There was mixed reaction to the Western Cape High Court judgment in March scrapping a subsection of the National Credit Act (NCA) that required lenders to obtain documentary proof of income, such as payslips and three months’ bank statements, as part of their affordability assessments.
The upshot of the ruling is that credit providers can grant credit without thorough vetting, while consumers can be dishonest when applying for credit. This could put even greater pressure on consumers, who are already indebted to the tune of more than R1.76 trillion.
The court case was brought by three retailers – Truworths, Mr Price and The Foschini Group – which argued that the obligation to submit documentary evidence as part of the affordability assessment process was unreasonable and discriminated against sections of society.
Affordability assessments have been a requirement of the NCA since June 1, 2007, but credit providers had the discretion to decide how these assessments could be conducted. This changed on March 13, 2015, when regulations were promulgated introducing criteria to be followed when conducting assessments.
The new criteria made it more difficult to access or grant credit, which resulted in credit providers pencilling in losses of millions of rands and a substantial drop in applications for store accounts, which prompted the three clothing retailers to take the National Credit Regulator (NCR) and its political head, the minister of Trade and Industry, to court.
Acting Judge Keith Engers agreed with the retailers, setting aside the need to obtain proof of income as part of an affordability assessment.
The ruling does not affect credit providers’ obligation to conduct affordability assessments, and applicants still need to provide “authentic proof”, although this can take the form of an affidavit or a letter of employment.
The NCR initially considered appealing against the judgment. Lesiba Mashapa, the regulator’s company secretary, bemoaned the judgment at the time, saying: “The purpose of regulation 23A(4) was to enable credit providers to lend to consumers on the basis of verified/validated income. It was an important tool in the fight against reckless lending and borrowing.”
Mashapa said the judgment permitted people in formal employment, who could produce payslips and bank statements, not to do so.
The regulator published draft guidelines at the end of last month to plug loopholes left by the judgment.
Consumer debt mountain
With South Africa’s debt levels among the highest in the world, the ruling did not go down well with those at the forefront of the fight against debt.
Neil Roets, the chief executive of debt counselling firm Debt Rescue, warned of a growing number of consumers notching up ever more debt. He says Debt Rescue’s statistics show that store card debt has increased by more than 5% in recent months. “Most enamoured” with store cards are consumers aged under 21 and those over 66.
“Pensioners don’t have money, so they take out loans to get by, and it catches up to them. The younger ones have an even bigger problem, which is indicative of a lack of financial literacy in South Africa. The youth don’t know the difference between good and bad debt. Once they start earning an income, credit providers start hunting them and almost throw credit at them.”
Roets says the judgment undermines the spirit of the NCA, because people will do “anything” to access credit.
“There is no doubt that people will abuse the ruling [scrapping documentary evidence]. It’s scary how much people depend on loans – no matter the LSM (Living Standards Measure). Whether it’s a low-income earner wanting to buy a bed or a wealthy person wanting to buy a Porsche, people will do anything to access credit.”
Credit providers cautioned
Credit providers should avoid reckless lending at any cost, says Gur Geva, the chief executive of InDox, a documentation collection provider that services four major banks and listed retailers. InDox collects documents, formal or informal – including affidavits and confirmations of employment – which smooth the path for lenders and ensure they comply with the NCA’s regulations.
“Some credit providers have viewed it as a victory in court that no pay-slips were required, but that’s not what the judgment said,” Geva says.
“The judgment can mislead credit providers. If you’re trying to disburse as much credit as possible, you can be overextended and view the judgment as relaxing lending criteria.”
He says a “wrong” interpretation of the judgment will harm the industry, causing further harm to over-indebted consumers, who are supposed to be protected by the NCA, and damaging credit providers, both reputationally and financially.
“It’s important that people have some third-party checks to mitigate their desire for credit. It’s not an LSM thing, it’s a human thing. Credit providers can manage bad debt, but the individual on the street is lumbered with the debt. There needs to be a cool, calm and collected entity that is able to guide retailers in granting credit.”