National Credit Regulator

1. “All progress is based upon a universal innate desire on the part of every organism to live beyond its income.” — Samuel Butler , English composer, novelist and satiric author (1835- 1902). “The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him” — Bentham, British reformer, 1787

2. National Credit Regulator Credit Suisse Standard Securities Gabriel Davel June 2010

3. Current state of the credit market Statutory Statistical Returns submitted by Credit Bureaus & Credit Providers (including banks)

4. Consumer Credit Market in South Africa 18 million Credit Active Consumers Credit Providers R1.1 trillion consumer credit Credit Providers = 4,120 Branches = 33.500 1,730 Debt Counsellors

5. Consumer Credit Market in South Africa Credit Providers R1.145 trillion consumer credit Credit Providers = 4,120 Branches = 33.500

6. Disbursements recovering after significant contraction (from R102bn for Q4’07, to a low of R50.6bn for Q2’09, Recovering to R63bn for Q4’09 and R61bn for Q1’10. Mortgage disbursements contracted most, by 67% from R53.1bn for Q4’07 to R17.6bn for Q2’09. Recovered to R21.1bn In Q4’09 (R20.8bn in Q1’10). Still 60% below the level in Q4’07. Secured credit 2nd biggest contraction (MV & Furn), by 42% from R32.1bn to R18.5bn from the peak to the trough. (R23.7 / R22.4 at Q1’10). Consumer credit contraction … & recovery Gross outstanding balances Credit granted / qtr

7. Housing price changes follows availability of credit … obviously = loose credit, beyond consumer repayment capacity will create bubbles … obviously Mortgage disbursements vs housing prices Mortgage disbursements House price index Consumer credit (balances) Changes in housing prices

8. Credit facilitiescredit flows over last 30 months Contraction in credit cards (bank credit) Store cards and other facilities: maintained levels with some growth, strengthening in recent quarters

9. Credit providers – mortgage arrears Credit bureau – impaired records Consumer stress + arrears… impaired credit bureau records vs mortgage arrears • % consumers with impaired records remain high, but starting to stabilise • Credit providers’ arrears levels improving

10. Credit cards Credit provider arrears ~ debt stress? Furniture • Generally improved arrears statistics from most sub-sectors. Lower stressed categories improving particularly well. • But, caution for effect of w/o & rescheduling … & “the cup” Store cards Personal loans (unsecured) Short term

11. Credit Bureau Statistics

12. Credit Bureau Statistics& impaired records • Debt stress levels stabilising. • Impaired records driven by enforcement action, not arrears. Retention period ~ lag to adjust. • Accounts looks better than consumers ~ better indicator of general position

13. Enquiries by banks & fin institutions Analysis of credit bureau enquiries Credit enquiries vs debt collection All enquiries, by sector Recovery in enquiry volumes (seasonal adjustment in Q1’10) Debt collection action ~ impact on impairments

14. Debt Counselling

15. Reality check: the US Experience • 6 million mortgages delinquent or in foreclosure. 14 million with debt > property value. 100,000 foreclosures per month (2008). • Many programmes, limited success … “Hope Now”, “Mod in a Box”, “HAMP”, variations. Cram Down blocked. • Issues & challenges: Capitalisation without modification. Interest reductions, term extensions, write-downs. Subsidies. Required or voluntary. Temporary and permanent. Limited success with “moral suasion & voluntary cooperation”; Increased repayments after modification; Temporary not converted; Perverse incentives to banks and to consumers. 40%+ re-default after loan modification - McCoy, White

16. Importance & role of debt counselling • Role of debt counselling, in the context of the lack of appropriate personal insolvency mechanisms in SA. • SA does not have appropriate “personal insolvency mechanisms”. Countries like US, UK and most of EU have range of different mechanisms to deal with personal insolvency. The mechanisms in SA are outdated and ineffective. • As result, when debt stress occurs there is no effective mechanisms to resolve the issues, or for creating a “settlement” in which the obligations of the consumer and the demands of different credit providers are reconciled. • The implications for households • Without mechanisms to address debt stress, significant negative social consequences. No mechanism to resolve a personal financial crisis and enable an individual to get another chance. • Without relief, the household income is permanently reduced through debt payments. Basic household needs are not met and social welfare receipts are diverted to debt servicing. It impacts on school fees not being paid, arrears on municipal service payments and a multitude of related areas.

17. 1,730 debt counsellors 176,000 applications, approx 100,000 ‘active’ 9 agreements per consumer R4,029 = ave payment per consumer Payment distribution by independent “PDAs”, specialized, trust accounts, regular audits 600+ “onsite inspections on DCs 80+ investigations  enforcement, deregistration Debt counselling R180 million / month paid to creditors +16% on April R1.9bn since inception

18. PAYMENTS per TYPE of DEBT Payments Per Product • Home Loans = 30% of payments • Vehicle & Asset Finance = 25% • Credit Cards & Personal Loans also significant categories Bank Payments: Payments to banks approx 74% of distributions per month. .

19. DC challenges: matching limited income with living expenses & debt payments Problems • Need personal insolvency mechanism for many cases! • Proving reckless loans difficult • Creditors – trying to recover more than what they would have received in normal legal action! • Cannot solve cases without write-downs and interest reductions!!

20. Established “Task Team” to identify blockages and propose solutions, report finalised Major progress in engagement with credit providers, various proposals made: Bank policies, COB’s, trade-offs between products; Payment arrangements & dr order cancellation. “Restructuring rules”. Clean out defaulters. Credit providers must define own “restructuring floor” … formalise own policies … create certainty for consumers who are complying + act against defaulters Despite challenges, debt counselling made a significant contribution. = mechanism to ‘mediate’ between consumer & creditors BUT = core of problem is in debt stress & arrears that have to “work through system” Task Team

21. Despite all the challenges … Despite all the challenges, the vast majority of consumers feel that debt counselling assisted them in dealing with the problem Survey by AIA

22. Compliance & enforcement Challenges, targets … Housing scams, fraud Microlenders – ‘emergency loans’, fees, re-advances Credit life insurance, bridging finance Debt counselling Providers ~ terminations, policies Counsellors ~ time lines, bad apples (payment distribution) Fees on pre-existing loans (retailers & banks) Pre-agreement disclosures & advertising Payroll deductions … & medieval contracts Debt collection practices … massive abuse … scams of various kind

23. Concluding comments • Impact of NCA: curbed excessive credit extension, creating basis for lower but more sustainable credit growth, curbing social cost of reckless lending • Debt counselling – reconcile claims of different credit providers, to create a sustainable repayment stream on non-performing consumer • While minimizing social cost, • BUT, significant implementation challenges … & debt counselling can’t erase debt stress • Impact of financial crisis continues, driven by reductions in income as much as loss of employment. Contraction in domestic credit had a significant negative impact, aggravating domestic position • Protection of households important priority, not just on protection of industry, • impact differently for different consumer groups • household solvency & buying power critical to economic health

24. Francis Bacon (1625)… “By the balance of the commodities and the discommodities of usury, two things are to be reconciled. One, that the tooth of usury be grinded that it bite not too much; The other, that there be left open a means to invite monied men to the merchants, for the continuing and quickening of trade.”

25. Thank You ! www.ncr.org.za

26. Background

27. Impact of the NCA since implementation? Significantly improved disclosure, (quotes require further attention) Change credit provider behaviour through impact of Reckless lending rules & debt counselling; Courts’ approach in enforcement action Massive change in credit bureau conduct Success through early enforcement action: e.g. Rudco finance, various housing scams; enforcement & redress Research: improvement in interest rates & credit life insurance Interest & fees Reckless lending rules Marketing & sales practices National Credit Act Enforcement & debt collection Agreements & quotes Unlawful agreements, provisions Debt counselling Credit Bureaus National Credit Register National Credit ActScope, objectives … impact?

28. Disclosure: standardized, comparable, early. Prescribed content & format. Enable price comparison. Negative option marketing prohibited, automatic increases in credit limits curbed. Reckless credit: Require affordability assessment. Define reckless credit, affects enforceability. Protect responsible lenders. Preferences & anti-competitive conduct prohibited, monitored. Interest rates & fees: Change basis of disclosure. Upper limits on interest & fees. Limit add-ons. Penalty interest + prepayment penalties removed. Debt collection fees regulated. Curb incentives for ‘debt farming’. Agents & brokers, different disclosure requirements. Market conduct changes …

29. Credit providers, registered, compliance audits, monitoring Debt counselling to restructure income, rehabilitate consumers. Credit bureaus, registered, monitored … regulated. National Credit Regulator, to monitor & enforce. Compliance reviews by auditors; investigations; market practice reviews, compliance notices. penalties through Tribunal (“special court”). National Consumer Tribunal, decriminalised contravention, with ‘special court’ Institutional changes …

30. Statistics & Research Debt Counselling monitoring &support Credit Bureau Regulation National Credit Regulator Department of Trade & Industry Departments of Finance, Housing & Social Development Board of Directors 100 staff members budget approx. R70 million pa

31. Reduced cost in most high cost segments + reduced credit life insurance Disclosure + consumer pressure Without negative option marketing, greater debt run-off Reckless rules + prohibition of preferences greater focus on affordability Change in mortgage & motor vehicle lending, to consider all debts and repayment capacity Debt collection practices much more restrained, increased economic basis, less predatory Dramatic change in court’s treatment of cases for debt enforcement Scrutiny of credit provider behaviour; Repossessions; Default judgments; Reckless lending practices Debt Counselling create statutory mechanism to deal with impact of fin crisis; In response to fin crisis, credit providers consider debt restructuring as 1st choice, rather than repossession NCR monitoring & enforcement action Credit bureau - weaknesses in data management Predatory lending to strip housing equity “Loan sharks” Debt counselling NCR statistics allowed more detailed assessment of impact of fin crisis; NCR focus on consumer credit market enable pro-active response Impact since implementationDramatic change in all aspects of market behaviour, impacting both on prices & debt stress