SA a debt timebomb, warns expert

Cape Town - Some credit providers allow consumers to use up to 70% to 80% of their monthly income to repay debt and this practice is reckless and immoral, Octogen director Paul Slot charged on Tuesday.

Slot said consumers who allocate more than 40% to 50% of their earnings to service debt may battle to meet normal household expenses. 

In South Africa, the total consumer debt has increased by 22% over the last four years and is currently at R1.39 trillion.

The amount of credit active consumers increased by  8.5% to 19.69 million over the last four years, with 47% being behind in repayments.

Also, unsecured debt has increased by 156% over the four year period and this results in increased short term debt, more expensive debt and a higher monthly debt repayment, according to Slot.

Although credit providers refute talks of a consumer debt crisis, the fact remains that millions of consumers are in crisis mode and need assistance, said Slot.

Why is it so difficult to rectify this position? 

"Many consumers are in a crisis mode simply because they do not have sufficient funds to service debt after paying normal household expenses.

"Any shock to the ability to repay debt such as cost of credit, price increases, salary increases, value of assets financed or unemployment will aggravate the situation," said Slot. 

For most consumers tackling a debt problem is a daunting task and it can take several years for them to reduce the debt burden.

This may be one of the reasons why so many consumers use new debt to repay existing debt. "This is obviously not a solution but rather an aggravator of the situation," said Slot. 

Slot said excellent progress has been made in South Africa with rescheduling consumer debt and more consumers should make use of the options available to solve their debt woes. 

"In the first place the National Credit Regulator (NCR) allows debt counsellors to pursue reckless credit but a lack of incentives and a dedicated process is a cause of concern.

"Secondly, credit providers have an internal restructuring program and thirdly the current bold industry agreement allows for massive reductions in the cost of credit to the consumer as part of the formal debt review process and this solution should be used by more consumers." 

However, Slot said, an amendment to the NCA is long overdue, but active support of the NCR and the government could improve the effectiveness of implementing the formal debt review process, which includes the industry agreements. 

Currently consumers under debt review pay R300m a month to credit providers, however, many consumers who entered into debt review a few years ago are now debt free.

Slot said a solution that has been implemented with great success in other countries is "out-of-court restructuring of all debt" but this solution is not available to consumers in South Africa. 

Where consumers are not able to repay debt over a reasonable period, a “poor man” sequestration is also not available in terms of current legislation, added Slot.

By: 28E Capital (Pty) Ltd