The topic of risk to both consumers and financial institutions brought about by reckless lending has been thrust into the spotlight following the recent critical status assigned to African Bank Investment Ltd. (Abil), due to their inability to collect on consumer repayments for their unsecured loans.
According to Wikus Olivier, a debt counsellor at DebtSafe, says that a major part of the decline of South Africa’s credit health is due to this boom in unsecured, and often reckless, micro lending. “Reckless lending creates devastating consequences for organisations such as Abil, who are unable to recoup their costs when consumers default on loans. There is also a major impact on consumers – particularly lower income groups – as a result of the high level of unsecured lending by financial institutions.”
“Years of reckless lending practices have resulted in many consumers becoming over-indebted and unable to keep up with their repayments due to a number of social and economic factors,” continues Olivier.
In addition, when the most recent credit information amnesty took place much of the important information about the payment history of individuals was removed, meaning that these same indebted consumers now stood the chance to gain access to even further credit despite their inability to settle their existing accounts on their current income. “This is incredibly worrying as there has been little to no financial rehabilitation of many of these individuals as part of the credit amnesty, and negative payment patterns are bound to continue as a result, pulling many consumers even further into the debt hole.”
Olivier says that micro loans and retail accounts are among the leading factors contributing towards South Africans’ over-indebtedness. “Many consumers do not foresee how the combinations of these seemingly small repayment costs can add up significantly, particularly when considering the addition of high interest rates, fees and other related charges,” he explains.
“The advice we offer to these individuals is to seek debt counselling in order to get their financial affairs in hand in an effective and manageable way. Many people tend to find the sheer scale of their debt overwhelming, and the task of managing it can seem insurmountable. However, if a systematic and practical plan is put in place, it is in fact possible to get out of the debt hole, as we’ve seen with tens of thousands of our successfully emancipated clients. A debt counsellor can also assist to determine if specific debt accounts can be classified as reckless lending”
Another serious consequence affecting consumers who are not currently in debt, and hold a ‘neutral’ credit profiles either due to a lack of credit activity or as a result of the amnesty. These individuals are likely to now be viewed as a much higher risk category by other lenders determined to avoid the path of destruction experienced by Abil. “Financial institutions will of course be inclined to limit the amount of credit they are granting in light of recent developments and when looking at South Africa’s overall declining consumer credit health.
“This cautiousness will mean those applying for credit that aren’t able to produce a positive payment history will have limited access to credit, which will also come at a higher cost to them. This will especially affect the lower income groups – often the consumers who require access to credit the most,” Concludes Olivier.