African Bank and Capitec have come under the spotlight recently thanks to their increasing portfolio of bad debt.
Concern was also raised about whether the banks were adopting stringent lending criteria. In response to these reports, African Bank claimed it is impossible for it to do anything in the event that a customer accepts more credit from other lenders.
African Bank also insisted that it is strict when it comes to lending. “We apply strict credit scoring with each client. Each individual applicant is scored based on their own risk profile and loan size requirements. The terms and pricing is then determined from this process.
"Credit scoring and product allocation is highly statistical and this is one of the contributors to ensure that we do not grant credit to very high risk customers or, where the risk falls within our area of suitable business, we may allocate alternative suitable products which would better suite their risk profile. Our intention is to provide credit that works for our customers so having them sign up for the wrong product would not be in our interest,” said African Bank’s chief financial officer, Nithia Nalliah.
Charl Nel, Capitec’s communications head, said the bank is conservative when it comes to money-lending and only considers [lending to] clients who are employed. “With every potential client, we contact the credit bureau who will inform us if the client has a good or bad credit record. It is in our best interest to lend money in a responsible way to ensure we get it back. More than half the people who actually apply to Capitec do not get the credit. That should give an indication of our strict criteria,” said Nel.
He too insisted the bank was not liable if consumers chose to take out more loans elsewhere. He added that it has become a growing trend for people who are turned away at formal financial institutes to turn to cash loan suppliers who do not conform to a strict selection criteria and this is where the National Credit Regulator (NCR) should step in.
Legal action is the last resort
Nalliah said that African Bank offered loans with fixed interest rates with fixed terms and if a customer subsequently takes on more credit that they cannot afford, African Bank can take action against such customers if they default on their loan.
But Nalliah insisted this was a last resort. “If the customer does default, our preference is not to resort to legal action in the first instance as that is not in the customer’s nor our interest in the long term. We try to work with these customers by accommodating them with a part payment of their instalment for a period of time until they are able to continue full payment. It is only when all our efforts to work with the customer on a mutually acceptable solution that we resort to legal action. Given that our loans are unsecured, there is no asset on which we can foreclose.”
Consumers must take responsibility
Nalliah added that consumers must carry some responsibility for their actions. If customers, for example, don’t fully declare their living expenses they should not then complain that the credit provider is responsible for them being in default as they could not afford such a loan he said.
“Income and debt servicing costs are fully verifiable but one is dependent to a very large extent on consumers declaring their living expenses honestly and correctly,” said Nalliah.
Paul Roelofse, consumer advocate for the Financial Planning Institute of Southern Africa, said that with the state of the country’s economy, indebted consumers are not getting ahead. He added that with the high interest charged on their payments, consumers are slumping even further into debt.
“Consumers should also take responsibility for their financial status. Many people are going out to money lenders because they do not want to delay an immediate gratification. Interest rates for unsecured credit is usually high and people should think about the long-term effect of borrowing money at an interest rate of 24%,” said Roelofse.