The second day began with two presentations from two South African delegates, both dealing with two facets of the South African National Credit Act.
The first, presented by Mr. Matome Melford Rabisa was a study of the role of the Act in preventing irresponsible borrowing and lending, viewed in context of the genesis of the global economic meltdown and how it might have been prevented by certain provisions of this Act.
The act aims “to promote responsible credit granting and use and to prohibit reckless credit granting.” Its implementation has received mixed reviews, but its worth can be seen in the light of the economic crisis which potentially may have been averted if the provisions of NCA were employed.
The presentation was divided into three portions, first being a discussion of the U.S. crisis and its beginnings followed by a brief discussion of the concept of securitisation, third coming a detailing of the provisions of the NCA culminating in an analysis of the concepts.
One of the major reasons said to be leading up to the global financial crisis was the crisis in housing that followed massive numbers of subprime loans given by banks to high-risk consumers. Eventually, the bubble burst when borrowers began to default en masse, which lead banks to foreclose on several loans leading to large scale failures of several financial institutions.
The concept of securitisation says “securitisation is a financial technique in terms of which pools of similar claims are grouped together to sell them to an entity established for the specific purpose of acquiring such claims.”
The NCA is aimed at preventing securitisation crises.
Some of the important provisions of this Act include prevention of over-indebtedness of borrowers and reckless lending of lenders at several transactional stages, and if such over-indebtedness is detected, debt restructuring comes into play. If reckless lending is detected then there are penalties imposed. Thus by forcing consumers to live within their means, no point of collapse would come about.
The major point emphasised was the need for regulation of lending practices to prevent situations like the one current from arising.
The second presentation of the day was by Prof. Michelle Kelly-Louw, dealing with the necessity of consumer protection against rapid and repeated hikes in interest rates. Again viewing the fallout of the NCA, she first delineated the objects of the act thus: “to encourage responsible borrowing, the avoidance of over-indebtedness and reckless lending, and to provide for a system of debt restructuring.”
Under this Act, to prevent over-indebtedness, a loan amount is adjudged based upon half a persons net income minus his value of necessities. The determination of loans allowed to be taken is based on data available at the time at which such a determination is made. Where a credit provider makes a proper assessment and finds that a consumer will be able to satisfy in a timely manner all the obligations under all his credit agreements, the credit provider will conclude the credit agreement, e.g., mortgage loan (home loan).
An ‘affordability assessment’ made will depend on the prevailing interest rates at the time. However, there has been a failure to consider what happens if the interest rate increases drastically after the agreement is concluded, causing the consumer to no longer be in a position where he can satisfy his obligations under his credit agreements? These agreements are often in the nature of housing loans, etc.
The increase in interest rates may also cause the consumer to become over-indebted and, in the end, he may even end up, e.g., losing his home. This phenomenon usually occurs in the low-income groups, since, the rich and middle income groups may always downgrade their accommodation but the poor have no choice to go lower from the homes they currently are attempting to buy.
There have been several interest rate hikes over the past few years, causing large practical impact upon low-income house owners.
The South African government provides free housing to certain members of the public, but the people whose homes have been foreclosed upon are not applicable for them since they are meant for those who have never previously owned homes. The NCA has failed to take into its purview cases such as these, and consequently there is no sort of consumer protection available for those who fall into over indebtedness thanks to constantly rising interest rates.
There is a necessity to redress this injustice, but the exact means are yet to be worked out.
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