Overburdened debtors trek to Banking Adjudicator

Mbongeni Mguni | Friday January 31, 2014 17:35

Overburdened debtors

trek to Banking Adjudicator

MBONGENI MGUNI

Staff Writer

he Office of the Banking Adjudicator has recorded a spike in disgruntled bank customers seeking relief from the consequences of heavy indebtedness, in yet another danger sign the household debt bubble is reaching its break point.

On Wednesday, Bank Adjudicator, Gabriel Maotwanyane told BusinessWeek that even as customers streamed in for help in their over-indebtedness, the absence of guidelines on Financial Hardship/ Difficulty meant little assistance could be rendered for them. Last December, the CEO of South Africa's National Credit Regulator urged the local credit industry to push legislators for the establishment of a credit watchdog, given statistics showing unsustainable indebtedness at household level and the powerlessness of consumers.

'I see this becoming a very serious issue and I spoke about it at the International Network of Financial Ombudsmen conference last year, where grave issues are discussed,' Maotwanyane said.

'These people end up without any alternatives and start defaulting while the bank would usually consider legal options to protect its interests.

'That's when the customers approach us for assistance. The customers maintain that banks are not helpful in any way and the banks on the other hand say there is nothing they can do to help.'

Statistics of complaints handled by the Office indicate that 'financial difficulties/hardships' began being recorded as a separate category of grievance in the 2012/13 reporting year when they comprised three percent of total complaints. However, of the 129 complaints handled between March 2012 and March 2013, 26% were classified to be within the 'personal loans' category and include grievances that in some cases are linked to financial difficulties.

Maotwanyane noted that growing indebtedness was driven by consumerism, lack of education among borrowers on how to manage credit and the tendency for 'quick fixes' when consumers are faced with debt difficulties.

He cited an example of a 'quick fix' solution in which an indebted consumer is able to approach a second or even third financier and access more credit, crippling their current situation.

The Banking Adjudicator also cited aggressive marketing practices by banks where customers are sent messages and letters and are told that they have pre-approved facilities accessible within a certain time period which consumers would want to take advantage of before the time specified lapses.

Another practice is where customers are offered holiday repayments. Even where information is provided that, they would have to repay the 'holiday' interest in the term of the loan, customers never take heed of such contract provisions.

Maotwanyane also pointed out that while most banks have at times engaged private loan consultants to drive sales of credit products, it is unclear whether the agents involved are empowered to educate customers on the dangers of unmanaged credit.

'In Botswana there's a problem of quick fixes which actually deepen consumers indebtedness,' he said. 'There's a story of how some people's payslips look like ised till slips and there are issues of customers borrowing for consumption and not for investment. 'People need guidance and should be taught how to manage their credit portfolios, for example by amalgamating loans to ease repayments when they are in financial difficulties.

'I believe that once you have a mortgage facility, some or all your investments and borrowings could be modelled around this facility in order to avoid over-commitments in different facilities such as personal and school fees loans, as you may use the equity.' The Banking Adjudicator said key to the crisis was greater education of borrowers by the organisations lending the money out. Maotwanyane suggested that even as most banks set aside a percentage of their profits for Corporate Social Responsibility initiatives, legislators should make it compulsory for financiers or other providers of credit to contribute towards greater public financial literacy.

'The modalities can be worked out, but it should cover everyone offering goods and services to the public on credit, as a demonstration of responsibility,' he said.

'Other developed countries have such programmes and guidelines and countries such as South Africa have credit regulators who have programmes of Financial Counselling.'

In his presentation at the International Network of Financial Ombudsmen held last September in Taiwan, Maotwanyane also added that banks could provide Financial Hardship Programmes such as, payment assistance, that is, agreeing to waive late payment or default fees, restoring customers' financial position by moving to interest-only or reduced payments for an agreed period or extending the loan term.

Latest statistics from the Bank of Botswana indicate that by the third quarter of last year, individuals accounted for P1.13 billion of the total P1.55 billion in commercial bank arrears.

Most troubling for the central bank is that the majority of these individual arrears are from unsecured personal loans, which unchecked could lead to stress within the banking sector. Unsecured loans account for approximately two out of every three loans issued by the country's commercial banks.

Week that even as customers streamed in for help in their over-indebtedness, the absence of guidelines on Financial Hardship/ Difficulty meant little assistance could be rendered for them. Last December, the CEO of South Africa's National Credit Regulator urged the local credit industry to push legislators for the establishment of a credit watchdog, given statistics showing unsustainable indebtedness at household level and the powerlessness of consumers.'I see this becoming a very serious issue and I spoke about it at the International Network of Financial Ombudsmen conference last year, where grave issues are discussed,' Maotwanyane said.

'People take loans under affordable conditions, but are then affected by conditions beyond their control such as divorce, industry retrenchments, death in the family, illness or at times lack of planning and recklessness spending. Banks always maintain that people could approach them if they experience financial difficulties, but it appears when they do, they are told to go back and think about what to do.'These people end up without any alternatives and start defaulting while the bank would usually consider legal options to protect its interests. 'That's when the customers approach us for assistance. The customers maintain that banks are not helpful in any way and the banks on the other hand say there is nothing they can do to help.'Statistics of complaints handled by the Office indicate that 'financial difficulties/hardships' began being recorded as a separate category of grievance in the 2012/13 reporting year when they comprised three percent of total complaints. However, of the 129 complaints handled between March 2012 and March 2013, 26% were classified to be within the 'personal loans' category and include grievances that in some cases are linked to financial difficulties.Maotwanyane noted that growing indebtedness was driven by consumerism, lack of education among borrowers on how to manage credit and the tendency for 'quick fixes' when consumers are faced with debt difficulties.

He cited an example of a 'quick fix' solution in which an indebted consumer is able to approach a second or even third financier and access more credit, crippling their current situation.The Banking Adjudicator also cited aggressive marketing practices by banks where customers are sent messages and letters and are told that they have pre-approved facilities accessible within a certain time period which consumers would want to take advantage of before the time specified lapses. Another practice is where customers are offered holiday repayments. Even where information is provided that, they would have to repay the 'holiday' interest in the term of the loan, customers never take heed of such contract provisions.Maotwanyane also pointed out that while most banks have at times engaged private loan consultants to drive sales of credit products, it is unclear whether the agents involved are empowered to educate customers on the dangers of unmanaged credit.'In Botswana there's a problem of quick fixes which actually deepen consumers indebtedness,' he said. 'There's a story of how some people's payslips look like itemised till slips and there are issues of customers borrowing for consumption and not for investment. 'People need guidance and should be taught how to manage their credit portfolios, for example by amalgamating loans to ease repayments when they are in financial difficulties.

'In addition, we are saying banks should look into developing Financial Hardship/ Difficulties programmes guidelines for addressing and resolving customers' over-indebtedness in the same way that we have documents such as a Code of Conduct for banks.'Other developed countries have such programmes and guidelines and countries such as South Africa have credit regulators who have programmes of Financial Counselling.'In his presentation at the International Network of Financial Ombudsmen held last September in Taiwan, Maotwanyane also added that banks could provide Financial Hardship Programmes such as, payment assistance, that is, agreeing to waive late payment or default fees, restoring customers' financial position by moving to interest-only or reduced payments for an agreed period or extending the loan term.Latest statistics from the Bank of Botswana indicate that by the third quarter of last year, individuals accounted for P1.13 billion of the total P1.55 billion in commercial bank arrears.