Premature debt counselling could harm future credit, banks warn South Africans

Major banks have warned that many heavily indebted South Africans opt for debt counselling when their financial circumstances do not necessarily warrant it.

“We are seeing that as a result of a lack of financial education, customers are entering into premature debt counselling arrangements which are ill-advised,” says Nozizwe Tshabuse, managing executive for retail and business banking and client debt management at Nedbank.

In an interview with Moneyweb, she pointed out that people often do not fully grasp the consequences of debt counselling.

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“Customers should understand what they’re letting themselves in for. Their credit scores are adversely affected because the process of debt review is registered with all the credit bureaus,” says Tshabuse.

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“Once people have agreed to debt counselling, they can’t get any kind of funding until the debt review period is concluded. It’s particularly problematic for young people who may want to buy a home. It might also affect all future funding negatively,” she warns.

Worrying debt counselling trend

Capitec CEO Gerrie Fourie said in April at the announcement of the bank’s annual results that while debt review has a place, there is a worrying trend of it being used against the interests of clients.

The group explained in a follow-up email that its debt counselling comments relate to a concerning trend where consumers enter debt review even when their financial positions do not warrant it.

ALSO READ: Consumers worse off now than in 2016, as debt counselling inquiries increase by 53%

“We believe this is in part caused by some debt counsellors, who intentionally market their services as debt consolidation or quick-and-easy debt relief processes, promising payment holidays and the possibility of savings in future,” it noted.

“This is often done through social media and telemarketing campaigns, without disclosing crucial details about the process, meaning clients cannot make an informed decision. In many instances it is too late for people to get out of the legally binding process by the time they have all the facts.”

Capitec emphasises that debt counselling is a valuable part of the credit industry and has helped many South Africans seeking debt relief, especially since consumers have been under considerable pressure in recent years.

ALSO READ: More South Africans turn to debt counselling as ability to borrow diminishes

“There is concern that current practices seek to exploit consumers’ heightened levels of fear,” the bank said.

“We see that 20% of consumers exit debt counselling after 12 months, paying at least R9 000 in fees, with no change in the level of indebtedness. These consumers are not receiving the intended benefits of debt counselling.”

Increased debt reviews

FNB says it has seen an increase over the past 12 months of customers entering debt review – predominantly middle-income to affluent South Africans. 

“We’ve seen that often customers do not understand the consequences of entering debt review, before their actual application,” the bank tells Moneyweb.

ALSO READ: Consumers spending ‘dangerously high’ portion of income on debt

“Often customers will say they did not understand the consequences; that they would not be able to use any of their credit facilities or that it would impact their credit bureau listings. In addition to these concerns, persons under debt review are often not aware of the costs associated with the process,” the bank adds.

According to latest statistics from the National Credit Regulator (NCR), the total outstanding credit in the country amounted to R2.3 trillion in the fourth quarter of 2023.

Altogether, R265.8 billion of the total outstanding debt was more than 30 days in arrears – an increase of 25% – compared to the corresponding period in 2022.

The largest percentage of the arrears was for mortgages (40%), followed by personal loans (21.7%), credit facilities (19%) and vehicles (15.3%).

Johann van Tonder, economist and researcher at Momentum, says the overall 25% increase in arrears is “massive”.

“If that number increases, banks are getting cautious about granting credit.”

ALSO READ: Consumers warned about getting trapped in debt spiral

After the global financial crisis in 2008, the rejection rate for credit applications was 44%, says Van Tonder. During the Covid-19 period, the rejection rate was 64.1%. Since the interest rate increases in 2022, this figure has increased to 68.1%.

“It might look like only four percentage points, but it’s significant when there’s a jump from an already high base [of 64.1%].”

Interest rate hikes 

The interest rate hiking cycle that started in November 2021 pushed consumers even further into debt. The last rate hike announced by the South African Reserve Bank (Sarb) was in May 2023, when it was increased by 50 basis points to 8.25%.

In 2023, South Africans’ interest payments on outstanding debt increased to R318.5 billion, according to the NCR. This is an increase of R115.5 billion.

“That means households had R115.5 billion less to spend on goods and services,” says Van Tonder.

“But the consequences of the high interest rates are not only the high cost of living. It also impacts financial resilience.”

ALSO READ: Buried under debt? When to get counselling, and when to consolidate

Households cannot absorb financial shocks, and they can no longer afford to take out insurance or save for retirement.

Van Tonder is of the view that indebted consumers should first approach their banks and creditors before considering debt review.

“Granted, many clients have in the past approached their banks and got nowhere. Historically, some banks had an attitude of ‘Pay up, or we repossess your house or your car’. The story started spreading that debt counsellors help when banks don’t.”

This has changed though, and some banks go out of their way to assist clients with renegotiated repayment terms and possibly lower lending rates, says Van Tonder.

Banks the first port of call 

Tshabuse says Nedbank set up a dedicated client debt management department eight months ago, and has since managed to reduce the number of clients going into default by 20%.

“We use preventative logic scorecards, looking at things like unpaid debit orders, ‘mis-payments’ or late payments and this has helped us reach out to customers by sending them reminders.

“In instances where the client is in deep trouble, or find themselves in unemployment, we could offer payment plans and help to restructure home loans or car payments and personal loans.”

Standard Bank says it has seen an increase in new entrants into debt review, especially in the second half of 2023, but volumes have moderated in recent months.

“While each customer is different, banks can assist by using levers such as consolidating debt, payment extensions and/or identifying burdensome debt and mitigating that by either selling or extending the term of the asset,” the bank notes.

Absa has observed a stabilisation in the overall trend of customers opting for debt review, it said in an emailed response. “While generally industry debt review flows remain elevated, this is not at levels seen in 2023 which followed a period of sustained interest rate increases, compounded by the effects of the adverse economic climate on consumer disposable incomes.”

Debt counselling puts money back into the economy 

The National Debt Counsellors’ Association (NDCA) said in a media statement on Thursday that there is “enormous potential” to release more of the outstanding personal debt owed by South Africans back into the economy.

According to NDCA chair Benay Sager, around R70 billion to R100 billion of the country’s total outstanding debt is held by consumers who are in debt review.

If more people sought help to manage their debt through debt counselling, the (current) R15 billion being returned to the economy annually could potentially be increased to R25 billion.

ALSO READ: SA’s cabinet could do with some major debt counselling

“Debt counselling is too often considered only a means to help consumers restructure their debt and get back on their feet … it [also] enables lenders to recover what they are owed,” says Sager.

“With personal debt at or near record levels and a stagnant economy, a functioning, efficient debt counselling sector is good for consumers and good for the country.”

This article was republished from Moneyweb. Read the original here