By Nicolette Dirk
Although the impending credit amnesty is aimed at making it easier for credit adverse individuals to obtain finance, South African banks are likely to become even more conservative with their lending practices.
According to Gary Palmer, CEO of Paragon Lending solutions, this is because banks and other lenders have traditionally relied heavily on credit information from credit scoring agencies. With some having their credit records wiped clean, it will make it more difficult for banks to identify the good payers from the bad.
“The increased risks of not knowing the history of the client can potentially result in delays in obtaining finance from the banks and may increase the costs to finance the loan to cover their risks,” said Palmer.
He added that banks already have strict lending criteria due to new regulations, such as Basel 3, which have already resulted in delays in loan approval times. If the new legislation is passed, the banks will tighten up even further, in order to protect themselves, if they are uncertain about a client’s capacity to repay a loan.
What does this mean if you want to buy property?
Palmer the new amnesty will mean that the banks will have to look at their credit granting processes with more scrutiny, as well as do more background research, to ensure that they are approving the loan to a low risk client.
“These additional delays can potentially result in a client missing out on a deal, as they may require the finance in a short space of time to secure a property even though their previous debt obligations have long been settled,” said Palmer.
South Africa’s current debt situation
Palmer referred to the latest survey released by TransUnion, which indicated that South African consumer credit health declined to 43.4 in the third quarter of 2013 from 44.8 in the second quarter. The TransUnion SA consumer index measures consumer credit health where 50 is the break-even level between improvement and deterioration. It has fallen from 63.6 in the fourth quarter of 2010.
“The index reflects a growing concern that consumer defaults continue to decline and highlights the need for more education and personalised services to reduce the risk of impaired judgements from reoccurring across all income groups,” said Palmer.
How can credit amnesty be beneficial?
Leading up to the impending credit amnesty, experts have also expressed concern on what it would mean to South Africa’s debt-ridden population. Last month Neil Roets, CEO of Debt Rescue, told Fin24 that the agreement by cabinet to implement a credit amnesty would bring South Africa one step closer to a major crisis in the credit industry.
But Palmer said credit amnesty legislation can have a beneficial effect on the economy if government creates a process to slowly re-introduce blacklisted and impaired credit consumers to the credit market, provided they are given free debt counselling and financial management skills.
“These services will go a long way to preventing a repetitious cycle of bad debt from occurring, as opposed to simply allowing consumers to obtain additional credit. The industry needs to encourage their clients to regularly review their credit worthiness to see if there are any areas that can be improved,” said Palmer.
He added that lenders should work strategically together to refer clients to the appropriate financial specialist where necessary, and must encourage consumers to pay off their existing debts, avoid late payments and to promote debt counselling if poor debt payments habits are displayed.