The South African government seeks to further tighten the country’s credit industry regulations in the face of persistent high indebtedness. The persistence of high indebtedness amongst South African households is though to be largely a function of reckless lending.
The latest push comes in form of a move to introduce more stringent and standardised credit affordability assessment regulations. There has been concerns that if left unchecked reckless lending might brew a devastating financial crisis, the kind that brought the US economy to its knees around 2008.
The Department of Trade and Industry (DTI) has been busy development these regulations over the past few months and has now released for public comment, the Draft National Credit Regulations for Affordability Assessment. Stakeholders and members of the public have until 31 August 2014 to submit their comments and inputs on the draft regulations.
In a statement released today the DTI said it is envisaged that these regulations will be a game changer in the credit industry as far as curbing reckless lending and over-indebtedness of consumers are concerned.
Zodwa Ntuli, the DTI’s Deputy-Director General of the Consumer and Corporate Regulation Division, said prior to the National Credit Amendment Act (Act No. 19 of 2014), as well as the release of these regulations, credit providers inconsistently determined the models for affordability assessments. Consequently, credit in excess of billions of rand was granted to consumers exacerbating the level of household indebtedness.
“The introduction of the affordability assessment regulations is necessary and urgent to address the prevalence of reckless lending in South Africa. Moreover these regulations are legally binding, making the application of affordability assessments compulsory,” said Ntuli.
She added that credit providers are required, prior to issuing credit, to determine the financial means and prospects of a consumer, the consumer’s existing financial obligations, the debt repayment history, avoid double counting in calculating the gross income less statutory deductions, and to disclose all the applicable costs of credit.
The regulations set out the criteria for conducting affordability assessments which include but are not limited to calculating the consumer’s allocatable and discretionary income, taking into account all debts, including monthly debt repayment obligations in terms of credit agreements as reflected on the consumer’s credit profile held by a registered credit bureau, and also take into account maintenance obligations arising from statutory deductions or necessary expense.
“Furthermore, the regulations create a ‘buffer’ which will ensure that households remain with money to put essentials on the table on a month to month basis after repaying their debts. The ‘buffer’ means that no credit should be extended if repayment of such credit will be from the income in the buffer.”
She added that the responsibility on the consumer to disclose fully their financial obligations to the credit provider is very important to affordability assessments. “The success of the affordability assessment hinges on both consumers and the credit providers to be honest and responsible.”