The
act seeks to eliminate reckless granting of credit. That included extending
credit to people that can’t afford to pay it back as well as increasing
credit limits more than once a year without the express, written permission
of the customer.
On the affordability front, it falls to the credit provider to check
whether the customer is capable of repaying the credit at the rates
of interest and in the period stipulated.
According to Lauren Kleynhans of TransUnion, one of South Africa’s
largest credit bureaus, one of the best ways of accessing a customer’s
likelihood of delinquency or, conversely, propensity to pay, is to use
the information collected over recent years by the various credit bureaus
database together with your own customer information.
That seems obvious –in a negative way, in terms of people defaulting
on payments .Yet, surprisingly, of the 18 million credit-active consumers
on credit bureaus database, 85% have entirely positive record.
“Most people don’t know it, but they should actually want
to be listed on credit bureaus because having a positive record there
is one of the best, objective ways to prove your credit-worthiness,”
Lauren says.
But be aware that your business must have the permission of the customer
to access his or her credit record with the bureaus.
Also, while the credit bureau will tell you that a customer has a track
record of good payments and the amount of debt to which the customer
is exposed currently, it can’t always tell you whether the customer
can afford the new debt he or she {or the small business you’re
dealing with}is about to incur you.
So you will need to ask the customer directly for information about
his or her income as well as monthly expenditures. In the case of a
customer, the expenditures would include items such as bond or rentals,
school fees, groceries, medical aid, and taxes. For businesses it would
include salaries, taxes and other regular, measurable costs that are
not related to credit agreement.
“Only at this point can you make a realistic assessment of the
affordability of the credit you want to grant to the customer,”
Lauren says. “And it is at this point that you could adjust the
repayment schedule-most likely by extending it, so that the customer
pays smaller monthly amounts over a longer period of time. Interest-wise,
it’s more expensive for the customer, but it does allow him or
her to make immediate lifestyle improvements that would otherwise be
impossible.”
Remember that the regulator will deem the credit to have been recklessly
granted if you don’t do the affordability check. The fine can
be up to a million rand or 10% of your turnover, whichever is the greatest.
Credit increases
When
it comes to increasing credit limits, the Act limits you to the one
automatic increase a year-and the rate of interest on the credit is
capped.
Also, you may not offer unsolicited increase in credit. The customer
must ask you for an increase and you are obliged to explain the implications
of the increase as well as any new terms or interest rates that will
accompany it. And even then the deal is not done unless the customer
signs an agreement with you for such an increase.
In other words, the onus is on you to ensure that the customer understands
fully what he is asking for and how his behavior will have to be modified
to get what he wants.
In fact, consent is the basic component even of entirely new credit
agreement. And, again, the onus is on you, the business person, to ensure
that the customer understands everything about his or her obligations
under the agreement. The customer must be made to read the small print-and
it must be explained in detail by the sales person involved.
This implies, of course, that your sales people will have been educated
not only on the small print in the agreement but also on the underlying
principles of the Act and of the rights of the consumers or customer.
Brian Taylor, general manager of Forms Independent, adds another warning:
anyone who signs a surety ship included with a credit agreement might
well be signing it in his or her personal capacity-and can be sued in
that capacity.
So, be very cautious about the ways in which you grant or give credit-and
to whom.
Not
to scary
That’s
not to say that granting credit needs to be too scary.
As Lauren Kleynhans says, it’s simply a matter of finding other,
perhaps more mature, ways to make credit available.
Cecily McNamara, group credit manager for Antalis, agree-particularly
when a customer decides to buy more stock than usual to prepare for
an anticipated increase in demand or to replenish products on which
there has been a sudden run.
“Previously, most businesses would just have ridden out the situation
with the customer. Now, what we’re going to do is immediately
send a letter to the customer alerting him to the fact that he has,
in effect, asked for a new credit limit-and stipulating the new credit
limit, interest rate and repayment period.
“That way you stay on the right side of the law because the increase
was initiated by the customer-and you keep the customer officially informed
of the implications of his increase.”
Unavoidable price increase that will push customers over agreed limits
seem to be a grey area in terms of the way you handle what is, in essence,
a credit increase initiated by the business rather than the customer.
Cecily’s suggest that the best way to keep your nose clean on
that one is to notify the customer of the fact that the increase in
price will probably make the customer’s credit limit inadequate
and to ask the customer how he would like the situation handled. In
this way, the customer has the option of formally requesting more credit.
If you want something more iron-clad, best you take formal legal advice.
Liquidations-the
dodgy side of credit-granting
One
of the big problems of allowing customers to increase their credit limits
too much is, of course, the risk of liquidation of those customers.
Which brings us back to the issue of affordability and your checking
that customers have the means to make payments.
Brian Taylor says you can usually tell when a retail business is setting
itself up to cash shortages by the size of its margins. “With
today’s rising interest rates and rental space as high as R500
a square meter, the only way for a retailer to stay cash flush is through
sizable margins. So if you see that a retailer’s margins are very
low, be cautious of providing him with excessive credit. In the long
term, he’s not going to have the cash to pay you.”
Brian also takes a tough line on customers who don’t pay their
accounts, particularly if the customer is a business.
“Never be afraid of putting that account on hold-because it is
costing your money. There’s no value for you in hanging on to
customers that can’t or won’t pay.
“And if you’re worried about offending the customer by putting
his account on hold remember that, in a lot of businesses, the person
who orders the goods is not the person who pays the account. So you’re
not embarrassing the buyer with whom you have a relationship. You’re
simply forcing the person who pays the accounts to ensure that you get
the money to which you are entitled.
“Besides, your customer is not your master and you are not his
slave. The exchange of money for a product or service is an exchanged
of equals. These are rights and obligations on both sides. If you honor
yours, he must honor his.”
The National Credit Act (NCA) is a new South African law that comes
into effect on 1 June 2007. This legislation is intended to protect
consumers against over-indebtedness by tasking companies providing credit
to consumers to carry out additional affordability checks before granting
them new or additional credit. The Act will be applicable to all institutions
which provide credit either to consumers or to their suppliers
The Act introduces new rights for consumers, as well as measures that
allow consumers to make informed decisions before buying goods and services
on credit.
It also places a greater responsibility on credit providers to refuse
to give you credit if you cannot afford it and, for the first time in
South African history, it will regulate the way credit bureaus do business.
The reckless granting of credit is prohibited under the Act.
Reckless credit is when a credit provider gives you a loan or other
credit without assessing whether you can repay the loan and even if
you do not understand or appreciate the risks, costs or obligations
under the credit agreement or if the granting of the credit leads to
you becoming over-indebted.
Credit
providers will need to review their existing credit agreements if these
will be used in the future as some of the normal contractual terms used
by attorneys in these agreements will not longer be allowed. Credit
providers will also have to review their existing debt collection and
enforcement procedures by 1 June 2007.
Which transactions fall under the Act?
• Banks:
• Loans
• Mortgages (home loans)
• Overdrafts
• Credit cards
• Vehicle finance
• Any other personal finance
• Retailers:
• Furniture finance
• Clothing accounts
• Any other type of credit from retailers
•
Other categories:
• Micro-loans and pawn transactions are also included
• Any other type of credit or loan provided to a consumer
