South Africa has about 8,5-million consumers battling with debt repayments and those with impaired credit records are hoping to improve their debt position this year.
Figures from late 2010 suggest that credit providers turned down 40% to 60% of all applications for credit — a sign that consumers are still borrowing to address their difficulties when it comes to repaying debt.
The average debt-to-income ratio of consumers in South Africa is 78,5% and this didn’t improve much last year, despite the fact that interest rates have dropped by over 6% since 2008. The ratio isn’t likely to improve this year, either. With a debt-to-income ratio of 78,5%, normal debt repayments result in a 5% improvement in an individual’s debt-to-income ratio over a year. This requires 22% to 25% of monthly income.
Heavily indebted consumers suffer most
The real problem lies with heavily indebted consumers with a debt-to-income ratio of 250%, who need to use 70% of their monthly income to repay debt. These consumers need drastic action to assist them and it is these individuals who will benefit from some concessions to be implemented by debt counsellors, credit providers and the National Credit Regulator (NCR) this year.
Up to 60% of consumers applying for debt review will be assisted — the idea is to reduce the number of debt review cases in the courts, as well as encourage credit providers not to terminate the debt review of consumers. These concessions will start in March this year.
According to Paul Slot, director of debt counselling at Octogen, consumers with a debt-to-income ratio of 250% can improve their ratio by about 40% to 45% a year, given the right debt repayment plan.
How this differs from previous concessions is that they’ll be implemented via technology. Debt counselling systems can refer to a central system to check on the quantum of concessions available to the client. If criteria are met, the debt counsellor can have the repayment plan approved instantly.
“A lot of hope is being placed on this ‘central repayment plan engine’,” says Clark Gardner, who heads up Summit.
The funds that are available can be used to calculate the fee and rate concessions that will help consumers improve their debt-to-income ratios quickly. About 60% of consumers who apply for debt review should benefit from the new concessions. Those who can’t commit sufficient funds to the repayments to have their non-secured debt repaid within 60 months can request their debt counsellor to refer their repayment plan to a magistrate for approval.
Theoretically, these concessions should reduce the backlog of pending debt review cases in the courts, as more cases will be resolved by consensus.
It’s also expected that credit providers will refrain from terminating debt reviews once a repayment plan has been approved, and when the consumer continues to meet monthly payments. As a further incentive, consumers will retain the fee and rate concessions as long as payments are maintained.
Of course, many credit providers say they can terminate the debt review process 60 days after the application for debt review. Gardner calls this “the single biggest challenge” that consumers and debt counsellors face, but legal clarity as to the interpretation of the National Credit Act (NCA) should be obtained early this year.
Credit providers and courts can assist
Friedl Kreuser, head of debt relief at Summit, points out that better communication among all role players would help the processes along. “Sometimes credit providers are not participating in the process in good faith, as required by Section 86 (11) of the Act, while at other times they are simply under-capacitated to handle the volumes of applications and have to answer to CEOs and bottom lines,” Kreuser says.
One of the biggest problems is “the lack of uniformity from the courts” — each court has its own requirements and it’s often impossible to set down the requirements for a successful court application. In the end, the consumer suffers, as many credit providers won’t accept payments and amend interest rates until there is a court order.
Kreuser also points out that it is almost impossible to restructure a consumer’s debt without reducing interest rates and credit providers are quick to acknowledge this.
“If it is raised as a point in court, though, the magistrate’s hands are tied, as they are creatures of statute, which results in court orders not being finalised, or repayment terms being extended indefinitely — this is not realistic,” says Kreuser. “Amendment of the NCA and clear directives for courts will go a long way towards making the process more effective for consumers.”
Meanwhile, South Africans should take advantage of the new concessions, and low interest rates, to make a significant dent in their debt repayments.
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