Household debt higher than SA's budget
27 May 2007, 14:08
South African households owe more on their home loans, car repayments, personal loans, furniture accounts and credit cards than the government has committed to spending on running the country in the current budget.
Total debt is estimated at R680-billion, while Finance Minister Trevor Manuel set aside R600-billion in February for, among other priorities, education, health, housing and servicing its own debt.
Credit card debt, according to Gabriel Davel, the national credit regulator, has seen a dramatic increase of 138 percent since 2004 while lease agreements rose by 123 percent in the same period.
Davel, speaking ahead of the National Credit Act coming into effect on Friday, said the latest statistics obtained by his office indicate that household debt is higher, at about R750-billion, but they were waiting for the implementation of the act before consolidating all information.
He said consumers can expect greater protection and more clarity from lending institutions when the act comes into effect. "Consumers will have to be told upfront what they would pay in total for credit, and reckless lending would be outlawed," he said.
A report by the regulator said it had become easier to service debt following the boom period accompanied by lower inflation and interest rates, with credit cards given, in some cases, to people with minimum incomes of R1 500.
Home loans - which account for roughly 65 percent of total household debt - are still significantly cheaper to service at current interest rates than they were in 1998 and 2002. In 1998, mortgage repayments amounted to R1 917 per month for every R100 000 borrowed. In 2002 monthly repayments of R1 467 per R100 000 were required, while at current rates repayments amount to only R1 066 per R100 000.
This means that someone with a mortgage of R500 000 in 1998 could afford to service a mortgage bond of almost R900 000 with the same nominal monthly repayments, even taking into account the interest rate hikes over the past year.
"We have a set of rules that governs the lending and repayment of loans, that is the long and short of it," Davel said.
Davel said he expects microlenders to experience "stress" due to the regulations as it would no longer be easy to hand out loans. "Already we have seen high evidence of stress," he said.
Earlier in the week, banking institutions complained it would cost them about R1,5-billion to deal with the new regulations. However, Davel said South African consumers paid R100-billion in costs and fees to banks.
Davel said: "The total conversion costs to the new systems required by the act are low in comparison to what consumers pay in fees."
Consumers expecting an escape route from their debt, however, are advised to make arrangements with the institutions to which they owe money. "There is no other way to get out of debt, if one comes to us for counselling (at a cost of R1 200), there will be no more credit for the consumer until all the debt has been settled no matter how much it takes," Davel said. "Consumers who call us expecting not to meet their obligations should negotiate with the credit provider first, that would be preferable."
Penelope Hawkins, in a report on credit extension to households in South Africa, found there had been significant credit extension growth in the past two years due to a number of interrelated factors: the economic boom and the relatively low debt serving costs, a change in strategy among key players in the market to extend credit to new segments and adopt a less risk-averse strategy in the case of certain categories of credit, and new alliances and new entrants - predominantly in the credit card area.
Mike MacMillan, the head of retail credit at First National Bank, said the most significant changes would see consumers get a five-day period in which the loan may be considered and the credit provider can be held to the quote.
Ina Wilken, the chairperson of the South African National Consumer Union, welcomed the credit laws.
Wilken said new credit seekers from low-income groups had entered the market and many were struggling to meet their obligations.
Total debt is estimated at R680-billion, while Finance Minister Trevor Manuel set aside R600-billion in February for, among other priorities, education, health, housing and servicing its own debt.
Credit card debt, according to Gabriel Davel, the national credit regulator, has seen a dramatic increase of 138 percent since 2004 while lease agreements rose by 123 percent in the same period.
Davel, speaking ahead of the National Credit Act coming into effect on Friday, said the latest statistics obtained by his office indicate that household debt is higher, at about R750-billion, but they were waiting for the implementation of the act before consolidating all information.
He said consumers can expect greater protection and more clarity from lending institutions when the act comes into effect. "Consumers will have to be told upfront what they would pay in total for credit, and reckless lending would be outlawed," he said.
A report by the regulator said it had become easier to service debt following the boom period accompanied by lower inflation and interest rates, with credit cards given, in some cases, to people with minimum incomes of R1 500.
Home loans - which account for roughly 65 percent of total household debt - are still significantly cheaper to service at current interest rates than they were in 1998 and 2002. In 1998, mortgage repayments amounted to R1 917 per month for every R100 000 borrowed. In 2002 monthly repayments of R1 467 per R100 000 were required, while at current rates repayments amount to only R1 066 per R100 000.
This means that someone with a mortgage of R500 000 in 1998 could afford to service a mortgage bond of almost R900 000 with the same nominal monthly repayments, even taking into account the interest rate hikes over the past year.
"We have a set of rules that governs the lending and repayment of loans, that is the long and short of it," Davel said.
Davel said he expects microlenders to experience "stress" due to the regulations as it would no longer be easy to hand out loans. "Already we have seen high evidence of stress," he said.
Earlier in the week, banking institutions complained it would cost them about R1,5-billion to deal with the new regulations. However, Davel said South African consumers paid R100-billion in costs and fees to banks.
Davel said: "The total conversion costs to the new systems required by the act are low in comparison to what consumers pay in fees."
Consumers expecting an escape route from their debt, however, are advised to make arrangements with the institutions to which they owe money. "There is no other way to get out of debt, if one comes to us for counselling (at a cost of R1 200), there will be no more credit for the consumer until all the debt has been settled no matter how much it takes," Davel said. "Consumers who call us expecting not to meet their obligations should negotiate with the credit provider first, that would be preferable."
Penelope Hawkins, in a report on credit extension to households in South Africa, found there had been significant credit extension growth in the past two years due to a number of interrelated factors: the economic boom and the relatively low debt serving costs, a change in strategy among key players in the market to extend credit to new segments and adopt a less risk-averse strategy in the case of certain categories of credit, and new alliances and new entrants - predominantly in the credit card area.
Mike MacMillan, the head of retail credit at First National Bank, said the most significant changes would see consumers get a five-day period in which the loan may be considered and the credit provider can be held to the quote.
Ina Wilken, the chairperson of the South African National Consumer Union, welcomed the credit laws.
Wilken said new credit seekers from low-income groups had entered the market and many were struggling to meet their obligations.
- This article was originally published on page 4 of The Cape Argus on May 27, 2007
Pretoria
