The Lending Spree before the Rate Cap

Since the government announced that it would be capping maximum loan interest rates and fees six months ago, unsecured credit jumped by nearly 30%. This may suggest that lenders were milking existing charges before the cap was enforced. The National Credit Regulator’s (NCR) Consumer Credit Market Reports (CCMR) show that unsecured lenders went on a lending spree in the months prior to the enforcement of the cap.

‘Credit growth spiked after caps to loan fees and rates were proposed’

Lending Spree

For the quarter to December 2013, unsecured credit growth was at more than R21 billion. However, credit growth shrank during 2014 to the start of 2015. It then spiked during the six months leading up to December 2015. It is no co-incidence that this spike occurred at the end of June – directly after the Department of Trade and Industry (dti) published the draft recommendations on caps to fees and interest rates.

In those draft recommendations, the dti proposed that the maximum interest rate for unsecured credit be cut to 24.78% from 32.65%. Similarly, extension of short-term loans also spiked after the lower cap was proposed.

‘Lenders went on a lending spree while interest rates remained high’

Tighter Credit Taps

Unsurprisingly, credit providers were outraged, complaining that this would force them to tighten credit taps. Thus, consumers would turn to informal lenders and loan sharks out of desperation. Lenders then proceeded to go on a lending spree. Likely in an effort to extend as much credit as possible while interest rates remained high.

The NCR’s data shows that bigger loans extended over longer terms jumped during these six months. Consequently, it was decided that the maximum interest rate for unsecured credit should be adjusted to the repo rate + 21%. Currently, this would add up to 28%. In November 2015, the dti published the final regulations, which came into force in May this year.

‘Unsecured lending fell after the six-month lending spree’

Fall in Unsecured Lending

As expected, unsecured lending fell by 16% to R18.9 billion during the first three months of 2016. Presumably due to credit providers pulling back in the wake of a six-month lending spree and weaker economic conditions. The total outstanding gross debtor’s book also reflects this lending ramp-up, revealing that many loans have yet to be repaid.

‘New regulation requires all lenders to register with the NCR’

New Threshold Regulation

Another new regulation requires that all lenders register with the NCR. Before this, only lenders with loan books totalling R500 000 or 100 credit agreements had to register. But this threshold has been done away with.

“Consumers are advised to obtain credit only from duly-registered entities, as doing so will advance their rights as provided in the National Credit Act. Consumers who are in doubt about the registration status of any entity can contact the NCR for verification,” NCR senior legal advisor Nthupang Magolego said.

Nonetheless, many smaller lenders operating out of car boots and so on continue to dodge registration.