Spike in ‘payday’ loans warrants investigation

The number of short-term agreements climbed 137% to nearly 2 million, suggesting a large number of South Africans rely on short-term loans to get by.

The NCR considers a short-term loan to be between R1 and R8 000, with a term no greater than six months.

The fastest-growing category of short-term loans was the R5 000 to R8 000 bracket, according to the NCR’s Consumer Credit Market Report (CCMR). The total value of loans granted in this category in the second quarter grew by 557% from the prior year to R841 million, while the number of loans granted was up nearly 600% to 131 000.

The CEO of DebtBusters, Ian Wason, blames the spike in short-term loans on the delayed implementation of amendments to the National Credit Act (NCA) pertaining to new affordability rules, arguing that short-term lenders generally have less rigorous affordability requirements.

The Department of Trade and Industry (dti) announced in August that the implementation of more stringent affordability assessments on credit agreements would be suspended from the previous enforcement date of March 13 2015 to September 13 2015.

Wason believes that lenders took a lax approach to implementing the new rules with the expectation that the implementation date would be pushed out. He says the delay drove aggressive marketing practices by unscrupulous lenders, who extended as many loans as they could to borrowers who will no longer qualify now that the amendments are in force.

This reaction is “reminiscent of the dramatic increase in credit in the run up to the implementation of the NCA in 2007,” says Wason.

Wason believes that the drop-off in applications for debt counselling across the industry between March and July indicate that stricter affordability assessments were not yet being applied. “People apply for debt counselling only when they no longer have access to credit,” Wason explains.

However, the CCMR figures include only those entities that submit quarterly returns, and therefore exclude the majority of smaller, short-term lenders that report on an annual basis, suggesting the spike could be driven by larger players, such as banks.

NCR company secretary, Lesiba Mashapa, says the growth in short term credit is being closely watched by the NCR. “There is clearly a need for the NCR to continue its investigations into short-term lending by credit providers to ensure that this type of credit is granted responsibly to consumers. In this regard, the enforcement of the affordability assessment regulations will play a key role,” he says.

Capitec may have influenced figures

Capitec’s focus on short-term lending over the last year has no doubt boosted the value and volume of short-term loans in the market. In the six months to September 2015, Capitec granted 1.8 million loans at a total value of R11 billion.

Loans of one to 12 months contributed just more than R3.5 billion (or 32%) to the period’s gross loan book, while the average loan amount fell 13% over the period to R6 157. Approximately 180 000 one- to six-month loans were advanced at a total value of R550 000.

Capitec CEO Gerrie Fourie recently told Moneyweb that in the wake of last year’s platinum sector strike and African Bank’s demise, the bank made a deliberate decision to grant short-term loans and is only now looking to opening up again with longer term loans.

According to the CCMR, personal loans for between five- and ten-year periods have shrunk by 67% year-on-year to R900 million. “Credit providers have realised that it is far less risky to lend consumers ‘pay day’ loans than jumbo ‘consolidation type’ loans over five plus years,” says Wason.

The CEO of MicroFinance South Africa (MFSA), Hennie Ferreira, suggests that the increase in short-term and reduction in longer-term loans is a function of the weak economic environment and risk aversion among credit providers, among other reasons.

“There is an ongoing swing towards digitally-orientated credit granting in all markets, which comes with its own risks, such as fraud,” Ferreira adds. “In order to manage those risks, you would want to limit your exposure in terms of the sizes and terms of loans.”

Wason, meanwhile, believes that South African consumers are addicted to “shorter term expensive debt”. “If credit providers’ affordability tests are policed correctly by the regulator then this will come to a shuddering halt and defaults will sky-rocket, not just in ‘pay day’ loans, but across all credit,” he warns, expecting to see an uptick in applications for debt counselling over the next few months.

Defaults on secured credit will be driven by exposure to unsecured credit. For example, 17% of DebtBusters clients who have pay-day loans also have a bond, while 36% have vehicle finance, Wason says.

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