Cancer begins with the change in the gene of a cell. Debt is a cancer. It’ll change your financial DNA. It grows while you work, while you play and while you sleep. It becomes immortal.
Debt has a place in the corporate capital mix. The tax and leverage advantages of debt within a predictable income structure can significantly enhance early growth and dramatically improve the overall return on capital.
That’s all very well in a limited liability structure where the damage is restricted to the encumbered asset only, where contamination is contained. The very purpose of the limited liability construct is to enable specific risk-taking in a contained way.
Debt is a cancer. It’ll change your financial DNA. It grows while you work, while you play and while you sleep.
Personal debt is a different animal altogether. Even in a mortgage bond, there is a disconnection between the yield of the asset (nothing but a lifestyle) and the income stream which is required to service the debt (your salary), but at most they can only take away the house.
Unsecured, consumption-driven, personal debt is the real cancer of finance. It’s not logical or defensible, but we do it anyway. We want things, and we must have them, now.
Personal over-indebtedness is now a worldwide phenomenon, and it will precipitate another global financial crisis, if not a series of revolutions. Everyone has borrowed a lifestyle beyond their means. Living in advance is the new way, and, ironically, most of us are going to live for longer.
Nobody is left out. In the US, personal debt has been growing practically exponentially for the past five years. In China, personal lifestyle finance debt has grown by over 40% in the past year. Argentina is in trouble. Greece is not out of trouble, and nor is the EU, for that matter. Capital is being withdrawn from emerging markets at an alarming rate. South African consumers haven’t escaped this mess.
There are new influences that will make matters worse than even the current statistics depict. Credit access is available to increasingly younger consumers. There are practically no barriers to entry. Sources of credit have multiplied. Unemployment is rising. Financial services now provide a significant proportion of retail revenue as stores are happy to finance their customers to drive up sales. The store figures look good in the short term
when you combine margin and finance revenue, but eventually, their customers suffocate and sales fall. Credit is everywhere – peer-to-peer is growing, and it’s here to stay.
Easy money was available for everyone in the post-2008 financial crisis stimulus years – happy hour in financial markets. Money was practically free. Of that base, though, a small percentage increase in interest rates had a massive impact on the cost of financing debt.
If interest rates move from 2% to 3% the cost of debt servicing goes up by 50%. At some point, this just becomes too large a slice of your take-home pay. Given that the unsecured debt interest rate is higher than the salary increases you’re likely to get, the prognosis becomes obvious. Lifestyle assets depreciate almost immediately you leave the store and they become worthless and out of fashion long before the loan is repaid. You simply must have the next gadget. You’ll need another loan.
As consumers default, the cost of funding for their financiers goes up. Before you know it, the acceptable ratio of household debt to national GDP (roughly 60%) has been breached, affecting the cost of sovereign funding.
Contagion is inevitable. Once the consumers start failing, a classic death spiral starts for business. As business starts cutting costs (people costs in particular) so the problem becomes exacerbated.
Eventually, the burden falls on governments, which by now also face borrowing limits, increasing required yields on debt and weakening currencies. More cost-cutting, more job losses, even in the public sector, are the last refuge. After that, there is no place to hide.
We will have to go outside the country to get capital. Foreign direct investment is the only way out, even if it means selling stakes in things we’d rather not. External confidence will determine the cost. Confidence founded on a credible growth plan and some quite extraordinary discipline.
The discipline will necessarily have to come from the top, initially, but the cure will only come from the bottom. From us, the parents, convincing our children of the virtue of deferred gratification, ourselves living within an earned lifestyle, not living in advance. We’ll have to ignore the Joneses for a while, who we may find are actually far less wealthy than their watches suggest.
Mark Barnes is CEO of the Post Office.
SA’s Rising Personal Debt Crisis
A decade after the National Credit Act came into being, 16 000 consumers a month are seeking debt review.
SA’s debt distress industry is booming. Some 16 000 South Africans are signing up each month for debt review as allowed under the National Credit Act (NCA).
Whether this is a good or a bad thing depends on which side of the ledger you sit. The number of SA consumers in distress has grown 61% since the NCA became law in 2007, while the number of credit-active consumers has grown 44% to more than 24 million, according to figures from the National Credit Regulator’s Credit Bureau Monitor.
And of these 24 million credit-active consumers, more than 40% are in some form of financial distress, meaning at least one account is minimally three months in arrears, or there is some other form of default or court judgment.
Fees charged by debt counsellors are regulated and have not been increased since 2011, while inflation has climbed roughly 6% a year. That’s driving debt counsellors out of business. There is no shortage of financially-distressed customers to service – but with more than 2 000 of the 3 000 registered debt counsellors having left the industry in recent years due in part to the cap on fees, this has left thousands of consumers stranded without a debt counsellor.
A weeding out of shady counsellors was long overdue, as stories abound of customers paying fees and receiving nothing in return. Others advise against debt counselling on the grounds that it traps you in debt slavery for years. There are alternatives, such as invoking the Prescription Act, which in many cases makes it difficult for a credit provider to reclaim debts three years after the first default. Debt Admin also provides a DIY debt recovery programme, using the Magistrate’s Court Act.
In the decade since the NCA became law, some 800 000 South Africans have cycled through the debt review system. The NCA was introduced to promote stronger consumer protection in the credit market, and to outlaw reckless lending. In some respects, it has succeeded, and in others, it has failed miserably. Of the 800 000 who went under debt review, about 30% have exited debt counselling, though 350 000 are still under debt review.
The advantage of debt review is that credit providers cannot launch legal proceedings against you for 60 days. The debt counsellor takes over negotiations with credit providers on your behalf, and you pay one rather than multiple monthly instalments. But should you default on the debt review payments, credit providers can terminate the debt review and launch legal action for the recovery of loans.
Recent conversations that took place in parliament, where the National Credit Regulator (NCR) addressed the Portfolio Committee on Trade and Industry on proposals to offer lower income groups debt relief or exemption. This has alarmed the credit providers and many in the debt counselling industry, who argue that a debt forgiveness programme will perpetuate SA’s already poor culture of savings.
The majority of loans provided come with credit life insurance, a type of insurance that pays off the loan in the event of the death, disability or retrenchment of the borrower. Ian Wason, CEO of the Intelligent Debt Management Group and DebtBusters, says many of these products have been grossly overpriced and mis-sold.
“There needs to be more focus on ensuring more is done for consumers to be assisted in claiming against these policies.
“It should also be noted that the NCR currently has the power to clamp down on reckless lending through the affordability regulations, by increasing the minimum expense allocation, which is currently around 9%, to a more reasonable level in line with other countries of 40%. I certainly don’t know anyone who lives on 9% of their monthly income and hence has 91% to spend on debt repayments,” says Wason.
Chris van der Straaten, head of payment distribution agency Hyphen PDA, which is a division of financial technology service provider Hyphen Technology, points to the 25% annual growth in collections and distributions as evidence of the success of the debt review system. “This is an important indicator because a key measure of the success of debt counselling is how much money is actually being paid to the credit providers. Currently, there is no realistic alternative to debt counselling since the shine has been taken off Emolument Attachment Orders (EAOs) due to the recent exposure of wholesale abuse and exploitation of consumers by certain lenders.”
Rob Easton-Berry, CEO of Consumer Friend, states: “Prior to the adoption of the NCA, over-indebted consumers had few options to restructure their debt. This resulted in the legal process running its course with houses being foreclosed on and vehicles being repossessed. Debt counselling now provides such a platform whereby debt can be holistically viewed, negotiated and restructured, thereby providing consumers with a new affordability and protection over their household assets.”
During the discussions in parliament last month, the credit industry – in particular banks and credit providers – cautioned against legislated debt forgiveness measures and their unintended consequences. There was support for refining the current debt review process to make provision for low-income consumers and to provide an incentive for debt counsellors to provide assistance, through debt counselling, to low-income consumers.
Consumer Debt Help (CDH) provides debt counselling solutions to people with lower incomes. CDH offers financial and debt education to the poor, helping them make responsible decisions and improve their financial futures. Says Wason: “While we are proud of the consumers we have helped, the business has always been loss-making and is becoming more so every month due to the structure of the current debt counselling fees last issued by the NCR in 2011. As with any business, if fees are capped whilst inflation runs at over 6% per annum, there is only so long that an industry is viable. Unfortunately, this has led to over 2 000 out of the 3 000 registered debt counsellors leaving the industry, and more importantly has left thousands of consumers stranded without a debt counsellor.”
Though debt counsellors have no shortage of customers, government is concerned about the stubbornly high level of debt delinquency in the country. There are roughly ten million people out there behind on their bills. With an election looming, it’s not hard to imagine that government will opt for some form of a debt relief programme in the not-too-distant future.
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How Financially “fit” are you?
Nearly 70 percent of South Africans don’t have a financial plan and 80 percent don’t have a financial planner, research by Momentum shows. The financial services company says these figures explain, in part, why most households are financially unwell.
A staggering 77 percent of households in South Africa are financially unwell, Johann van Tonder, a researcher and economist at Momentum, says. You or your household are financially unwell if you’re not able to pay all your bills monthly, cover unexpected expenses and make provision for retirement, he says.
Over the past five years, Momentum has partnered with Unisa to produce the annual Momentum Unisa Household Financial Wellness Index, which details, over time, the state of the nation’s financial wellness.
Based on the research, Momentum arrived at the following definitions to describe households:
• Financially well: they can comfortably cover their planned and unforeseen expenses, now and into the future;
• Financially exposed: they cope every month, but any sudden expense will necessitate a reworking of their budget, or they will have to borrow money or dip into long-term savings to cope;
• Financially unstable: they are not servicing their debts regularly and are borrowing more every year to cope; or
• Financially distressed: they have to borrow money every month to pay for basic needs such as food and shelter.
Van Tonder says that in 2015 only 23 percent of households could be classified as financially well – a decrease from the previous year when 28 percent of households were financially well. (The 2016 household financial wellness index will be published in July.)
Danie van den Bergh, the head of Momentum brand and marketing, says an alarming number of above-average income earners are financially unstable or financially exposed.
And there are problems among those who are “financially well”. For example, 40 percent of people who financially well have a will, yet half of them have incorrectly structured wills, or wills that are out of date, Van den Bergh says.
Saddest of all, he says, is that when consumers are asked what their time horizon is for planning for the future, only 22 percent of those who are financially well plan “beyond a few years”.
The statistics relating to discretionary income paint a bleak picture: Van den Bergh says people earning between R16 000 and R33 000 a month have a shortfall of R2 000 in their discretionary income every month; those earning R33 000 to R60 000 a month have no discretionary income; and those earning R60 000 to R100 000 a month have discretionary income of R3 500.
Twenty-five percent of, or 500 000, people in the upper segment of the market – namely those who earn R30 000 or more a month – have defaulted on payments over the past year, he says.
So, what’s the remedy to our financial illness? Van den Bergh says more products are not the answer. “We can’t sell you products to make you financially well; a relationship with an adviser will get you there,” he says.
Research by Momentum has found that financially well households have the following features:
• A budget;
• A documented financial plan;
• A will;
• A financial planner; and
• A tendency to change their behaviour as circumstances demand.
Van Tonder says the ability to adapt is important, and he explains this as follows: “Let’s say you live in a house worth R2 million and something happens to you and suddenly you can’t afford the house. Instead of trying to maintain their current standard of living, financially well households will downscale. They change their behaviour as circumstances demand, unlike people who resist downscaling.”
How well are you?
What if you tick all the boxes – you have a budget, a will, a financial plan, a financial planner and reckon you’re inclined to change your behaviour when necessary – but feel that you’re not quite “financially well”?
To check your financial wellness, you can use a self-assessment tool on Momentum’s website. It took me 30 minutes to complete the eight questionnaires that give you a score out of 100. The questionnaires cover everything from income protection to life cover, health cover, retirement savings, estate planning, critical illness cover, car and home insurance, and how financially savvy you are.
Each questionnaire comprises between six and 12 questions and starts with a blurb describing what it aims to assess. For example, the retirement questionnaire “assesses your likelihood to be able to completely replace your income at retirement and have this income last for as long as you live. A score below 100 percent means you should speak to an adviser about increasing or beginning your savings, but a score above 80 percent can be considered a good score.”
I found some of the questions challenging to answer, particularly those in the critical illness and functional impairment questionnaire, revealing gaps in my knowledge about this type of cover.
To find the test, go to www.momentum.co.za and click on the “Financial wellness” tab.
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Home owners taking strain on bond repayments
New data by credit bureau, Compuscan, shows that even wealthy South Africans are struggling to keep up with their mortgage repayments.
Citing the latest information on consumer credit behaviour for, Compuscan said that the number of mortgages accounts with adverse enforcements listed on them increased by 26% from quarter to quarter.
Compuscan noted that even those accounts with mortgages of R3 million and above had been missing payments.
“In the first quarter of the year, we noted that consumers were struggling to keep up with their vehicle and asset finance loan repayments. The fact that the seconds quarter’s data indicated that consumers were struggling to make their mortgage payments is extremely concerning,” said Jacobus Eksteen, a senior data analyst at Compuscan.
“On the whole, consumers tend to prioritise their mortgage payments as this type of debt is usually taken very seriously by consumers. They have a lot more to lose if they don’t make payments on this type of account, so the trends we’ve seen in our data leads us to believe that consumers have really been feeling burdened financially.”
The number of mortgages that had been subject to adverse enforcements increased from 18,500 to 23,300, from Q1 2016 to Q2 2016. The bureau’s data also indicated that the number of mortgages that were three or more months in arrears increased by 7% from quarter to quarter.
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While many consumers across the board seem to be in tougher financial positions than preceding months, consumers in lower income groups understandably feel the pinch the hardest.
According to Compuscan’s data, approximately 39% of mortgages to the value of R300,000 or less had been subject to adverse enforcements as at the end of Q2 2016.
Adverse accounts: mortgages
||% of adverse enforcements|
|Less than or up to R300 000||38.93%|
|R300 001 – R500 000||24.25%|
|R500 001 – R999 999||26.38%|
|R1 million – R3 million||10.01%|
Considering the vehicle and asset finance (VAF) loans listed on the bureau, Compuscan previously reported that there was a 19% increase from Q4 2015 to Q1 2016 in accounts that were three or more months in arrears.
Although there was a less significant increase (9%) in these accounts that were three or more months overdue from Q1 2016 to Q2 2016, the trend remains a concerning one, Eksteen said.
“We noted that VAF loans of a medium value, from R101,000 to R250,000, had been subject to the highest percentage of adverse enforcements, followed by those from R250,001 to R400,000,” he said.
Adverse accounts: VAF loans
||% of adverse enforcements|
|Less than or up to R50 000||2.56%|
|R51 000 to R100 000||7.80%|
|R101 000 to R250 000||49.69%|
|R250 001 to R400 000||18.63%|
|R400 001 to R999 999||18.54%|
According to Compuscan’s data, the number of consumers that had been declared over-indebted and were part of the debt counselling process as at the end of Q2 2016 had increased by 8% from quarter to quarter to over 158,000 consumers.
There was additionally a 6% increase in the number of individuals whose worst position was an adverse status on one or more of their accounts, as well as a 7% increase in the number of accounts that were three or more months in arrears.
Rather notably, there was a 20% increase in the number of revolving loans with adverse statuses.
The data further revealed that of the approximate 70 million accounts that were open on the bureau as at the end of Q2 2016, only about 47 million of these had been paid up to date.
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