2 November 2012
South Africa’s major retail banks and the Banking Association of South Africa (Basa) have signed an agreement with the National Treasury aimed at improving responsible lending and preventing households from becoming caught in a debt spiral.
In a joint statement on Thursday, Basa, the banks and the Treasury expressed concern over lending to households that could not afford their loans, illegal collection practices such as keeping ID documents, bank cards and PINs, selling inappropriate credit products to maximise margins, and extending unaffordable loans to pensioners and other social grant recipients.
The agreement calls for several measures to be taken, including a review of loan affordability assessments, appropriate relief measures for distressed borrowers, reviewing the use of debit orders and limiting the use of garnishee orders.
The parties agreed that while there were currently no systemic risks related to unsecured or secured lending, certain market behaviour could result in households, particularly poorer ones, getting caught in a debt spiral.
It was recognised that although efficient regulation of South Africa’s banking sector limited the incidence of poor credit practices, some practices were nonetheless “undesirable and reckless”.
The parties agreed to support the National Credit Regulator in enforcing the law and stamping out poor market conduct, and encourage it to improve preventative measures.
These measures included introducing stronger fit-and-proper criteria for all lenders, ensuring all financial service providers were appropriately licensed or regulated, taking steps to improve supervision of credit bureaux, and requiring credit providers to update credit information at least once a week.
Basa and its member banks agreed to review their approach to the assessment of affordability, and ensure the selling of appropriate credit products to their customers.
“Basa, the National Credit Regulator and the National Treasury will formulate a standard to measure affordability, which could then be incorporated into regulations as minimum standards,” a joint statement read.
“Each relevant Basa member bank will develop approaches to provide appropriate relief to qualifying distressed borrowers by reducing their instalment burden, without additional cost to the borrower.”
The association’s members further agreed to load payment data onto the various credit bureaux systems as soon as was practically possible, preferably overnight in bulk.
They also agree to minimum norms and standards for consumer credit insurance practices linked to lending, and said they would work with the Treasury and the Financial Services Board to develop a framework that took into account the interests of customers and the impact of charges on affordability.
Furthermore, Basa members committed not to use garnishee orders against credit defaulters. Garnishee orders are court order requiring the employer of a person in debt to pay part of their wages, with interest, directly over to their lender.
“Basa and the National Treasury will promote and support enforcement initiatives against credit providers that issue pre-signed garnishee orders,” the parties said.
“The National Treasury will also engage with the Department of Justice about the abuse of garnishee orders and suggest that their use be restricted to maintenance orders.”
Going forward, National Treasury, Basa and the National Credit Regulator are expected to discuss how the current system of debt counselling can be improved to remove perverse incentives and eliminate abuses.
While the commitments were only made by Basa and itse member banks, other credit providers, such as non-bank micro-lenders and retailers, were encouraged to conform to the good practices committed to by the banks.