Consumer Credit by the numbers – is it getting better?

Consumer Credit by the numbers – is it getting better?

South African consumers are buckling down and their management of household debt has shown improvement.Starting with collection of outstanding debt, where a clear improvement in consumer behavior is evident. The total number of civil judgments recorded for debt decreased by 16% in the first quarter of 2017 compared with the first quarter of 2016, according to Stats SA data released on 18th May 2017. The total value of judgments dropped 12%. And, the number of summonses issued for civil debt increased by a mere 2% during the same period.

Encouragingly, the trend shows that since 2013, the total number of civil judgments for debt have steadily decreased from above 30 thousand per month, to below 20 thousand per month. Summonses issued to obtain judgment for the collection of debt have also been sliding from slightly above 60 thousand to just more than 50 thousand, since 2013.

The latest Transunion consumer credit index appears to support the assertion that household debt reduction is a reality. As a credit bureau, Transunion receives real time data from creditors and other financial services providers on consumer payment patterns. This data is used to compile the index. It measures aggregate consumer loan repayment records, the use of revolving consumer credit facilities as an indicator of distressed borrowing, estimated household cash flow as a means of determining financial pressure/relief, and the relative cost of servicing outstanding debt. These aspects are then combined into a single indicator of credit health.

If the indicator is above 50, the consumer data is positive. Below 50 it is negative. The latest Transunion Consumer Credit Index indicates that the number of accounts in arrears by three months or more, have decreased at the fastest pace since 2015. The first three months of 2017, 5.7% fewer accounts were in default by this measure than in the same period last year.

Meanwhile, the use of revolving credit facilities as an indicator of distressed borrowing, increased by just 1%. And limits on these facilities showed an even slighter rise, according to the report. There is limited new borrowing and lending in the unsecured credit market, yet at the same time, Household cash flow was down 1% in the same comparative period.

The authors of the index report state “Given challenging economic and labour market conditions over the past year, better loan repayment behaviour may be driven by tighter lending standards among major credit providers, more cautious borrowing, and deleveraging.” To deleverage is to reduce total debt outstanding in one’s estate.

Evidence of this deliberate effort by households to bring down debt comes from SA Reserve Bank data, released earlier in May. It indicates that from January to end of April, households spent roughly 73% of their disposable income to service debt. Last year over the same period it was over 75%. In 2008 it was 88%.

The effect can be seen in inflation figures. According to official statistics released mid-May, there has been a slower increase in consumer prices in April. Consumer inflation rose by 5.3% in April, compared to 6.1% in March. The inflation rate had been above 6% since January 2016. It dipped very briefly below 6% in the second part of the year, but also only for one month.

Another statistical release in May from Stats SA revealed the estimated number of insolvencies decreased by over 17% in the first quarter of 2017 compared with the first quarter of 2016. This is largely due to a more than 24% reduction during March 2017, compared to March 2016.

Number of Insolvencies as taken directly from Stats SA

The trend of fewer bankruptcies is also evident in the corporate space.

 

Number of Liquidations as taken directly from Stats SA

 

Trapped in administration? Cancel it or write it off!

Trapped in administration? Cancel it or write it off!

An administration order is granted in terms of the Magistrates’ Court Act 32 of 1944 where the consumers debt is less than R50 000.00. An administrator is then appointed to collect a monthly amount that is distributed amongst the consumers’ creditors as detailed in the administration order.

Administrators can add new creditors to the list of those already included in the administration order, after the administration order is granted. This may result in the total debt exceeding the R50 000.00 threshold and a growing list of creditors to be paid, together with the accumulated interest charges levied on the debt.

Consumers can apply to court to rescind or cancel an administration order, even if the debt under administration is not fully paid. The most common instance when this can be done, is when the consumer’s financial circumstances have improved to the point where the consumer is no longer over-indebted and can pay the affected creditors a substantially larger amount than what the administration order demands. Other instances when an administration order can also be cancelled are, if “good cause” can be demonstrated to the court. Examples of good cause include:

(a) change in financial circumstances, for instance, you earn more today or have less debt;
(b) the creditors are not being paid timeously. For instance, the administrator is making payments to the creditors on a trimonthly basis whereas the debtor can make payments directly to the creditors on a monthly basis
(c) the administrator is not duly performing their duties as an administrator or the administrator’s charges are in dispute

If the cancellation of the administration order is not possible on any of the above grounds, the consumer may want to consider sequestration in order to terminate and cancel the administration process. Sequestration would be a suitable option where the consumer cannot in fact afford the monthly amount required in terms of the administration order.

Take the case of John Doe. John Doe has a nett income of R6 000.00, excluding a monthly deduction of R850 for an emolument attachment order that goes toward his administration. His living expenses are R5 300.00. This leaves a surplus of R600.00 is less than his monthly administration of R850.00. Clearly, the court will not grant the cancellation of the administration order.

However, the above scenario shows that Mr Smith is also unlikely to be able to cope with the R850.00 being deducted from his salary every month. He cannot afford it. He has to find a way to have the debt “written off”. Sequestration is an option.

If Mr. Smith is sequestrated, all his debt would be “written off”. This means that he would only have to provide for the repayment of 20% of his total outstanding debt and his outstanding creditors would receive 20 cents in the Rand.

Mr Smith’s administrator advises that the latest balance is R45 000.00. This means that under sequestration, an amount of approximately R9 000 would have to be provided for repayment to his creditors (that is, 20 cents in the Rand). Further, with sequestration, the garnishee would also stop, thereby increasing his monthly nett income.

However, Mr. Smith will not be able to obtain credit until he has been rehabilitated. A person is generally rehabilitated after 4 years, calculated from the sequestration date.

The right to receive a statement of account

Section 108 of The National Credit Act enforces:

The right to know how much you owe and how it has been calculated.

In respect of a mortgage bond, the credit provider must deliver a periodic statement at least every six months to the consumer. In the case of an instalment agreement, lease or secured loan, the statement of account must be supplied to the consumer at least every two months. In respect of all other credit agreements, statements of account must be issued every month.
Despite the above provisions of the NCA, a consumer and a credit provider may agree to reduce the frequency of statements of account. However, such an agreement cannot provide for more than three months between the issuing of successive statements of account. If a statement of account is not issued on time, then a consumer may approach the NCT for an order to compel the credit provider concerned to provide the statement. The NCT may then order the credit provider to provide the statement or determine the amounts in relation to which the statement was sought.
A statement of account does not have to be delivered in respect of a credit facility if no amount has been debited or credited in the statement period. It is important to note that any credits reflected on a statement of account take effect on the date payment is made to the credit provider or otherwise when the right to have the account credited arises. Similarly, debits take effect as of the date on which the consumer incurred that particular debit.
A statement delivered in respect of a credit facility is not binding to the extent of any credits to that account, or charge made to that account, after the date on which the statement was prepared.
The right to dispute entries in a statement of account

If a consumer disputes any part of a statement of account, for example, a particular credit or debit that she believes has been entered incorrectly, then she may deliver a written notice to the credit provider, detailing the basis of her dispute. The credit provider must, in response, investigate and explain the disputed entry or confirm that the disputed entry was indeed made in error and subsequently remove the entry in question.
The credit provider cannot commence with any enforcement proceedings on the basis of a default arising from the disputed entry until after the investigation has been completed. Therefore, the credit provider must give the consumer written notice, explaining the disputed entry in reasonable detail or confirming that the statement was in error either in whole or in part, and setting out the revised entry. Before this is done, enforcement proceedings cannot commence.
The right to a statement of settlement amount
If a consumer wishes to settle a credit agreement, she has the right to request an updated statement of account from the credit provider concerned. The credit provider is then obliged to deliver such a statement of account to her without any charge being levied.
This statement must be delivered to the consumer within five business days of her having made the request. This statement of account will be binding upon the credit provider for a period of five business days after delivery. The statement of account can be delivered to the consumer in any of the following ways:

  • orally, in person or by telephone; or
  • in writing, either to the consumer in person or by SMS, mail, fax or email or other electronic form of communication to the extent that the credit provider has such facilities.