Consumer debt poses major risk factor for banks

Overall consumer debt is growing and the fact that ratings agency S&P flagged it as a major risk to the country’s banking sector should act as a wakeup call for consumers and banks.

Neil Roets, CEO of Debt Rescue, said there had been a noticeable increase in the number of distressed consumers who had knocked on their doors for assistance in servicing their growing debt load.

“We know that debt levels are escalating because we see this on the balance sheets of indebted consumers coming to us to be placed under legislative debt review.

“Many of them are on the verge of bankruptcy and the only way they can hold on to their belongings and pay off their mounting debts over a longer period of time is through the process of debt review”

In its Banking Industry Country Risk Assessment (Bicra) for South Africa, S&P said it estimated the country’s per capita gross domestic product at about $6000 (R78000) for this year, which in US dollar terms was still lower than in 2010.

Matthew Pirnie, an analyst at S&P, was quoted as saying that the rating agency expected very modest growth in retail lending over the next 18 months as the low economic growth, rising unemployment, and political uncertainties continued to undermine consumer confidence.

“We continue to believe that domestic households pose the most significant source of risk for the banks because of their relatively high leverage and low wealth levels compared with other emerging markets,” Pirnie said

The National Credit Regulator (NCR) said about 10-million South Africans were over-indebted, which meant they were unable to meet their financial obligations timeously.

According to the NCR South Africa has a total of 23.88 million credit-active consumers who use 75% of their pay cheques to service debt.

In testimony before parliament last year, Nomsa Motshegare, National Credit Regulator (NCR) chief executive, said as at the end of September 2015 the country’s gross debtors’ book stood at a whopping R1.6-trillion, while the total credit rand value of new credit granted to consumers was close to R124-billion.

Youth (15-34 years) and persons without matric remain vulnerable. The youth unemployment rate remained high at 37,5%.

“There are about 3,2 million young persons aged between 15-24 who are not in employment. The Stats SA report shows that the most vulnerable are those without matric certificates who are finding it almost impossible to find employment.”

“What poses a major problem for us is that we are unable to help some of the distressed consumers coming to us for help because they are unemployed. It is a fundamental principal of debt review that the consumer has to make regular monthly payments until the debt has been cleared. Without an income the unemployed are unable to fulfil this requirement.”

“Debt counselling remains the best way for consumers to manage their debt load by negotiating with creditors and paying off their debt in smaller installments over a longer period of time.

“None of their assets may be attached by debt collectors while they are under debt review,” Roets said.

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