Debt review relief for consumers?

As the Banking Association announces plans to cut interest rates for people under debt review, one can’t help but question the sincerity of SA’s biggest lenders. It would be “extremely helpful”, but it remains to be seen whether they would do so without any preconditions said Neil Roets, CEO of debt review counselling company Debt Rescue.

Could there be real relief for SA’s most indebted consumers or will SA banks be the real beneficiaries?

Commenting on an announcement made in Addis Ababa by Cas Coovadia, the managing director of the Banking Association of SA, that South Africa’s biggest lenders had agreed with the government on a trial programme that would cut interest on R14 billion of loans to some of their most indebted customers, Roets said there appeared to be a degree of self-interest.

“We know that especially the big four commercial banks are seriously exposed to substantial numbers of loans that are busy going sour on them. This may be an attempt to improve their chances of collecting at lower interest rates rather than having to write off loans altogether.”

Bloomberg reported that Coovadia said loans to people in debt counselling programmes would be rescheduled over five years.

Addressing the World Economic Forum, he claimed that South Africa’s credit and competition regulators were both “on board” with the pilot project.

“We may be able to restructure the debts of 70 percent” of those consumer-bank customers who were in arrears and in credit counselling, Coovadia said.

Roets said bad debt levels at South Africa’s four largest banks, including Barclays subsidiary Absa and Old Mutual’s Nedbank unit, have remained elevated even as the Reserve Bank has held interest rates steady since the end of 2010, limiting the burden on borrowers.

“With policymakers expected to raise rates this year to restrain inflation, loan books may sour further, “he said.

“The first step to restructure will be to reduce interest rates charged to (equal) the repurchase rate over five years,” Coovadia said. “If people still can’t do that, then the interest rate drops to zero.”

All South African banks and some retailers would be ready to test the programme by the end of June, Coovadia said.

The total number of consumers with impaired credit records increased by 100 000 to 8.93 million in the fourth quarter of last year, the National Credit Regulator said.

The lenders have been targeting low-income households to boost sales. In 2009, Standard Bank said it would loosen loan criteria for mortgages and credit cards.

Central bank statistics show savings as a percentage of household income was zero in the third quarter of last year.

“I am aware of the National Credit Act changes being considered and to be piloted,” said Louis von Zeuner, the deputy chief executive of Absa.

Absa reported a credit loss ratio of 1.01 percent last year, which was almost double the figure reported in 2007, before the financial crisis began.

A source at the National Credit Regulator who asked not be named said although there had been “exploratory talks” no firm decision had been taken. “If the major lenders decide to change their policies, those changes would have to be in line with the National Credit Act and would have to continue offering the legal protection currently offered to consumers under the Debt Counselling system.”

Roets said the one issue the debt counselling industry was adamant about was that if the major lenders were planning to go ahead with the plan, it would have to fall within the ambit of the debt review counselling system where debtors enjoyed legal protection from having their assets attached unlawfully

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