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Ограничение процента кредита Южной Африке не помогло

The Russian Government is discussing a proposal on the administrative limitation of maximum interest rates on consumer loans. The reason is the state’s concern regarding citizens who fall into debt to banks and micro finance organizations. One of Russia’s partners in BRICS – South Africa – already has experience of such a solution. The HSE Center of Development published an analysis of this case in its ‘Banks: Statistics and Economics’ newsletter

Consumer loans in South Africa are regulated by a special framework National Credit Act, adopted in 2005, and a sub-legislative act on National Credit Regulations, adopted in 2006.

Creation of a fair and transparent credit market was the main aim of this act, which included regulation of credit organizations and borrowers’ rights protection, as well as standardization of forms and limitation of loan values. As a result, this was supposed to promote economic and social wealth for all South Africans. But what actually happened?

The rapid growth in the popularity of unsecured consumer loans (including credit cards and overdrafts) in South Africa mainly resulted from the widening gap between rich and the poor in society. If we look at the Gini index, in South Africa it’s the highest among all BRICS countries, and, according to the World Bank, it was 63.1% in 2009. For comparison, in Brazil this index was 54.7%. As a result, the availability of loans on one hand, and the desire to live ‘no worse than others’ on the other hand, became powerful drivers of consumer loans.

But people with a low income, who are often the target of such loan programmes, due to their financial illiteracy, pay little or no attention to such indicators as the interest rate – a situation made all the worse because loan providers can hide the real price of the offered loan in the small print of the contract. Largely due to these reasons, the South African government attempted to adjust the laws to real life conditions, trying, on one hand, to systematize the credit process, and on the other hand, to limit the financial load on borrowers.

As part of this approach, maximum levels of interest rates, commissions for application and loan servicewere fixed for various types of credit. The rates are calculated on the basis of the discount rate (repo) in South Africa, which has been set at 5% since July 19, 2012.

Table 1. Maximum interest rate and commission for application for different types of consumer loans

Type of loan contract

Maximum interest rate

Maximum commission for application

Mortgage/bond loan

(repo* 2,2) + 5%

1 000 rand + 10% from amount above 10,000 rand (up to 5,000 rand)

Credit lines (credit cards)

(repo* 2,2) + 10%

150 rand+ 10% from amount above 1, 000 rand (up to 1, 000 rand)

Unsecured loans

(repo* 2,2) + 20%

150 rand + 10% from amount above 1, 000 rand (up to 1, 000 rand)

Small loans

2% a month

-

Credits for development (residential loans for low-income people)

(repo* 2,2) + 20%

500 rand+ 10% from amount above 1, 000 rand (up to 2,500 rand)

Short-term loans (up to 6 months and 8,000 rand)

5% a month

150 rand + 10% from amount above 1, 000 rand (up to 1, 000 rand)

Any other types of loans

(repo* 2,2) + 10%

150 rand + 10% from amount above 1, 000 rand (up to 1, 000 rand)

Source: National Credit Regulations

Today, eight years after the National Credit Actcame into force, we can evaluate its effectiveness. Over the period from the fourth quarter 2007 to the fourth quarter 2012, the number of assigned unsecured loans grew considerably: from 1.5 to 3.5% GDP, and the total debt under unsecured loans grew almost four times – up to 5.12% of the yearly GDP in the first quarter of 2013. The share of unsecured loans as part of the total number of loans grew from 7.75% in the end of 2007 to 24.24% by the end of 2012.

Figure 1. Volume of unsecured loans in South Africa, billion rand

Source: National Credit Regulator

The process of credit from banks, micro finance organizations, retailers and other bodies giving loans to the population, led to a growing debt load: the ratio of debt to household revenue grew from 54.8% in early 2000 to 75.4% in the first quarter of 2013.

But the growth of this sector of credit market was reflected not only in the volume of money assigned, but in the expanding range of consumers. According to NCR as of October 2013, the number of people with loans was 16.78 m people in Q2 2007 and grew to 20.08 (which is over one third of the total population of South Africa) in Q1 2013.

But this ‘credit fever’ has had a downside. Over the last six years, the credit status of borrowers worsened considerably: as of Q1 2013, 47.5% of them had doubtfulloans. For comparison, in Q2 2007, only 36.4% of borrowers had doubtful loans.

This statistics looks particularly worryingwhen compared with the data on employment in South Africa. With a total population of 52.98 m people, 33.24 m were in the able-bodied age of 15-64 in Q1 2013. Out of them, 13.62 m had jobs – both officially (9.58) and unofficially, including employment in agriculture and private households. 4.6 m were unemployed, and 2.33 had no hope of finding a job. While the number of borrowers is almost 1.5 times higher than the number of employed, it is unsurprising that almost half of the loans turn out to be doubtful.

Conclusions

The rapid growth of unsecured loans, such as consumer loans, credit cards, and overdrafts, allowed many people in the country to increase consumption of both first-necessity goods and goods of relative luxury.

The growth of consumer loans helped South African economic growth in the 2000s. But it not only allowed the population to solve their financial problems, it lead to new ones – including the inability to repay existing debts.

An infrastructure for effective control over processes of consumer credit was created in the country, and the National Credit Regulatorwas founded.

A new legislative base was created in the country, aimed at protecting the borrower as the weaker party. One of the important points in the legislation is the administrative limitation of the top margin of payments by loan, including the nominal interest rate, as well as commissions, which are part of a closed list.

The implementation of these measures didn’t save households from a growing debt load above the safe level, which is today one of the social problems the country is facing.

The example of South Africa demonstrates that in a developing economy, where the key initial growth driver of unsecured retail credit is the willingness of low-income population to instantly improve their lifestyle, such measures as legislative limitation of the loan service value don’t bring about the desired effect. It happens because the ‘root ofevil’ is not the interest rate size in the contract, but easy access to credit resources for the population, including those used for refinancing existing loans.

 

 

September 03, 2013