By Richard Stovin-Bradford, Robert Laing & Adele Shevel
A time bomb is waiting to detonate in this week’s seemingly harmless statistics about the number of people having trouble meeting their credit repayments.
Statistics SA said fewer summonses and judgments for debt were issued in February than a year ago.
Despite the prime rate climbing from 10.5% in April 2005 to the current 15%, the government’s official data provider has continued to report declining legal action against people in arrears.
However, the real reason for the fall is that banks and retailers are scared to take defaulting borrowers to court — for fear of being branded “reckless lenders”.
This is because of the National Credit Act, introduced last June to protect consumers from dodgy money lenders.
What the Act has done, however, is obscure the real extent of SA’s consumer debt crisis. The booby trap is only likely to explode a year from now.
Marlene Heymans, the National Credit Regulator’s research and statistics manager, said the new rules have seen a dramatic fall-off in cases of debt collection claims before the courts.
Before taking a defaulter to court, a lender must first issue a Section 129 notice. This allows the distressed borrower a month to employ a debt counsellor — who has three months to help the borrower in trouble escape the insolvency courts.
This drawn-out legal process means Statistics SA is not able to reflect the true extent of how many consumers are in debt up to their eyebrows. Furthermore, the banks are obliged by provisions of the Credit Act to try to gently squeeze defaulting customers, not prosecute them.
“We’re certainly seeing increasing consumer strain,” said Standard Bank’s chief of personal and business banking Peter Schlebusch. “We saw it coming a while ago, and believe there’s probably more pain to come.
“Our focus has been on rehabilitating customers and rescheduling their debt. We’re pro-actively engaging with customers to help them before they get into difficulty.”
Standard Bank has, along with its peers FirstRand, Nedbank and Absa, hired extra debt-collection staff to manage their way through the current cycle, suggesting it may be more prolonged than at first thought.
Louis Reynders, Absa’s national manager of debt rehabilitation and counselling, confirmed that there is a bottleneck in the debt- collecting process. “Most cases that enter the debt review process are caught up in debt counselling, and the intended consent agreements are not concluded.”
Even more worryingly, Jeremy Stevens, an economist at Standard Bank, wrote in a research note that household insolvency statistics typically lag changes in macro- economic variables by at least 12 months.
“The fact that an evident upswing in civil summonses for debt is already mounting is ominous,” he said.
Non-performing loan bells usually start ringing with credit card accounts.
Standard Bank has found that the number of its credit card account holders behind in payments has gone from 4.8% to 6.9% in the last 18 months — its highest rate since the gloomy economic days of June 2004.
The debt-counselling process adds up to a six-month to two-year lag between interest rate increases and debt judgements.
The latest bank results showed credit impairments rising. First National Bank was surprised at the extent of strain in its credit card and vehicle finance books.
Absa reported an increase in non-performing loans as a percentage of total advances to 1.6% from 1.3%.
The big four banks moderated their pace of credit extension last year and tightened lending criteria.
But how are banks coping with consumer stress as living costs and interest rates rise?
Nedbank has had notable success in the low-income segment, but retail chief Rob Shuter said: “We’ve seen signs of strain in our consumer portfolio for quite some time now, and they intensified in the second half of last year.”
He said the main challenge consumers face is affordability as debt instalments and the cost of living have risen. “It’s tough out there, but it’s not cataclysmic.”
Nedbank has beefed up its systems to cope with clients falling behind on repayments, and has boosted its capability to help them out of difficulty.
Shuter is typical of bankers prepared to take a long-term, through-the-cycle, view. “We really want to keep clients in their houses and cars where possible. Moving someone out of their home is a very traumatic event, but for someone who relies on their car to earn a living it’s also bad.”
Nazmeera Moola, head of macro strategy at Macquarie First South, said the middle- income group is most hard-hit by credit pressure.
Driving this are: inflation eating into real income growth and interest rates.
Any survival tactics?
“Peoples’ natural instinct when not making ends meet is they start using their credit card,” said Moola. “It’s already happened to a large extent — but don’t do it. This rate cycle is not going to turn around soon.”