Although the impending credit amnesty is aimed at making it easier for credit adverse individuals to obtain finance, South African banks are still likely to become even more conservative with their lending practices as the banks and other lenders have placed huge reliance on credit information from the credit scoring agencies. High net worth property owners (HNW), who have previously struggled to obtain a loan due to their impaired credit file, may continue to struggle to obtain finance, even if they possess the assets for security.
According to Gary Palmer, CEO of Paragon Lending Solutions, a private non-bank lender, the increased risks of not knowing the history of the client can potentially result in delays in obtaining finance from the banks and may increase the costs to finance the loan to cover their risks.
“The banks already have strict lending criteria due to new regulations, such as Basel 3, which have already resulted in delays in loan approval times. If the new legislation is passed, the banks will tighten up even further, in order to protect themselves, if they are uncertain about a client’s capacity to repay a loan.
He explains that a previously impaired credit property owner may have the assets to secure finance for working capital or for buying property, but the new amnesty will mean that the banks will have to look at their credit granting processes with more scrutiny, as well as do more background research, to ensure that they are approving the loan to a low risk client.
“These additional delays can potentially result in a client missing out on a deal, as they may require the finance in a short space of time to secure a property, or other financial transaction, even though their previous debt obligations have long been settled.”
Palmer says HNW property owners need to employ strategic resources to obtain their desired loan and avoid falling into bad debt. “Private non-bank lenders are usually smaller businesses who are specialists in their field and have the capacity to determine a client’s needs and if their assets and situation stand them in good position to obtain a loan.
“Each client’s situation is taken into account with the aim of providing them with access to time-sensitive transactions using their asset as collateral.”
He adds that due to the probable increasing debt costs, as well increasing living costs, private lenders are primed to remind their clients of their debt obligations and assess if they are able to afford the long-term costs of the loan to prevent a reoccurrence of bad debt.
Palmer points to the latest survey released by TransUnion, which indicated that South African consumer credit health declined to 43.4 in the third quarter of 2013 from 44.8 in the second quarter. The TransUnion SA consumer index measures consumer credit health where 50.0 is the break-even level between improvement and deterioration. It has fallen from 63.6 in the fourth quarter of 2010.
“The index reflects a growing concern that consumer defaults continue to decline and highlights the need for more education and personalised services to reduce the risk of impaired judgements from reoccurring across all income groups.”
Palmer adds that the credit amnesty legislation can have a beneficial effect on the economy if government creates a process to slowly introduce blacklisted and impaired credit consumers are provided with free debt counselling and financial management skills. “These services will go a long way to preventing a repetitious cycle of bad debt from occurring, as opposed to simply allowing consumers to obtain additional credit.”
He also says that the industry needs to encourage their clients to regularly review their credit worthiness to see if there are any areas that can be improved. “Lenders should work strategically together to refer clients to the appropriate financial specialist where necessary, and must encourage consumers to pay off their existing debts, avoid late payments and to promote debt counselling if poor debt payments habits are displayed.” concludes Palmer.