THERE are fears that banks, especially unsecured lenders, are not adequately advising customers to pursue the debt counselling option, a report by Bank of America Merrill Lynch shows.
This raises the question whether lenders are avoiding the process as it allows distressed customers to repay debt at much lower interest rates than under the original arrangements, thus depriving banks of higher income. A customer on debt counselling may have their repayments reduced to as low as 7.5% on secured debt and 0% on unsecured.
However, lenders denied that they avoided the debt counselling process, saying last week it was standard practice and prescribed by legislation to advise customers. The lenders argued that the debt mediation process was protracted and expensive for customers as it required a fee up front, and some could not afford this.
In a report issued to its clients in June, Bank of America Merrill Lynch noted that since 2007, only 300,000 individuals had applied for debt counselling, while the latest data from the National Credit Regulator showed that in the first quarter of this year the number of consumers with impaired records stood at 9.05-million compared to 8.93-million in the quarter ended December.
"Banks, as with any credit provider, are required to first send a defaulting consumer a section 129 notice setting out (their) right to debt counselling, among other options. The wording of such a letter is prescribed," said Vincent Tadden, head of collections at First National Bank (FNB).
"There are many reasons why a consumer may choose not to enter debt review and, in each instance, it is the election of the individual. Consumers remain cautious of debt counselling for many reasons, including high costs of the process and the loss of control over their financial affairs whilst under counselling."
Mr Tadden said fees up front paid to debt counsellors before a financial assessment ranged, for some customers, between R5,500 and R8,000, and this fee was not regulated within the ambit of the National Credit Act.
"Lastly, many consumers, especially in the lower LSM (living standards measure) bracket are unaware of the statutory debt counselling process."
African Bank Investment Limited (Abil), the largest lender of unsecured loans in SA, had similar views to FNB and said the process needed to be improved. "The principle of debt counselling is sound. Where the National Credit Regulator is struggling is the implementation of the process. It has been troublesome," said George Roussos, executive for central support services at Abil.
Mr Roussos said the process was long and costly, and needed to be enhanced. To deal with the challenges, the credit industry, which included banks, microlenders and retailers, was working on a pilot project to supplement debt counselling, he said.
Capitec, a huge player in unsecured lending, said it was not in its power to decide if a client went for debt counselling or not. The bank said, however, it was not in the interest of lenders to avoid the process as it was more expensive to pursue the financially distressed customer through the courts.
Absa’s head of retail markets, Arrie Rautenbach, said his bank embraced the debt review process and viewed it as a positive mechanism to combat overindebtedness, but that a review might still be needed.
"The National Credit Act 34 of 2005, in its current form, might need some form of review to ensure that the spirit of the act is encapsulated in the act itself; safe to say that the nature and consequences of this review cannot be determined at this stage," said Mr Rautenbach.
Another issue raised in the Merrill Lynch report was that credit life offered for unsecured loans also aggravated the cost of the credit.
In response, Capitec said it did not ask for any extra fee for death and retrenchment cover as its book was insured.
"We have noted that some players have advertised 0% interest, but then the credit life part of their instalment gets loaded," Capitec said.
Rival Abil said its credit life policy was not standard and if someone was retrenched, it covered the instalment period for six months, and if the unemployment continued the debt would be settled.