Spike in payday loans warrants investigation
Short-term loans to consumers soared between the second quarter of 2014 and the second quarter of 2015, jumping 205% year-on-year to 3.9 billion rand, according to figures from the National Credit Regulator (NCR) .
The number of short-term deals soared 137% to almost 2 million, suggesting that large numbers of South Africans depend on short-term loans to get by.
The RCN considers a short-term loan to be between R1 and R8,000, with a term not exceeding six months.
The fastest growing category of short-term loans was the 5,000 to 8,000 rand, according to the NCR Consumer Credit Market Report (CCMR). The total value of loans granted in this category in the second quarter increased by 557% from the previous year to R 841 million, while the number of loans granted increased by almost 600% to reach 131,000.
DebtBusters CEO Ian Wason attributes the surge in short-term lending to the late implementation of changes to the National Credit Act (NCA) regarding new accessibility rules, arguing that short-term lenders generally have less stringent accessibility requirements.
The Department of Trade and Industry (dti) announced in August that the implementation of stricter affordability assessments on credit agreements would be suspended from the previous application date of March 13, 2015 to September 13, 2015.
Wason believes lenders have taken a lax approach to implementing the new rules in the hopes that the implementation date will be pushed back. He says the delay has led to aggressive marketing practices by unscrupulous lenders, who have granted as many loans as they can to borrowers who will no longer qualify now that the changes are in effect.
This reaction “recalls the spectacular increase in credit in view of the implementation of the NCA in 2007”, explains Wason.
Wason believes that the drop in requests for debt counseling across the industry between March and July indicates that more stringent affordability assessments were not yet enforced. “People only seek debt advice when they no longer have access to credit,” Wason explains.
However, CCMR figures only include entities that submit quarterly reports, and therefore exclude the majority of small, short-term lenders that report on an annual basis, suggesting that the rise may be caused by larger players. important, such as banks.
NCR Secretary General Lesiba Mashapa said short-term credit growth was closely watched by NCR. “There is a clear need for the NCR to continue investigating short-term loans by credit providers to ensure that this type of credit is responsibly extended to consumers. In this regard, the enforcement of the affordability assessment regulation will play a key role, ”he said.
Capitec may have influenced the numbers
Capitec’s focus on short term loans over the past year has undoubtedly boosted the value and volume of short term loans in the market. In the six months to September 2015, Capitec granted 1.8 million loans for a total value of R11 billion.
One to 12 month loans contributed just over R3.5 billion (or 32%) to the gross loan portfolio over the period, while the average loan size declined by 13% over the period. to reach R6,157. About 180,000 loans of one to six months of loans were made for a total value of R550,000.
Capitec CEO Gerrie Fourie recently told Moneyweb that following last year’s platinum sector strike and the demise of African Bank, the bank made the deliberate decision to grant short term loans and is only now looking to reopen with longer term loans.
According to CCMR, personal loans over periods of five to ten years fell 67% year-on-year to R 900 million. “Credit providers have found that it is much less risky to lend consumers ‘payday’ loans than ‘consolidation type’ jumbo loans for five years or more,” Wason explains.
MicroFinance South Africa (MFSA) CEO Hennie Ferreira suggests that the increase in short-term loans and the reduction in long-term loans are due, among other things, to the weak economic environment and aversion at the risk of credit providers.
“There is a continuous movement towards digitally oriented lending in all markets, which comes with its own risks, such as fraud,” adds Ferreira. “In order to manage these risks, you would want to limit your exposure in terms of the size and duration of the loans. ”
Wason, meanwhile, believes South African consumers are addicted to “costly short-term debt”. “If the accessibility tests of credit providers are properly controlled by the regulator, it will stop abruptly and defaults will skyrocket, not only for payday loans, but for all credit,” warns he, expecting to see an increase in requests for debt counseling in the coming months.
Defaults on secured credit will be motivated by exposure to unsecured credit. For example, 17% of DebtBusters clients who have payday loans also have an obligation, while 36% have auto financing, Wason says.