4.4 The National Credit Act
4.4.6 Influence of the NCA
an agreement. For example, credit providers may not commence legal proceedings before they have issued a written notice to their debtors meeting all of the prescribed requirements set out in the Act (Section 129). So threatening a bad debtor with legal action prematurely could have negative consequences to the credit provider. The implications are that some businesses try and find ways to avoid the requirements of the NCA. For example, some businesses will rather forfeit interest when collecting on unpaid accounts, in order to avoid the requirements of the NCA (Migiro, 2017).
The next step in the consumer credit lifecycle is the termination of the credit agreement which will be discussed below.
Termination of the credit agreement
A credit agreement can be terminated by either the consumer or the credit provider. This section covers mainly the following areas; settling a credit agreement, rescinding a credit agreement, rescinding a lease or installment sale agreement, surrendering of goods, making early payments, and the credit provider’s right to terminate and the prescription of debt.
What is important to note under this section is that no penalty fees may be charged for the early settlement of small and intermediate agreements. If the consumer would like to terminate a large credit agreement (over R250, 000) or a mortgage agreement, the settlement amount may include an early settlement charge which is not allowed to be more than three months interest. If the consumer provides notice of his/her intention to settle early, it will reduce the three-month interest early charge by the notice period (Section 125) (Migiro, 2017).
The above provided a brief on the prominent areas of the NCA throughout the credit lifecycle.
Below the influence of the NCA on credit providers will be summarized.
Changing model
Prior to the NCA, small informal lenders could charge any interest rate on loans. Post-NCA, there is reduced interest rates and therefore reduced profit margins. This coupled with the aggressive price undercutting by larger competitors questions the future of the smaller informal lenders. The big listed micro-lenders have greater access to cheap capital allowing for the provision of loans at lower interest rates (Ntingi, 2008:1).
According to Riaan Stassen, the CEO of Capitec Bank, there is speculation that the NCA has leveled the playing field as more small informal lenders are leaving the market, and larger institutions are entering the micro-lending space. The reason for this is the inability to cope with the NCA and competition in the market. Wessel Smit, Head of the legal department at Blue Financial Services, adds that other reasons for small lenders leaving the industry are due to the lack of access to affordable capital (Ntingi, 2008:1).
On the other hand, Gabriel Davel, former chief executive of the National Credit Regulator (NCR), stated that there is no clear evidence that the number of micro-lenders in the market has shrunk due to heightened competition. Some have closed; however, new players have also come to the market. Official figures show that there were 2100 micro-lenders registered with the NCR during 2009, compared with 2000 lenders that were registered with the NCR’s predecessor, the Microfinance Regulatory Council (Migiro, 2017).
Consolidation
Another implication of the NCA is the consolidation of the microlending market, and as a result, there has been a reduction in credit provided. The NCA also drove the Loan Sharks or Mashonisas out of the market (Ntingi, 2008:2).
Examples of the consolidation process were African bank which acquired furniture retailer and credit provider Ellerines for R10 billion. Furthermore, Blue Financial Services, which has extensive operations across the African Continent, acquired rival micro-lender, Future Finance, thereby boosting it's earning from South Africa (Ntingi, 2008:1).
It can be argued that whilst the NCA may have created opportunities for some large micro- lenders, also driving out dubious practices by Loan Sharks, there are surely also pitfalls. One of these pitfalls is the increase in the cost of credit for credit providers, which will be elaborated on below.
Increase in the cost of credit
Ntingi (2009) states that the cost of credit may increase as a result of the additional cost incurred due to the requirement of providing extra information, and conducting more detailed affordability assessments. Previously the onus was on the customer to ensure that he/she was fully informed concerning the finer details of loan agreements, as well as the rights in the event of a dispute. Under the NCA, the emphasis has shifted to the credit provider to ensure that customers are fully informed of their rights and all the relevant information, as determined by the law.
Loan documentation must now make all required information comprehensible to the consumer, from providing pre-agreement quotes with five-day validity, to how debt and interest payments will be calculated. In addition, credit providers may no longer use ‘fine print’, all documents must be legible. In the past, while consumers were able to shop around for the best rate, not all credit providers, however, supplied the same level of information. As a result, it became difficult to compare credit products. The new system allows consumers to make accurate comparisons (Ntingi, 2009).
Credit constraints and productivity
Miller (2013), states that interest rate caps intensifies the already existing problem banks face of adverse selection as it prevents the bank from price discriminating. Effectively it reduces the provision of credit as the more risky businesses which previously obtained credit at a higher cost, will no longer qualify for credit. The World Bank found that credit constraints may reduce profit margins by up to 13.6% per annum (Miller, 2013). In addition, the interest rate caps will result in less credit for the lower end of the market considering that microfinance institutions charge higher interest rates, as they pay a higher cost of funds to on-lend to small businesses (Miller, 2013). Mphahlele (2015) concurs that by capping interest rates and fees, loans to smaller and higher-risk consumers may have been discouraged, inhibiting access to credit by those consumers. Despite this limitation to microfinance institutions, there is still a steep growth reflected in the unsecured lending market which will be elaborated on below.
Steep growth in the unsecured lending market
Although the NCA has achieved many positive milestones in protecting the consumer, Aregbeshola (2014) argues that it has not been able to prevent opportunistic behaviour on the part of the lenders. This is based on the steep growth in the unsecured lending market. As a way of circumventing the provisions against opportunistic lending in the capital market, especially asset-backed finance such as home loans, the four leading banks in the country diversified into the lower credit stream of the market (Bloomberg, 2012; Mittner, 2013). This is
reflected in the data which shows a steep growth in unsecured loans of 53% between 2010 and 2011. Moreover, the data shows that ¾ of unsecured loans consist of loans more than R15, 000 and more than 60% of the loan value goes to low-middle income earners (people earning less than R10, 000 per month). The most worrying aspect of the growth in unsecured loans is that the funds are used for immediate consumption in most of the cases, and also to service or repay existing debt (The National Treasury, 2011; Mittner, 2013; Aregbeshola, 2014).
It is also important to note that according to Raath (2018) there are individuals who benefit from developmental credit when qualifying, for example, for educational loans or low income housing. Developmental credit is financing for a specific prescribed purpose (one of which is for the development of a small business) but otherwise applies in principle to any type of borrower, any type of credit agreement for any amount [s10]. For the prescribed purpose
“development of a small business”, “small business” is defined in the NCA with reference to the National Small Enterprise Act (102 of 1996) and, therefore, may only be granted to those small businesses that qualify.
A “small enterprise” is defined as a separate and distinct business entity, predominant in certain economic sectors mentioned in a schedule and classified as a micro, very small, small, or medium enterprise according to criteria in the schedule [s1]. Since this definition limits the meaning of “small enterprise” to a separate and distinct business entity, it legally limits developmental credit to qualifying companies and close corporations. In general legal terms these are the only legal entities with separate legal personality and qualify, therefore, as separate and distinct business entities. The effect of this is that a sole proprietor, partnership, association, stokvel or (any) business trust (all relevant in the small business market but which are not “separate and distinct business entities”) do not qualify for NCA developmental credit, as these do not meet the definition criteria of a “small business” (Raath, 2018).
The above covered an overview of the NCA and the influence on small business lending.
Whilst the initial intention may have been to regulate the sector and provide a platform for the development of SMMEs, the benefit of the development of SMMEs is not evident.
Whilst the protection of borrowers is clear from the above literature, the downside is that there is less access to credit, as it appears that the granting of credit has become more cumbersome and expensive for credit providers since the implementation of the NCA. Overall, access to credit remains persistently inadequate (Raath, 2018).
Turner et al. (2008) notes that the NCA has a profound effect on the SMME lending market overall in South Africa. This is considering that the majority of the smaller businesses are sole proprietors which mainly use consumer loans to finance their business. Based on this assumption, the NCA’s reckless lending provision may restrict credit to sole proprietors despite the exemptions for small businesses (Turner et al., 2008).
The above summarizes the influence of the NCA on credit lending in South Africa.