Entrepreneurs and start up companies are positioned to be hardest hit by the National Credit Amendment Act as the major banks look to mitigate risk by tightening lending. DESTINY takes a look at how the banks are reacting to the new legislation
Capitec Bank is currently feeling the effects of the 2006 credit amnesty, which adversely resulted in increased debt balances as cash-strapped consumers, whose names had been taken off the black list, sought to increase their credit.
The bank has had to implement stringent credit criteria, approving fewer loans, decreasing loan sizes and shortening the repayment terms
For entrepreneurs and young start up companies, changes to the Credit Amendment Act could mean securing credit from a bank as a new client is going to become considerably more difficult now. This will be true even for consumers with clean credit records, as banks will try to mitigate unknown risks from consumers whose credit history they don’t have on record.
Neil Roets, CEO of debt counseling firm Debt Rescue, says consumers who do manage to receive a line of credit will likely be charged higher interest rates, while existing bank clients may also feel the effects with hiked interest rates.
Here’s what the major banks had to say:
Cristoph Nieuwoudt, chief risk officer, says the bank generally lends to existing customers and as such they don’t anticipate the changes will have a major impact on the bank or its customers.
“To offer affordable, responsible and cost-effective loans, FNB mainly lends to customers where we already hold the customer’s primary bank account, being the account into which the customer’s salary is paid.”
A Standard Bank spokesperson says while it’s too early to predict how the amnesty will impact the financial services industry, “unknown risk” will invariably creep in and that “risk appetite tightening” measures are likely to be introduced.
“It is important to note that the removal of adverse information is a once-off event. Historical adverse information will be removed, but a customer’s payment history will remain with the credit bureau.
Credit providers are not required to remove the information affected by amnesty from their databases, but they aren’t allowed to use it to assess an individual’s application for credit. In effect what this means is that credit providers will not have access to the adverse descriptors in their decision making, but can effectively use their own and the credit bureau payment profiles.”
Gavin Payne, executive head of retail risk, says tightening of credit criteria is “inevitable.”
“From a commercial bank’s perspective, we rely on the availability of reliable and accurate credit information on borrowers to make sound credit decisions as this is the cornerstone of sound risk management. The removal of adverse credit information regulations reduces the data set available to make informed lending decisions.
Therefore in order to safeguard the prudent credit standards applied by Nedbank, some tightening of credit criteria are inevitable.”
National Credit Amendment Act getting you down? Here’s a look at non-traditional avenues for securing funding
As the name suggests, crowd funding is a way of collecting funds from a pool of financial backers made over an online platform.
In SA you can visit www.startme.co.za
A venture capitalist will invest money raised from institutions, pensions funds and wealthy individuals and is likely to ask for more than just a percentage stake of the business, but also possibly a board seat. There is also typically a longer due diligence process.
An angel investor is essentially a very successful businessperson who funds new business ventures with high growth potential from their own pocket. Be sure to read the fine print because angel funding isn’t a loan but an equity investment.