There is a light at the end of the tunnel for over-indebted consumers

Consumers have become so over-indebted that any additional credit lines are starting to run very thin Photo:

Consumers have become so over-indebted that any additional credit lines are starting to run very thin Photo:

Published Sep 3, 2023


According to the National Credit Regulator’s (NCR) Credit Bureau Monitor for March 2023, South Africa currently has 27.07 million credit active consumers with 90.44 million accounts in the country. The number of consumers with impaired records increased to 9.82 million whilst the number of impaired accounts increased from 19.09 million to 19.13 million. It further indicates that 6.8% of consumers missed one or two instalments, 16.05% missed three or more, 4.25% had adverse listings and 0.86% had judgements or administration orders. The NCR is a South African government agency that regulates the credit industry in the country.

“It is obvious that consumers are struggling financially,” said Obed Tongoane, former deputy chief executive officer of the National Credit Regulator and now director at Welltec Group. “This is exacerbated by factors such as the high-interest rates that the SA Reserve Bank, has been setting; increased electricity tariffs, labour strikes with the “no work no pay rule”; increased fuel and food prices; slow economic growth; retrenchments and the hangover of the Covid-19 pandemic.”

As a matter of fact, consumers have become so over-indebted that any additional credit lines are starting to run very thin. According to the NCR’s Consumer Credit Market Report (CCMR) for the period ended March 2023, the value of credit extended decreased by R21.84 billion (13.35%) compared to the quarter ended December 2022. For the same period, the number of credit agreements concluded saw a decrease of 13.04% compared to the previous quarter. For the same period, the number of applications for credit which were rejected increased from 68.73% to 70.07%.

The current situation has led to most consumers finding themselves in a spiralling debt frenzy, said Tongoane. “As the saying goes, many “borrow from Peter to pay Paul”.

The increasing rejection of applications as the CCMR showed, is driving consumers to seek refuge with unregistered loan sharks, who charge exorbitant interest rates and use unscrupulous and unlawful collection methods, he said.

“It has further been established by various media reports that the debt trap can cause health problems; drug and alcohol abuse; depression; suicides; absenteeism; employee fraud and family breakdowns amongst others,” he added.

His statement is based on an article titled “Reducing Debt Improves Psychological Functioning and Changes Decision-making in Consumers’ minds” published by The Proceedings of the National Academy of Sciences (PNAS), a peer-reviewed journal of the National Academy of Sciences in March 2019,

But Tongoane said that not all hope should be lost as there are various legal mechanisms for financially strapped consumers to break free from the confines of credit.

The Insolvency Act, the Magistrates Court Act and the National Credit provide for various legal avenues available to consumers. “The Insolvency Act provides for the sequestration process whilst the Magistrates Court Act provides for administration orders. The National Credit Act (NCA) on the other hand provides for alternative dispute resolution and debt counselling,” he said.

Should a consumer apply for debt counselling in terms of the NCA, a debt counsellor will assess his/her financial situation and make the following determinations:

  • the consumer is not over-indebted and rejects the application;
  • the consumer is not over-indebted but is nevertheless experiencing or likely to experience difficulty satisfying his/her financial obligations in a timely manner. In this instance, the debt counsellor may recommend that the consumer and the respective credit providers voluntarily consider and agree on a plan of debt rearrangement.
  • the consumer is over-indebted, which will entail making a proposal to the Magistrates Court.

Tongoane said it is important to note that in terms of certain sections of the Act, a consumer who had applied for debt review is precluded from further credit except for a consolidation loan. “A number of consumers are also apprehensive of applying for debt review since they might need further credit for daily needs like school uniforms and fees and basic household expenses,” he stated. “Consumers who would like to structure a plan for debt rearrangement our unfortunately left stranded at present since they are required to engage with each of their credit providers separately. It is encouraging to note that there are some initiatives taking place under the umbrella of the Banking Association to make this process more accessible to consumers.”

In a research study commissioned by the Portfolio Committee of Trade and Industry and Competition, it came to light that there are consumers who cannot be assisted through the existing legal mechanisms. This resulted in Parliament promulgating an amendment to the NCA, which introduced Debt Intervention for consumers with unsecured credit of up to R50,000 and gross income of up to R7 500. The Act is not yet operational.

This has created an opportunity for Financial Wellness Companies to assist indebted consumers in more ways than one. One of the ways is through debt consolidation - where multiple loans are consolidated into a single loan with possibly a lower interest rate. The Financial Wellness Companies also stand a better chance of negotiating discounts with credit providers during the consolidation process.