Banks, BASA, Treasury agree to curb irresponsible lending

Representatives of major retail banks, the Banking Association of South Africa (BASA) and the National Treasury have signed an agreement aimed at improving responsible lending and preventing households from being caught in a debt spiral.

In a joint statement on Thursday, the parties expressed concerns at the excessive lending to households even when such loans were not affordable, illegal collection practices such as keeping ID documents, bank cards and PINs, selling inappropriate credit products to maximise margins and extending unaffordable loans to pensioners and other social grant recipients, among others.

The agreement was reached at a meeting between the Minister of Finance, Pravin Gordhan and the Chairperson of the Banking Association of South Africa, Sim Tshabalala on 19 October. BASA represents ABSA, Standard Bank, FirstRand, Nedbank, African Bank and Capitec.

It calls for several measures to be taken, including a review of loan affordability assessments, appropriate relief measures for distressed borrowers and the reviewing the use of debit orders and limiting the use of garnishee orders.

The parties agreed that while there are currently no systemic risks related to unsecured or secured lending, certain market conduct behaviour may result in households, particularly poorer ones, getting caught in a debt spiral.

BASA and the National Treasury noted the importance of credit to the economy, particularly to grow small businesses, enable the purchase of houses and other assets, help students to study at higher-education institutions and so on, however, they accepted the need to take steps to ensure that current lending trends do not increase future prudential risks.

It was recognised that although the efficient regulation of the banking sector limits the incidence of poor credit practices, some credit practices were “undesirable and reckless”, and they agreed on the need to deal with poor market conduct practices that contributes to over-indebtedness of borrowers.

In the agreement, parties agreed to support the National Credit Regulator (NCR) in enforcing the law and stamping out poor market conduct practices, and encourage it to improve preventative measures – including introducing stronger fit-and-proper criteria for all lenders; that all financial service providers must be appropriately licensed or regulated, and that steps should be taken to improve supervision of credit bureaus and obligate all credit providers to update credit information at least once a week.

BASA and National Treasury agreed to prevent future indebtedness and address current over-indebtedness where practical.

BASA and its member banks will review their approach to the assessment of affordability, and ensure the selling of appropriate credit products to their customers.

“BASA, the National Credit Regulator and the National Treasury will formulate a standard to measure affordability, which could then be incorporated into regulations as minimum standards. Each relevant BASA member bank will develop approaches to provide appropriate relief to qualifying distressed borrowers by reducing their instalment burden, without additional cost to the borrower,” said the joint statement.

The association’s members further agreed to load payment data onto the various credit bureau systems as soon as is practically possible, preferably overnight in bulk.

They also agree to minimum norms and standards for consumer credit insurance practices linked to lending, and said they would work with the National Treasury and the Financial Services Board to develop a framework that takes into account the interests of customers, appropriateness and the full impact of all charges on affordability.

Further to this, BASA members have committed not to use garnishee orders against credit defaulters, as they believe the use of such orders for credit is inappropriate.

“BASA and the National Treasury will promote and support enforcement initiatives against credit providers that issue pre-signed garnishee orders. The National Treasury will also engage with the Department of Justice about the abuse of garnishee orders and suggest that their use be restricted to maintenance orders,” said the parties in the statement.

Going forward, National Treasury, BASA and the NCR are expected to discuss how the current system of debt counselling can be improved to remove perverse incentives and eliminate abuses.

The National Treasury and BASA will coordinate a process to complete the identified work over the next two months.

The commitments in the agreement related only to the member banks of BASA and not other credit providers, such as non-bank micro-lenders and retailers. These were encouraged to conform to the good practices committed to by the banks. –