Tag: debt

By Georgina Crouth for IOL 

Stellenbosch Law Clinic filed an application in the Western Cape High Court, seeking judicial intervention on the manner in which debt is collected. It believes debt collection needs to be regulated and that costs must be capped.

The clinic is joined by Summit Financial Partners in representing 10 of their clients. All the major role players in the credit industry are involved, with 49 respondents, including all the major banks, the lending institutions, the ministers of Justice and Trade and Industry, and the National Credit Regulator.

Stephan van der Merwe, senior attorney at the university’s Law Clinic, says there’s widespread abuse in the industry.

“We have a lot of situations where people have been garnished with emolument attachment orders against their salaries. When you sit down and look at it you find amounts in excess of five, six, seven times the principal debt and they’re expected to continue making payments on it,” he says.

In one case, a client was granted an initial loan of R600, but had paid back more than R5 000 – about eight times the initial loan amount. In another, a farm labourer, earning R2000 a month, has R970 garnished from his monthly salary. Back in 2011, he was given a loan of R16 000 and has repaid in excess of R31 500 – yet the creditor alleges he owes R37 000.

Van der Merwe says the reason they get away with it is because there are no rules that the costs levied against the debtor are taxed.

“What you have is the creditors going to their attorneys or their collection agents and telling them to collect on the debt but the charges are borne by the debtor.

“This is why the debtors end up paying these astronomical amounts for small loans, because the attorney and collection agency fees are dumped on them.”

The common law in duplum rule says that interest cannot accrue to more than the capital amount. Since 2007, when the National Credit Act (NCA) came into effect, the statutory in duplum rule has been interpreted by institutions in a myriad ways.

“This is why we are going to court: to request a declaratory order that the statutory in duplum is applicable to all the interest, the costs, including the legal fees that are levied against the debtor – irrespective of whether a judgment has been granted.”

Van der Merwe says on a proper interpretation of the relevant sections of the NCA, it would mean that if the debtor is in default under the credit agreement these amounts may not exceed the unpaid balance of the principal debt at the time of default.

“When a consumer is in default all the combined interest, the collection costs and so on cease to run when they reach the unpaid balance of the principal debt.”

“The problem is creditors say legal costs don’t form part of it, or that this isn’t applicable after judgment.”

In addition to the two declaratory orders, asking for clarity on how sections 101 and 103 of the NCA are interpreted, the clinic is also asking that the court declare that legal fees may not be recovered from the debtor unless they have been taxed.

“Nowhere in the National Credit Act is a distinction drawn between legal fees and collection costs.

“What we’re saying is that creditors want to use expensive attorneys to collect on miniscule debts; debtors can’t be expected to pay those fees.

“We shouldn’t allow debtors to be abused in this way – we need to the court to make a ruling.”

Once the court has clarified allowable collection costs, the clinic wants it to order that an independent expert recalculate the applicants’ indebtedness and then order that if there is an overpayment, the money must be repaid to the debtors.

But before consumers get excited about having collection fees and interest repaid, Van der Merwe says prescription might be at play. “You might have trouble in court claiming that money back because prescription would have to be taken into consideration.

“There will be clarity: everyone will know what is expected and people won’t be abused financially as a result of uncertain legal interpretation.”

Van der Merwe says they are not attempting to vilify small cash loan providers, the credit industry or attorneys in general: “We applaud those creditors who are honest, give loans responsibly and collect responsibly: they play an important part in our economy.

“We are not tackling the industry in general – we have an issue with unscrupulous guys who don’t play by the rules. We are not going to assist so called ‘professional debtors’ either, who abuse the system by getting loan after loan at creditors’ expense if there are no merits in their cases.

“We have a problem with creditors who abuse low-income earners by coaxing them into enticing loans which they would never be able to service based on their limited wages.”

In 2016, the law clinic won a landmark case in the Constitutional Court, which found that several practices relating to the abuse of emolument attachment orders were unconstitutional.

“The court also considered the validity of the initial loan agreements which regularly included interest of 60% annually and they were concluded absent of any, or alterna- tively after severely defective, affordability assessments. Those transactions were conducted in breach of section 81 of the NCA which talks about reckless credit.

“Those specific creditors want to extend reckless credit to consumers, who they know won’t be able to repay the loans, and then they abuse the situation by putting debtors into a debt trap that they’ll never be able to get out of.

“People like that shouldn’t be able to shirk responsibility in their collection when they use illegal practices. They cause economic catastrophe in the lives of those clients.”

Van der Merwe says that after the Marikana massacre of August 16, 2012, clear linkages were drawn between the demands for higher wages and the abuses in the credit industry.

“Those workers demanded more money to allow them and their families to make a living because their salaries were severely garnished by credit providers that were instituting emolument attachment orders that were illegal and unconstitutional.

“We are trying to avoid those situations arising in the future, by asking the court to assist us in fostering a healthy and responsible credit environment.”

By Carin Smith for Fin24 

Research by Momentum and Unisa shows that 73.5% of SA households were “financially unwell” in 2017.

The research found that, while some households did very well during 2017, others just muddled through, while a large portion struggled immensely.

According to the study, one of the more concerning findings was that the proportion of financially well households was virtually unchanged between 2016 and 2017.

Even more concerning was that the proportion of financially well households was virtually unchanged since 2011.

However, there was a bright spot: The research found that while a large proportion of households was still financially unwell, it also found that these households were not as financially unwell as they had been previously.

Decline in net wealth

The study looked at various factors influencing the financial well-being of South Africans.

One was a decline in the net wealth to disposable income ratio of households, caused by a decrease in assets to disposable income ratio.

The decline was mainly due to negative growth in house prices and real investments in residential property increasing by less than 1% compared to 2016.

In addition, the real value of financial assets was lower during the first half of 2017 compared to the same time a year earlier.

Skills gap

The research further showed many households just don’t have the means and skills needed to take control of their finances.

While more people completed secondary and tertiary qualifications, social capital levels remained low due to feelings of disempowerment, low levels of subjective well-being, financial vulnerability and low consumer confidence in the economy.

There are indications that, although the SA educational system delivers a growing number of matriculants and graduates, the students predominantly acquire academic knowledge and not high-level cognitive, social and communication skills.

It furthermore looks like an improvement in education did not translate into a proportional increase in income, the study suggested.

This can, to a large extent, be explained by low labour demand growth due to a skills mismatch in the SA economy.

Control

Factors over which households have little control include macroeconomic factors such as low economic growth, high levels of unemployment, political and policy instability, and low levels of business confidence.

The factors over which households do have control include the educational levels of household members, their financial literacy and capability levels, their work statuses, the degree to which they conduct debt and financial risk management and financial planning, the amount of money they earn, and the level to which they save and accumulate their net wealth.

The results of the study have shown that, although households do have control of these factors, they generally don’t budget, conduct very little debt- and financial planning, and generally have very low financial literacy and capability levels.

Intervention

The research findings suggest that a comprehensive intervention is needed for financially unwell households to become financially well.

Such a comprehensive intervention should be more multi-faceted than merely providing social grants, social housing, free services and financial products, according to the report.

Putting households on a path of financial wellness growth will require high-quality education, an enhancement of their financial literacy and financial capabilities, and improving their understanding of financial planning and other financial services.

Source: IOL 

Edcon Holdings said on Thursday that it will be closing three of their chains: Boardmans, Red Square and La Senza lingerie.

This is the latest strategy to save the company after dwindling sales and profits.

By shutting down the other chains they hope to attract more customers to their flagship Edgars stores.

The decision to shut down certain chains comes from the newly appointed CEO Grant Pattison who took over the position fro Bernie Brookes. Edcon is South Africa’s largest non-food retailer.

The Johannesburg company has had a hard time staying afloat amid weak consumer spending and economic growth and in 2016, the company had to be taken over by banks and bank holders to stop it from collapsing.

Under Pattison’s plan, Edgars will cut down on more than 1 300 stores’ footprints as well as reduce floor space by 17% over the next five years to increase profitability.

They will also be focusing on Edgars mainly, which sells most of the of the items that are available in the stores that are being shut down.

Other stores that have made the cut include CNA and Jet.

Pattison said that he thinks that the company can turn. He said, “The quicker we can do this, the better”.

Debt

The urgency to make changes comes after Edcon retail sales dropped by 9,4% in three months through December 23 while adjusted earnings before tax, taxes depreciation and amortisation declining by 25%.

The owners of Edcon Holdings are Frank Templeton Sanford C. Bernstein & Co. LLC and Harvard University Pension Fund. They took over when Edcon was struggling under foreign-currency debt that was used to finance the takeover by Bain Capital Private Equity LP in 2007.

The 89-year-old company also employs 14 000 permanent a significant number in a country where more than 1 in 4 people are unemployed.

At the of last year, the company’s net debt was R4,2 billion. Some of the other attempts to revive the company include increasing the workforce, decreasing prices and bringing in international brands.

Edcon said earlier this year that they were in talks with creditors about refinancing debt to strengthen the balance sheet. Edcon also has liquidity facilities and credit facilities that will be maturing towards the end of 2018.

By Linda Ensor for TimesLive

Treasury estimates that the total debt that could fall under the debt extinguishment proposals made in the National Credit Amendment Bill proposed by Parliament’s trade and industry committee could range between R13.2bn and R20.7bn.

Banks and retailers would be the most heavily affected by the proposed scrapping of debt‚ Treasury said in a presentation to Parliament’s trade and industry committee on Tuesday during public hearings on the proposals.

The committee has proposed amendments to the National Credit Act‚ which include writing off the debt of those earning below R7‚500 month and who fall within the threshold of realisable assets.

According to research by consultancy firm Eighty20‚ about 56% of the credit active market of about 18-million has an income of R7‚500 a month or less.

“Based on the income estimates approximately 9-million borrowers could potentially meet the eligibility criteria for debt intervention as per the draft bill‚” the organisation said in a presentation to the committee.

“In total borrowers that could qualify for debt review hold over 16-million loans. 29% of these loans (4‚7-million) are three months or more in arrears belonging to borrowers who could qualify for debt intervention. The total outstanding balance on these loans is around R20‚7bn.”

The Black Sash said in its presentation that the debt relief proposals would provide much-needed assistance to social grant beneficiaries who are prey to loan sharks.

The Black Sash has been at the forefront of exposing the vulnerability of social grant beneficiaries to unlawful deductions and the predations of loan sharks. The organisation welcomed the R7‚500 income threshold as this would cover many social grant recipients.

Black Sash national advocacy manager Hoodah Abrahams-Fayker noted that the Easypay bank account – a joint operation between Grindrod Bank and Net1 subsidiary Moneyline – had fuelled indebtedness “as many loan sharks use this card to provide loans often with no affordability tests‚ no proper avenues of recourse‚ no administrative justice and no debt counselling.

“Grant beneficiaries are trapped in a vicious cycle using debt to pay for food and basic living needs. Overindebtedness is a social and economic challenge with far-reaching consequences for vulnerable social grant recipients (who) can become easy prey for moneylenders as they are receiving a guaranteed monthly income from the state.”

Treasury noted in its presentation that there were currently gaps in the protection of the overly indebted. For example‚ there were weaknesses in the insolvency framework as sequestration did not work for those with no income and no assets. The debt review system only worked for those earning more than R7‚500 per month.

Treasury proposed that the debt review system be improved for those with some income. This could be completed “relatively quickly”. However‚ a mechanism was needed for those with no income. A revision of the Insolvency Act was under way but could take some time to finalise.

The Department of Justice and Constitutional Development also made technical suggestions to improve the proposed National Credit Amendment Bill.

How to calculate your credit score

An excellent credit score is one of the most priceless assets a potential home buyer can have. This tool has the power to secure favourable mortgage and refinancing rate, influencing everything from the size of the loan repayment to the interest rate on the home loan.

“It is advisable that potential home buyers check their credit score before even starting to look for homes or applying for a home loan, as the banks will look into your financial history and the application will be declined if you have a low credit score. The important thing is that your accounts are up to date and that you have the ability to afford the bond,” said Craig Hutchison, CEO Engel & Völkers Southern Africa.

South Africans are entitled to a free copy of their credit record every year.

“Many South Africans are surprisingly unaware of the importance of a good credit profile, many do not know what a credit profile even is, and even if they do, they seldom check their own personal credit profile. Today many potential employers look at credit profile reports as a way to judge a person’s character and level of responsibility,” said Mellony Ramalho, group executive African Bank.

Your credit score is typically a number from 0 to 999 and is calculated by using all the details on your credit profile. “It reflects a ‘score’ summary of all your financial decisions, it is often used by lenders, such as home loan and personal loan companies, to make accurate decisions on whether they should lend to you or not,” said Michael Bowren, CEO and founder Fincheck.

Overall, a credit score measures the amount of potential risk the consumer is to the creditor.

How does a credit score work?

The higher your score the better your credit health will be, which will be an advantage when applying for a home loan, making it easier for you to borrow money at lower interest rates.

“The lower the score, the higher the risk which then influences the outcome of the credit application,” advises Andile Fulane, CEO, Seed of Prosperity.

By managing your credit profile effectively, you can ensure your image and profile is viewed favorably by lenders or other organisations. A bad credit score would mean the exact opposite of this and result in almost no financial institution willing to offer you a home loan.

How do they calculate your credit score?

Your credit score is calculated by a credit bureau based on your credit report. They consider how you pay your bills, how much debt you have and more importantly, how all of that compares to other credit active consumers.

Each bureau has a different way of calculating your score and take into account different forms of information, including information their organization already holds on you, or your employment circumstances.

Your credit score is only one part of your credit report although it is almost the single most important item on your credit report; the full report gives you some handy information. Your credit report is a combined summary of your financial background with an overview of your credit score, financial accounts, profile, and rating.

What influences your credit score?

As you start transacting with various banks, retailers and other financial institutions like lenders, you start building a financial history. Your credit history will be determined by the amount of money you have borrowed in your life and how much of it you have diligently paid back on time.

Credit score is affected by the following:

  • Missing payments or not paying on time, even if you make double payment the following month the score will affect your credit history. “While adverse legal information is cleared as soon as the account is settled, the negative repayment history however remains for a couple years,” said Ramalho.
  • Too much debt – how much you owe and how much of your available credit you’re using – it is advisable to try to keep the use of your current credit facilities to less than 35% of your limit.
  • Negative information like a court judgment taken against a consumer’s name (commonly known as blacklisting).
  • Length of credit history.
  • Account application and enquiry activity – within a short period of time, how many account applications the consumer submitted and how many new accounts you opened.

My credit score is lower than I expected. Why is this?

Fincheck provide some reasons:

  • A credit history of fewer than 6 years, which is the time frame used to calculate your total credit score.
  • Missed or late payments over the last 6 years.
  • Holding very few credit accounts means there will be less credit history available on your profile.
  • Court judgments or record of insolvency.
  • Having a lot of unused credit available could lead to a large balance of debt if you decided to use it all at once.
  • Balances on your accounts that are very close to the credit limit indicate that you rely on credit to get through each month.

Why improve your credit score?

Credit providers measure their risk in taking you on as a client before they approve or decline your application for credit, so improving your credit score increases the chances of being granted credit on favorable terms.

How to improve your credit score

  • Regularly checking your credit report to confirm all the details are correct.
  • Making sure you make payments on any outstanding credit accounts on the due date. (Should you have difficulty in making your payments, you should contact your credit provider to agree on a payment plan, or to reduce your regular payments to an amount that you can afford to pay).
  • Consider setting up regular automated payments rather than doing manual payments.
  • If you have too many old, unused credit accounts, consider closing them.
  • If you are almost reaching your credit limit on one or more accounts, try and reduce your balance. Outstanding balances mean you have a lot of outstanding debt in your name.

    How long does it take to improve your credit score?

It depends on how long it will take to improve areas that need attention and maintain them, real improvement will start showing after three months of consistency, as you show progress your credit score will automatically get updated.

If you have had a couple bad experiences with your credit health, it is helpful to know that, credit inquiries stay on your credit report for up to two years, whereas more serious activities that incur namely late payments, lawsuits, bankruptcy and tax liens will stay on your credit record for up to 10 years.

How to build up a credit score if you don’t have debt

Unfortunately you won’t have a credit score if you don’t have any debt because your credit score is calculated and based on your credit habits. This doesn’t mean your financial health is bad, there’s just simply not enough data to give you a credit score.

This can be bad news if you’re looking for a home loan though, so your first steps will be to apply for financial products where you can start building a credit record.

These can include:

  • Credit card
  • Vehicle finance
  • Phone contract
  • Clothing accounts
  • Consequences of a bad credit score

Not paying your account on time or at all which can result in you not getting further or desired credit when needed.

Lenders will see you as a high risk meaning that should they decide to take on that risk, they will charge high interest rates compared to someone with a good credit score.

Depending on what industry you are in – some industries such as banking – check a potential employee’s credit report and score. They consider a bad credit score as someone who is not trustworthy to work in a banking environment.

Consequences of not checking one’s credit score

It is advisable for a consumer to check their credit report every 3 to 6 months. Statistics show that only 3% of the 24 million credit active South Africans have seen and understood their credit report.

This comes as a threat of potential identity theft where someone can use a consumer’s ID to clone their profile and open lines of credit. A credit report contains so much personal information including addresses, phone numbers and employment that the leak of such information poses a big risk of fraud to the individual.

How a credit score affects you when applying for a home loan

When it comes to taking out forms of credit like a home loan, your credit score plays a vital role in your eligibility for a home loan, however it’s not the only factor to affect your application, your debt-to-income ratio will also play a big role.

What score do you need to qualify for a home loan?

There’s no specific score which will qualify you, if you follow the step to build a healthy credit score and maintain a healthy debt-to-income ratio, lenders will see you as eligible for things like home loans. Most lenders prefer to lend to an individual whose debt is less than 36% of their gross income.

This, along with healthy credit habits that keep your score in the ranges above 650 will put you in a good position to secure a home loan.

If you are declined for a home loan, what should you do and when do you apply again?

It’s important to know that if you apply for any hard forms of credit like a personal loan, credit card or home loan, you will get a hard inquiry against your credit report, too many of these are a red flag to lenders.

If you have had an unsuccessful home loan application, take a step back and start improving your credit health. There’s no fixed time frame for this, it will take as long as you take to form healthier credit habits, pay back debt and wait for that very happy green indicator on your credit report.

Source: Business Tech

Beware the dark side of Black Friday

Deeply indebted consumers should think long and hard before plunging themselves even deeper into debt by splurging on luxury goods on Black Friday.

With Black Friday and the silly season upon us, finance experts are warning consumers to steer clear of any spending sprees that could exacerbate their debt situation.

It should go without saying, but the message is clear: don’t spend money you don’t have on things you don’t need.

According to Neil Roets, CEO of debt counselling group Debt Rescue, deals offered by major retailers on Black Friday often seem so good that consumers throw caution to the wind and blow their entire Christmas budget on single expensive items such as high-end TVs and other domestic appliances.

“(Black Friday) promises deals that would tempt even the most financially distressed amongst us,” Roets said. “The short answer is – don’t.”

Roets said that his company, for the past several years, has seen the impact that Black Friday and Christmas shopping sprees have had on consumers when they approach the group to try and get them out from under the financial mess that reckless spending has caused.

“Retailers who are themselves in deep trouble because of the contracting economy have come up with a host of clever ideas to tempt consumers to open their wallets and purses, which is how the idea of Black Friday was born,” he said.

“Black Friday was initially slow to take off when the idea was imported to South Africa. Once it took hold, however, it took off like a rocket ship, and many traders are now notching up a significant portion of their yearly sales on this day and over the Christmas holidays.”

Roets said many consumers also fell into the trap of feeling a degree of resentment, believing that they had been tightening their belts for so long that they needed a break and that Black Friday would be the ideal opportunity to splurge on something nice.

However, he warned that the current state of the economy did not lend itself well to this pattern of thinking.

“We are far from seeing the light at the end of the tunnel. It is our belief – and many leading economists share that belief – that we are far from staging a recovery.”

“In short, things are going to get a lot tougher before they get better. Now is not the time to act recklessly. On the contrary – it is more important now than ever to implement fiscal discipline and save whatever money is left over at the end of the month.”

The CEO said that consumers should plan around a budget, and bear in mind that December tends to feel like a long month, as the stretch between paydays is often much longer. Those who are paid a 13th cheque also get lulled into a false sense of security, he said.

“While we all feel that we desperately need a holiday and the end of a brutal year, keep those holidays within budget and don’t think that if you don’t have the money for school fees in December that the money will somehow, magically become available in January when the schools reopen,” he said.

According to Debt Rescue’s data, half of all South Africans are three months or more behind in their repayments, having collectively notched up R1.71-trillion in debt.

Source: Business Tech

As at the end of September 2015, South Africa’s gross debtors’ book stood at a whopping R1.63 trillion, while the total credit rand value of new credit granted to consumers was close to R124 billion, says Nomsa Motshegare, CEO of the NCR.

Members of the committee wanted to know from the NCR what measures it has put in place to ease the burden of consumers who are over-indebted and struggling to repay their loans, and how it will act against reckless lenders.

The ANC’s Adrian Williams suggested that the regulator consider a kind of “debt forgiveness programme”, which would reprieve lower income groups. “This shouldn’t be for the rich who have just been spending recklessly.”
Committee chairperson Joanmariae Fubbs from the ANC added that debt forgiveness programmes have been implemented successfully in both developed and developing countries.

The NCR’s Motshegare said in her presentation to MPs that the credit regulator is continuing its investigations into reckless lenders, the overcharging of fees and misleading advertisements. “Lewis Group has for example agreed to pay a total of R75m to refund consumers since we’ve started the investigation last year.”

Forty-four of the investigations have been referred to the National Consumer Tribunal for hearings, one of which is the probe into Lewis Group.

Fin24 reported last year that in one instance Lewis charged a customer repayments of R18 000 after buying a washing machine for R6 000. Another customer bought a laptop, but was charged a compulsory R650 for a delivery fee, although the customer carried it out of the store. There was also R741 charged for an extended warranty.

During question time, the Democratic Alliance’s Geordin Hill-Lewis said the NCR appears unable to exert sufficient control over alleged reckless lenders such as African Bank and the Lewis Group.

“In recent months there have been numerous exposures of nothing short of viperous conduct of lenders, such as the Lewis Group. It’s not good enough to refund R67m to customers who had been overcharged when they made much more money than that with the scams they were running.

“Why doesn’t the NCR, the Hawks or the Reserve Bank take serious actions against these institutions? This reinforces the perception that there are no consequences for such behaviours,” Hill-Lewis said.
Motshegare responded by saying it is often difficult for the legal representatives at the National Consumer Tribunal to agree on dates for the hearings of the investigations that have been referred to the institution.

Fubbs concluded by saying that the committee would request the tribunal to appear before Parliament to give an update on the hearings of the investigations referred to it.

Source: ITWeb 

Indebted consumers stretch SA to its limits

Credit extension is growing faster than job creation, and the moribund economy cannot carry that burden forever

A 2014-15 World Bank report declared that South Africans were the world’s “biggest borrowers”. Consumer credit-use statistics — a comparison of employment and credit consumer numbers — suggest that South Africans are failing to manage their debt responsibly and that some credit providers might be missing the mark regarding their criteria in affordability assessments.

Despite tougher affordability requirements and large-scale efforts to educate consumers, credit use is outpacing employment growth, and the over-indebted gap is widening.

There were 16.9-million credit-active consumers in 2007, the national credit regulator’s Credit Bureau Report reads. At the time, 6.38-million (or 37.7%) had an impaired credit record. In 2013, there were 20.21-million credit-active consumers, of whom 9.69-million (47.9%) had impaired records.

A record is declared impaired if a debtor is three or more months in arrears on an account, if the debtor is under administration or if there are judgments against the debtor.

In the fourth quarter of 2016, there were 24.31-million credit-active consumers, 9.76-million of whom had impaired records — 40%, or two out of every five credit-active consumers.

While employment has increased by only 18% since 2007-08, the number of credit consumers has grown by almost 44%. The percentage of consumers in bad standing grew from 37.75%, to 40.15%. There are now 24.31-million credit consumers — more than 8-million more people than the total number of employed people in SA.

Even allowing for the fact that some people such as financially supported students may not need a job to qualify for certain credit accounts and not all SA’s employed people will be credit active, there is a huge difference in the numbers.

The official credit statistics for 2016’s fourth quarter peg collective consumer debt at more than R1.69-trillion. A significant portion of this — R8.75bn or more than half of debt book value — comprises mortgages, which are considered a wealth-creation type of debt.

For most people, a home loan will be the largest personal debt they incur in a lifetime.

If we move from rand value to sheer number of credit facilities by type, the numbers shift significantly. Mortgages only represent 4.47% of credit accounts. Credit facilities such as credit cards, overdrafts and store cards make up 65% of credit accounts and unsecured credit 14.6%.

These figures do not account for informal debt. Credit bureaus do not list what consumers owe municipalities, in school fees or unpaid medical accounts. One estimate is that only 40% of consumer-debt information is captured by credit bureaus.

As private loans and lending granted outside the formal system, such as loan sharks or mashonisa loans, are not captured, the problem is likely to be much larger than official numbers indicate.

World Bank survey data from a sample of 1,000 people in the Global Findex Report showed that 86% of South Africans took loans in 2016, mostly from acquaintances or private microlenders.

If risk pricing is added to the picture, the poorer end of the consumer market is out in the cold. All credit on offer — from loans to store cards or hire purchase agreements — is priced for risk: the higher the perceived chance of default, the higher the interest rate charged. Low-income earners will, therefore, usually be charged more than high-income earners for the credit on offer.

Instead of excluding poor and risky consumers from credit, many providers allow access but at higher interest rates. Prohibitive rates, greater need — due to lack of generational wealth or more insecure income — and a lack of financial education collide, often overwhelming the most economically vulnerable.

Under apartheid, most South Africans were denied access to certain financial services including credit, either through direct policies or systemic barriers. When that political system was dismantled, there was a desperate need to reform the social system and the barriers to financial inclusion.

The government has been chipping away at the legislation ever since with repeals, new acts, amendments to existing legislation, patches and policy reimagining. The goal is a very narrow sweet spot — increasing financial access while limiting opportunity for abuse of the hungry-for-credit populace.

The Usury Act of 1968 was replaced by the National Credit Act of 2005. The National Credit Amendment Act in 2015 was a further tightening of the reins, especially in terms of the affordability assessments that credit providers are now required to perform. With each new piece of legislation, the government has tried to get one step closer to that dual target.

Their success is a matter of debate, depending on which side of the market you find yourself. One particularly controversial move was the credit information amnesty, or as the credit and legal fraternity know it, the Removal of Adverse Consumer Information and Information Relating to Paid-up Judgments regulations, 2014.

It compelled credit bureaus to remove information of judgments, defaults, and terms such as “delinquent” or “slow paying” from consumer credit profiles, provided that the capital amount owing had been cleared.

This became a requirement of the bureaus and the credit providers supplying payment information to them. It also meant that no matter how abysmal consumers’ track records of debt payments were, if it was paid up, they were given a clean slate by credit providers doing new assessments.

It was championed by the Department of Trade and Industry and one that caused some ructions between it and the Treasury. In 2015, the then chief director of financial sector development at the Treasury, Ingrid Goodspeed, said that the Treasury had “fought that credit information amnesty, we fought it to the last day”.

Credit providers needed “more information, not less”, she said at the time.

“The fact that you wipe it out has not … changed anything. The same people who were overindebted before are now even more overindebted.”

The Treasury was asked to update its position on the matter, but was unable to respond in time for publication.

Officially, two out of five consumers are credit-stressed, and unofficially, the picture is much worse. By omitting municipal, education, private or loan-shark debt, and education debt, our country’s credit numbers underplay a significant portion of the personal debt carried by the average consumer.

Add to that the pressure of crippling debt-recovery measures such as garnishee orders and asset attachment, insecure employment, stretched regulators, loopholes in the laws and the rising cost of living and the picture is far worse.

Economists say that the amount of consumer debt a country can support depends on the health of the underlying economy. SA may be about to find out what the limits are.

Source: Supermarket
Graphics credit: Dorothy Kgosi

Toys R Us files for bankruptcy

Toys R Us has filed for chapter 11 bankruptcy protection, the company announced Monday.

The bankruptcy filing helps the Wayne New Jersey-based toy retailer relieve itself of the debt left over from its $6.6 billion acquisition by Kohlberg Kravis Roberts, Bain Capital Partners and real estate investment trust Vornado Realty Trust in a 2005 deal valued at $6.6 billion.

The retailer has $4.9 billion in debt, $400-million of which has interest payments due in 2018 and $1.7 billion of which is due in 2019.

“Today marks the dawn of a new era at Toys”R”Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” said Dave Brandon, the company’s chairman and CEO, said in a release announcing the filing.

“We are confident that these are the right steps to ensure that the iconic Toys”R”Us and Babies”R”Us brands live on for many generations,” he adds.

The toy seller also intends to seek protection in parallel proceedings for its Canadian subsidiary.

The company said it will continue to operate as usual its approximately 1,600 Toy R Us and Babies R Us stores around the world. The company’s operations outside of the U.S. and Canada are not part of the protections proceedings, it said.

The retailer said that it has already received a commitment from some lenders, including a JPMorgan-led syndicate, for over $3-billion in debtor-in-possession financing. Although that’s subject to court approval, Toys R Us said it “is expected to immediately improve the Company’s financial health and support its ongoing operations during the
court-supervised process.”

Restructuring that debt would give Toys R Us the financial flexibility to continue its turnaround. Initiatives include improving its website and revamping its Babies R Us business, by focusing on items like cribs that are less likely than diapers to be sold on Amazon.

A bankruptcy filing will also help the retailer manage the the crucial holiday season and give vendors like Mattel and Hasbro clarity into its long-term plans.

For its owners, the bankruptcy filing ends a chapter that started at a time when private equity dove into the retail industry, buoyed by low interest rates and the attraction of recognizable names. That flurry has come back to haunt many, as debt burdens have made it difficult for retailers to make the necessary investments to adjust to the rapidly changing retail industry.

Private equity-backed Payless ShoeSource and Gymboree are among those that have filed for bankruptcy over the past two years.

For Vornado, the deal was a bet on the value of Toys R Us’s real estate. It came just a year after K-Mart and Sears merged in an $11-billion deal based on the idea that combining the real estate value of the struggling stores would strengthen both.

Many retailers have over the past year shed their real estate footprint, finding the U.S. store-base too vast and too out of sync with the many American shoppers that no longer go to the mall.

By Lauren Hirsh for CNBC

Fewer seek credit as tough times bite

Consumers, many of whom are vulnerable in an environment of rising retrenchments and weak economic growth, are trying to pay down debt.

Consumers adopted a cautious stance to credit applications in the first quarter of 2017, figures from the National Credit Regulator show.

At end-March, credit applications decreased by 998,000 to 9.53-million, representing a quarter-on-quarter decline of 9.5%, the regulator said. Consumers, many of whom are vulnerable in an environment of rising retrenchments and weak economic growth, are trying to pay down debt.

Head of Absa home loans Carel Grönum said last week household debt to disposable income, at 73%, was at its lowest level since the global financial crisis. Credit bureau Compuscan recorded a 13% year-on-year increase in the number of accounts that were more than three months in arrears in the first quarter, suggesting consumers cannot afford to take on more debt.

The total value of new credit granted in the first quarter fell 5.6% from the fourth quarter of 2016 to R116.5bn, representing a 7.5% year-on-year increase, the regulator said. The largest increase was recorded in the developmental credit category, which nearly doubled to R5bn. The value of mortgages granted and of other secured and unsecured credit agreements, fell.

Credit facilities such as credit cards and overdrafts increased moderately, while short-term credit granted also declined.

By Hanna Ziady for Business Day

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My Office News Ⓒ 2017 - Designed by A Collective


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