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Revised caps to interest rates and fees charged on loans came into effect on Friday, reducing interest costs on personal loans and forming part of government’s efforts to promote affordable access to credit and prevent reckless lending.
Caps on rates and fees must be viewed together with the affordability assessment regulations – which came into effect in September 2015 and require credit providers to more thoroughly interrogate whether a borrower can afford a loan – as well as proposed limits to credit life insurance.
It is hoped that this overhaul in credit regulations will promote access to credit that is reasonably priced, by consumers who can afford it.
“South Africa has a worryingly high level of over-indebtedness,” the Department of Trade and Industry (dti) said in its statement inviting public comment on draft recommendations to cap rates and fees.
Published in June 2015, the dti’s proposal around rate caps on unsecured credit transactions elicited widespread warnings that high-risk borrowers would see their credit access curtailed.
Initially, the dti proposed that maximum rates on unsecured loans be reduced from 32.65% to 24.78%.
Following submissions from and consultation with industry, this has since been revised to the repo rate (RR) plus 21% per year. With the RR currently at 7%, this amounts to 28%.
| Credit type | Maximum prescribed rate |
| Mortgage agreements | RR + 12% per year |
| Credit facilities | RR + 14% per year |
| Unsecured credit transactions | RR + 21% per year |
| Developmental credit agreements (i.e. small business, low income housing) | RR + 27% per year |
| Short-term transactions | 5% per month on the first loan and 3% per month on subsequent loans within a calendar year |
| Other credit agreements | RR + 17% per year |
| Incidental credit agreements | 2% per month |
Source: Government Gazette, 6 November 2015
Initiation fees on credit agreements are also limited under the regulations.
| Credit type | Maximum initiation fee |
| Mortgage agreements | (a) R1 100 per credit agreement, plus 10% of the amount in excess of R10 000 (b) Never to exceed R5 250 |
| Credit facilities | (a) R165 per credit agreement, plus 10% of the amount in excess of R1 000 (b) Never to exceed R1 050 |
| Unsecured credit transaction | (a) R165 per credit agreement, plus 10% of the amount in excess of R1 000 (b) Never to exceed R1 050 |
| Developmental credit agreements – for small business development – for low-income housing | (a) R275 per credit agreement, plus 10% of the amount in excess of R1 000 (b) Never to exceed R2 600 (a) R550 per credit agreement, plus 10% of the amount in excess of R1 000 (b) Never to exceed R2 600 |
| Short-term credit transactions | (a) R165 per credit agreement, plus 10% of the amount in excess of R1 000 (b) Never to exceed R1 050 |
| Other credit agreements | (a) R165 per credit agreement, plus 10% of the amount in excess of R1 000 (b) Never to exceed R1 050 |
| Incidental credit agreement | Nil |
Source: Government Gazette, 6 November 2015
Credit life used to fatten margins
Alongside capping rates and fees on credit agreements, the dti in November issued proposals to cap credit life insurance at R4.50 per R1 000 loan.
Credit life insurance is generally mandatory and provides for repayment of a loan in the event that the debtor dies.
The period for public comments on these regulations closed on January 6.
Pointing to the urgent need to finalise these regulations, it is widely suggested that as long as credit life remains uncapped, lenders will simply overcharge on these policies in order to claw back profits now lost to the caps on rates and fees.
This is why all of these caps need to be determined on a scientific basis with a proper impact assessment, argues Hennie Ferreira, CEO of microlending industry body, MicroFinance South Africa.
When credit life caps are implemented, lenders focused purely on unsecured credit will find their margins squeezed, which will reduce the availability of unsecured credit to, in particular, high-risk and low-income consumers.
This will hurt in the short-term but may reduce over-indebtedness in the long term.
The latest TransUnion Consumer Credit Index reflects an increase in new accounts in default in the first quarter and a sharp decline in the overall health of consumer credit behaviour, indicating that consumers are struggling to pay their debts.
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