IAN Wason is CEO of DebtBusters.
SUMMIT TV: If you had a bad Monday, there’s a reason — the South African debt management firm DebtBusters says Monday 28 January was not only the worst day of the year, but the worst day ever for South African consumers in debt. That’s quite a claim — why was January 28 such a horror?
IAN WASON: In terms of personal finance it’s the worst day of the year because people get paid early before Christmas, and there’s the splurge over the festive season with all the presents. They haven’t quite been paid by the end of January and what happens is all the credit card bills and everything else comes through around this time.
STV: So this is the usual thing — the January period where the weeks stretch out like a desert wasteland as you wait for your salary to come through and there’s all these bills waiting to be paid. But is it worse than previous years? People have been taking on credit in the past few years, with unsecured lending booming in South Africa.
IW: In my view it’s an unsecured lending bubble — certainly over the past year unsecured lending has increased by 39%, which is huge. What many consumers have been doing is borrowing from Peter to pay Paul. We are seeing in the market at the moment that unsecured lenders and the banks have been lending all this money to the market in the form of personal loans and credit cards, and consumers have been taking on more and more of these personal loans to meet payments on their existing debt obligations.
STV: What portion of people are using new debt to pay old debt? Is that the greatest commitment people have when they take on new loans?
IW: Yes, it probably is. The reason they are taking on new loans and taking on new debt is that over the past few years we’ve seen inflation in areas like electricity tariffs and rates putting extra pressure on families so they are borrowing to try keep their heads above water. At a certain time in a month they need to borrow more money to pay that debt back...
STV: What are you seeing with customers applying to your organisation for assistance with their debt? Have you seen a big jump in applications since the start of the year?
IW: We’ve seen a huge jump this year — almost double last year — which makes us think it’s the worst day of the year ever because so many people have reached the end of the debt spiral. Credit providers have tightened up their lending over the last three months and what that has meant is that people no longer have access to more credit, so where they’ve been borrowing from Peter to pay Paul, now Peter has stopped that...
STV: Are we in a new phase with the unsecured lending bubble you’ve talked about? You mentioned unsecured lenders and there was a huge focus on them at the end of last year — and we’ve seen reports from Abil (African Bank) and other credit retailers that they had pulled back on loans to customers so they are starting to tighten up, but is this the next phase where people who were using new loans to service old loans now can’t get that money and therefore end up in an impossible financial situation?
IW: Yes, they have to find a solution. Their access to credit has dried up so the only real solution for them is debt counselling, which is why we are seeing the numbers.
STV: What is the debt counselling process?
IW: A client comes to us generally on average with 14 credit agreements owing around R20,000, which is the middle-income bracket. We do our calculations to check whether they can afford their repayments, which 99.9% of the time they can’t. Then we alert the banks to the fact that they have applied for debt counselling and request information from the credit providers as to what their balance is, and what their interest rate is and their credit life insurance. We then go through the client’s budget in detail and we cut out luxury items like gym memberships and stuff like that, and we requote any insurance they may have on vehicles and homes. Then we see what they can realistically afford to repay towards their debt at the end of the month, being maybe R5,000. We then look at their debt obligations and use a debt counselling rules system where we have mandates from all the credit providers to extend terms and reduce interest rates down to zero if necessary on unsecured debt to get them debt-free in 60 months.
STV: So that’s five years, which is quite a long process.
IW: It is, but fortunately interest rates are fixed so many of our clients are able to overpay so generally they can come out of debt review within 40 to 50 months.
STV: What has your communication been like with the major lenders? Obviously you have key dealings with them in the process of rehabilitating people — are they quite worried about what’s going on and the kind of applications you’re experiencing for assistance with debt?
IW: Yes, I think it’s not a surprise to them — but obviously they are seeing our numbers and the numbers across the industry increasing quite dramatically. We’ve always had a policy of a very close relationship with the credit providers, and through transparency and negotiation we can get agreements in place to reduce client interest rates and strip off fees. We have very positive relationships.
STV: If we are in a bubble, how long is this going to play out? Are we still in a bubble phase and do you think something is bursting at the moment?
IW: I think the bubble is starting to deflate pretty rapidly at the moment and I think we will see this play out over the next two to three years.
STV: Could this be as bad as the Unifer collapse in 2001-02, which cost Absa huge amounts of money and provoked the small banking crisis of 2002, which took a couple of years to work its way through the system and there were casualties — are we facing a similar thing at the moment?
IW: It’s possible. The big difference between now and 10 years ago is that consumers are multi-banked so with our average consumer having 14 credit agreements that would be split across seven or eight credit providers. Ten years ago they may have had one or two credit agreements with one or two credit providers. The credit providers cannot solve this situation themselves — it has to be done holistically by an independent credit management business such as ourselves.
STV: You talked about people needing to take on new loans to pay off old loans to keep up with expenses — do you think there is an element of profligacy here? Is that one of the reasons why consumers get into distress?
IW: We are strongly of the opinion that our clients are good clients in bad times — the vast majority have not gone out to get themselves into this situation. Bear in mind that debt counselling is a voluntary step. I think it’s the pressure of keeping up with the Joneses and the pressure of putting food on the table for their families. We’ve been in a period of slow economic growth over the past few years and people have not been getting pay rises in the private sector and they may not have been getting the commissions and bonuses they may have been getting and they just borrow too much.
STV: It’s the lenders as well who take people on and then realise they have these huge expenses...
IW: Absolutely. There is a huge problem with education in South Africa so we have a third world financial education but first world financial services. Unfortunately where that meets there are casualties.