The South African Savings Institute (SASI) launched its annual Festive Season Savings Campaign in a year where the demise of African Bank highlighted that the escalation of arrears has reached levels previously unknown of in unsecured lending to credit-hungry South Africans. Prem Govender, Chairperson of SASI, says, “We not only have to develop a robust culture of saving in South Africa, but we also need to educate consumers about the pitfalls of giving in to easily accessible credit they simply cannot afford. The Festive Season is a particularly vulnerable time for all income brackets and consumers need to remember the demands that the New Year will bring.”
Panellists from SASI, the National Credit Regulator (NCR, the Financial Planning Institute (FPI), the Bureau of Market Research-UNISA and the National Consumer Education Committee representing the Provincial Offices of Consumer Protection, presented research insights and discussed South Africa’s savings and credit landscape in light of the upcoming Festive Season pressures.
The Consumer Financial Vulnerability Index indicates that the pressure on consumers’ cash flow has remained consistently high throughout 2014. International and domestic uncertainties as well as disruptive events such as labour strikes, contributed to the dampening income levels, negatively affecting consumers’ cash flow decisions.
“Debt to disposable income in South Africa has almost doubled from 1980 to 2013, from 41.9% to 75.2%. As the savings rate fell in the same period, indebtedness rose significantly,” says Govender. “South Africans continue to spend more than they earn in an environment of growing inflation and rising interest rates. This is compounded over the Festive Season when money is used to celebrate rather than being put aside for unavoidable New Year obligations such as equipping children for school, getting to work, medical expenses as well as food costs. Consumers are also tempted by offers of credit such as store cards and short term loans. They then mismanage this debt, incurring high interest rates and becoming further indebted.”
It is clear that consumers are inundated with offers of quick and easy cash, and much has been made of the unsecured lending industry in South Africa. Reserve Bank data shows a massive increase in South Africa’s exposure to credit in the private domestic sector. From 1994 to 2010 sector increased from R230 billion to close on R2.1 trillion.
Against the background of this credit crunch, the South African government has implemented a credit information amnesty from April 1 this year, giving all consumers a fresh start with a clean credit record. At the same time, draft regulations on more stringent affordability assessments that credit providers will have to undertake before they grant credit to customers were published by the Department of Trade and Industry for public comment before the end of August, and will soon come into play. In the meantime, the exploitative behaviour of lenders makes them increase their credit offers to cash-strapped consumers.
“Credit mismanagement remains a threat to the accumulation of household savings. We are however, encouraged by the reforms relating to credit,” says Govender. “Responsible spending over the season – without incurring debt – is vital for the long-term financial wellbeing of South African households. Our message is simply to remind consumers to spend wisely, avoid unnecessary consumption expenditure and the credit trap.”
The Consumer Credit Market Report issued by the National Credit Regulator (NCR), offers insight into how much credit is being granted nationally, and provides data on SA’s total debtor’s book. The report shows that the nation is becoming increasingly indebted. The total value of new credit granted increased from R105.60 billion to R107.19 billion for the quarter ended June 2014, an increase of 1.50% when compared to the previous quarter but a decrease of 2.21% a year ago. However, the number of applications for credit increased by 7.21% for the quarter.
The total outstanding gross debtors’ book of consumer credit for the quarter ended June 2014 was R1.57 trillion, representing a quarter-on-quarter growth of 1.16%.The banks’ share of total credit granted was 81.31%. Other credit providers, including micro-loan lenders, are at 8.13%m followed by non-bank financiers at 6.53% and retailers at 4.03%. Unsecured credit agreements and credit facilities which consist mainly of credit cards, store cards and bank overdrafts increased by 2.64% and 2.31% quarter-on-quarter, while Short-term credit showed a quarter-on-quarter increase of 4.75%.
The 2014 Finscope survey reveals that 4.9 million people are showing signs of over-indebtedness, an increase from 4.7 million in 2013. The use of personal loans from a bank is on the increase with 1.6 million people in 2014 compared to 1.2 million in 2013. 36% of adults have formal credit facilities from non-bank financial institutions which could be in the form of store cards, hire purchase (HP) credit, cellphone contracts and outstanding balance for a service offered. The survey further indicates that borrowing from family and friends is on the increase at 3.7 million in 2014 up from 1.8 million in 2013.
“When it comes to consumer credit, it is clear that South Africa has its back against the wall,” says Govender. “Reserve Bank stats show that a significant number of consumers use much of their disposable income to service debt and that unsecured lending is what is largely driving the debt spiral. Consumers are also turning to the financial sector to take advantage of unsecured borrowing, in part to pay for essential costs such as food and paying utility and medical bills.” In an environment where incomes are not increasing in tandem with households requirements, this poses a threat to consumer’s welfare if they cannot service their debts in the required time.
According to Govender, it is imperative that consumers are aware of their rights and responsibilities when entering into credit agreements. “Consumers must know that they cannot be charged excessive interest by credit providers. At the same time, we are encouraging consumers to take control of their finances and advising them not to enter into credit agreements when they know they will not have the financial capacity to repay their loans. Otherwise they compromise their welfare and that of their families. We strongly encourage consumers to use the services of financial advisors, who are doing pro-bono work in selected areas during the Festive Season.”
The 2014 Finscope shows that while there has been an increase in the salaried adult population in 2014 (7.2 million in 2004 to 12.4 million in 2014), there is also an increase in dependence on government grants (19% in 2004 to 30% in 2014). 78% of the adult population earned an average personal monthly income of less than R2 000 per month in 2014, and only 44% of the salaried individuals have any long-term savings or retirement products.
Govender highlights that with interest rates increasing in an inflationary environment, the cost of living will continue to rise. The New Year will bring new tax implications that consumers need to be aware of. “While it is encouraging that the current tax reforms and policies which incentivise savings and the creation of long term wealth, a potential tax increase in the new year to service the goals of the Medium Term Expenditure Framework will hit consumers hard, particularly the emerging middle class,” says Govender.
The final word comes from the Deputy Minister of Finance for South Africa, Mr Jonas Mcebisi. “With no savings, households are likely to borrow more to deal with shocks to their income and expenditure. The danger is that excessive debt tends to linger and negatively affect our self-esteem. Let us save, even if it is little money from the various grants we get, rather than get into debt.”
The Institute will together with the Provincial Offices of Consumer Protection and the Financial Planning Institute spend the month long campaign conducting consumer education workshops in key strategic areas and Provinces round the country.
Tips to survive the festive season
1. Resist SALE, think SAVE! Clearly distinguish between needs and wants.
2. Make your own Christmas gifts and only take holidays you can afford.
3. Have a clear budget for your requirements in the New Year. Create a budget using the SASI budget tool.
4. Use free online tools to track your spending and debt and know where every cent of your income goes.
5. Pay cash for all purposes and don’t be trapped by easy credit – in fact, cut up those store credit cards!
6. Visualise what you want to save for and start saving more. Save your bonus and make it multiply.
7. Service your debt and stick to the payment terms. If you cannot service your monthly debts discuss your situation with your credit providers before it is too late. Consumers can seek assistance from a registered debt counsellor by contacting the NCR on 0860 627 627.
Avoiding the credit trap
The cost of buying on credit, even for a short period such as two years, can result in a consumer paying the effective interest of double the quoted price. The maximum interest rate allowed by the National Credit Act is 21% a year. Once initiation fees, monthly premiums for compulsory credit life insurance, service fees and VAT have been added, R5000 spent on credit today at a large retail store may cost between R6 200 and R9 000 by the time the debt is repaid over 24 months. It’s better to pay cash, or even consider that if the instalments were paid into a saving vehicle, you can end up multiplying your cash.
Credit also needs to be carefully managed. According to the National Credit Regulator, almost half of all credit-active consumers have impaired credit records and 9.53 million consumers are in arrears by three more months or more, or have judgement or administration orders against their names.
Contacts for interviews, photographs and information:
Samkele Kaase, firstname.lastname@example.org, 010 594 4629, 072 623 5795, 079 713 4466
Issued on behalf of:
South African Savings Institute, +27 (011) 269 3789