South Africa’s Proposed Credit Regulations Irk Credit Providers, Please Consumers

This post was originally published on the
Center for
Financial Inclusion
website. A few weeks ago, South Africa's Department of Trade and Industry published new proposed regulations pertaining to the National Credit Act limiting fees and interest rates on short-term and unsecured loans along with credit cards. The public may lodge comments to the draft regulations up until 30 days after its publishing date of June 25th. The intelligence used to inform the proposals have not been released so it is not clear what policy, cost, or operational factors were taken into consideration to arrive at the outlined changes. Meanwhile, the microfinance industry in the country, which has been lobbying for the flexibility to charge significantly higher interest rates and fees, seeks to understand the regulators' rationale. The draft regulations were published after a protracted court battle where one of the industry associations representing micro-lenders requested the court to force the regulator and policymakers to review the fees requirements of the National Credit Act. The fees and interest rates hadn't been reviewed since the Act became effective in 2007 - a concern when taking into account factors like inflation. Credit providers have responded with dismay and concern about the proposed changes, especially the interest rate caps on unsecured loans. They have expressed the fear that the proposed interest and fee changes will affect the cost of administering credit, reduce profits, and constrict access to credit for borrowers. Other commentators have viewed the reductions favorably considering consumers are already over-indebted to a large extent and the interest rate cycle is predicted to start trending upwards. On this blog a few months ago, I shared that in 2014, the National Credit Regulator (NCR) Credit Bureau Monitor revealed that out of South Africa's roughly 23 million credit active individuals, about 11 million have impaired records. Now, for some specifics. Bear in mind that the rates listed below are subject to change according to fluctuations in the market's interest rate cycle - namely, fluctuations in the market's "repo rate," which is the rate at which the central bank lends to commercial ones. However, the proposed amendments do dampen the effect of repo rate changes on interest rates so that increases in the cost of capital for banks don't get passed on to borrowers.

• Credit Cards & Overdrafts: Current per annum interest rate: 22.65%; proposed interest rate: 19.775%
• Unsecured Credit Transactions: Current per annum interest rate: 32.65%; proposed interest rate: 24.75%
• Short-Term Loans (Up to R8,000 (US$648) Repayable Over Six Months): Current per month interest rate: 5%; proposed interest rate: 5% on first loan, and 3% on any additional loans within the same year
• Maximum Monthly Service Fee: Currently R50 per month; proposed R60 per month
• Mortgage Agreement: Current (per annum) interest rate of 17.65% would not change with new rules

The draft provision has raised major concerns and uncertainties regarding specifics surrounding the rules and regulations. For example, for monthly service fees, the draft states: "This service fee covers the cost of administering a credit agreement which is the operational cost of the credit provider such as rent, labor, communication, banking, processing of repayments and related costs." It remains unclear what credit providers are allowed to charge for outside the proposed R60 per month and how this will affect sustainability and profitability. The proposed regulations are part of a broader legal reform strategy in South Africa to address overindebtedness and reckless lending, which the government views as getting out of control. The strategy encompassed recent amendments to the National Credit Act to introduce more stringent loan affordability tests, and moves to stop credit providers from employing unnecessary and hidden fees. The amendments on affordability were promulgated this past March. The amended legislation introduced the new affordability guidelines because any such regulatory mechanisms were lacking. In some cases of reckless lending we are investigating, evidence indicates that consumers consistently under-declare their monthly expenses by as much as 60 percent, that way it appears they have more money for loan repayment. The affordability amendment requires credit providers verify income as well as conduct the following assessment: calculate the consumer's discretionary income; take into account all monthly debt repayment obligations; and take into account maintenance obligations and other necessary expenses. Additionally, a credit provider must take into account the consumer's debt repayment history under credit agreements. The new affordability measures incorporate minimal expense norms, which are individuals' necessary expenses that a provider must accept they have and keep free from use for loan repayment. Given the structure of these new expense norms, their introduction will restrict credit to lower income consumers, especially those who currently depend on state grants, unless they have proven additional income. Many view this as a good thing but others fear that they will gravitate towards underground lenders who charge illegal and usurious interest rates and use hard core and illegal collection tactics like retaining bank cards. Though these affordability amendments to the National Credit Act are already enacted, we'll be eager to witness what transpires during the 30-day comment period for the proposed interest rates and fees amendments. Of course client well-being and protecting against overindebtedness is the central priority of microfinance, but these proposed changes don't seem to match the financial realities required to serve lower income clients.