviour of South Africans as a whole appears to be improving. Household debt as a percentage of disposable income has fallen to about 52% from 60% in 1997, and is now nearly half that of the United States and many European countries.

RMB Industrial fund manager Iain Power says local consumers were scalped by high interest rates in the late 1990s and worked hard to pay their debts. But with interest rates expected to stay low for the foreseeable future, this leaves considerable capacity for retailers to increase credit sales.

Several retailers ran up massive bad debts in the 1990s as they rushed to extend credit to the emerging market. Most have since cleaned up their debtors books.

Personal insolvencies are running at about 120 a month, down from nearly 500 a month in 1999. Company liquidations touched a near record 330 a month in 2003, but have since fallen slightly.

Credit Guarantee Insurance Corporation economist Luke Doig says the positive trend in insolvencies is suspect, and seems to contradict the data on company liquidations.

While overall debt levels have improved, it is a different story for new entrants to the credit market.

Ten years ago consumer businesses started targeting the emerging market, selling everything from life insurance, appliances and furniture to those previously denied access to credit.

Suddenly showered with offers of credit, many new market entrants ended up drowning in debt.

Millions of South Africans have been hit with adverse credit reports, barring their access to further credit for a period of three to five years.

Credit bureau Transunion ITC has 17-million “credit active” names on its database, with adverse credit reports on 15%, or about 2,5-million, of these. It keeps both positive and negative data on consumers’ payment behaviour, breaking with the practice of focusing exclusively on negative data.

The Congress of South African Trade Unions criticised the credit bureaus last year for making life a misery for the millions that are blacklisted. However, Transunion ITC communications manager Lauren Flemming says the bureaus are critical to the success of the economy: “Research has been done overseas showing that countries with credit bureaus perform better than those without.”

Flemming says the percentage of adverse credit reports has remained fairly constant over the past three years, but debt collection agencies report a noticeable increase in delinquency particularly among low-income groups.

Rowan Gordon, executive director of debt-collection group CMS, says debt delinquency moves through cycles, loosely connected to interest-rate cycles. The proliferation of debt fuelling the current consumer boom is driven mostly by banks and retailers.

South Africa’s consumer credit market is worth R360-billion, but 85% of this goes to just 15% of the population. The Department of Trade and Industry has proposed a new consumer credit Act to rectify this distortion and improve consumer protection by curbing reckless lending, creating mechanisms to restrict consumers borrowing beyond their means, and forcing credit issuers to disclose the true costs of debt.

Two beneficiaries of the growing debt business are debt collection agencies and administrators. Consumers unable to repay their debts are running for the cover of debt administrators, who place them under court administration in terms of the Magistrate’s Court Act.

There are now more than 650 000 South Africans under debt administration. In practice, creditors receive a small percentage of the money owed, while administrators are accused of pocketing fees of up to 25% of the outstanding debt.

The biggest challenge for municipalities is overcoming the culture of non-payment. Gordon says those municipalities employing debt collection agencies are seeing an improvement.

But non-payment reflects the poor quality of services in some municipalities, says Claasen: “I think we need to see an improvement in services if we are to overcome the culture of non-payment.”

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Ciaran Ryan
Guest Author

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