> Posted by Magauta Mphahlele, CEO, National Debt Mediation Association (NDMA)
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Overall, 2014 was not a good year for South African consumers of credit. Evidence of this is based on statistics from the banking regulators as well as the casework compiled through the work of the National Debt Mediation Association (NDMA) with individuals and mineworkers employed by two of the largest mining companies in South Africa.
The South African economy has remained stagnant, contributing to strikes and retrenchments across the board, especially in the mining sector. For those consumers who were lucky not to be retrenched, factors, such as price inflation, a freeze on bonuses, reduced commissions, and personal circumstances like illness, divorce, and death in the family put pressure on their finances leading many to default on their debt repayments. Despite several regulatory initiatives and interventions, the results of the December 2014 National Credit Regulator (NCR) Credit Bureau Monitor showed that the number of credit active consumers was 22.84 million and of these, 10.6 million (46 percent) have impaired records.
The statistics provided by the regulators are useful, but they offer very little in terms of understanding why individuals struggle so much with debt. The work done by the NDMA in the mines provides an intimate insight into the challenges faced by mineworkers and demonstrates that preventing and resolving debt problems is a complex process that cannot be done on a one-size-fits-all basis or resolved through legislation only.
Between May and September 2014, the NDMA completed an analysis of the credit health of a sample of mining employees in the Rustenburg, Brits, Lydenburg, and Steelpoort areas. This exercise was done through face-to-face interviews with each miner on site. A total of 658 assessments were completed which represents nearly 8 percent of the lower-level staff of the mine concerned.
The results of the exercise showed the extent to which mining employees struggle with debt due to a combination of factors, including excessive borrowing and lending, lack of financial management knowledge and skills, and other socioeconomic issues, like type of households, distance from home, and education levels.
Each mineworker was placed into a category that reflected how healthy or unhealthy his financial or credit situation is. This was done using information gleaned from salary slips, credit bureau reports, bank statements, and information provided by the mineworker regarding monthly household living expenses.
Below are the categories they were placed in.
Of the 658 completed assessments, 422 (64 percent) fell into categories 3 – 5 where employees require some form of debt rehabilitation intervention due to excessive debt levels, negative credit status (judgments, administration, debt review, arrears) or a combination of the two. Many in this category were struggling to meet their monthly living expenses, let alone pay their debts. The remaining 36 percent fell into categories 1 – 2 where employees require minimal preventative interventions as they have manageable debt levels and a clean credit record.
Types of issues miners are struggling with
The graph below indicates that 50 percent of the mineworkers have excessive debt levels that leave them with no surplus at the end of the month to adequately cater for their essential living expenses and debt repayments. Employees in this category are highly stressed and could have job performance problems. Only 32 percent have manageable debt levels and affordability, while the remainder have taken up a debt management remedy and are legally prevented from accessing credit as they are under administration, debt counselling, or have judgments against their name.
The assessments were done during the “Credit Information Amnesty” period in South Africa, and it was clear that there was very little understanding among the interviewees of what the process was about and how it worked. Many do not monitor their credit bureau reports or the impact of their payment behavior on their reports. Each mineworker was provided with his or her credit bureau report which was explained in detail as well as ways to keep one’s record clean or resolve disputed information. This part was usually a wake-up call and kick-started a concerted rehabilitation process.
The study revealed limited understanding of types of credit and the cost of credit, resulting in the uptake of “expensive” or unsuitable credit products. Some mineworkers took out large loans (e.g., R150 000) with the intention to use the money to build a house or buy a car but the money ended up not being used for the intended purpose, thus creating financial and debt repayment difficulties. Although it would have been more affordable to obtain secured vehicle finance at a lower interest rate, some mineworkers said they preferred unsecured loans as banks were notorious for repossessing cars and homes.
Many mineworkers also took out short-term credit, which are loans averaging R8000, payable over six months at 5 percent per month. Most payday lenders offer similar credit, often the most expensive and creating the most hardship as the full amount borrowed has to be repaid the next month. Mineworkers use this as revolving credit that keeps them in a never-ending debt spiral.
Many mine workers have a basic salary that is supplemented by regular bonuses or overtime pay. Usually this extra income is included in the affordability assessment by the credit provider, which creates major problems should the extra pay not be realized due to a work stoppage, strike, or if production targets are not met.
The Department of Trade and Industry has amended the National Credit Act and introduced new regulations that prescribe affordability assessment guidelines that require income to be verified, set minimum expenditure norms per income category, and require credit providers to ensure that consolidation loans are used for their intended purpose. The Amendment Act also alters how debt counselling operates, how credit bureau information is submitted and retained, how consumers can improve their credit profile and prohibits certain debt collection practices. All these measures are meant to address the high debt levels in South Africa.
The Mineworker Credit Health Assessment Project provided the employer and the NDMA with clear insight into the credit health of its employees and an opportunity to design and adopt appropriate interventions. The type of issues that mineworkers and consumers in general struggle with indicates that legislative interventions will on their own not solve over-indebtedness in South Africa. The involvement of employers is a positive step, as resources can be made available to work with individual employees to put them on an assisted path to debt rehabilitation.
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