THE NATIONAL ASSEMBLY
QUESTION FOR WRITTEN REPLY
Question 2422
Mr G G Hill-Lewis (DA) to ask the Minister of Trade and Industry:
(1) What was the rationale for the formulae for the calculation of
the maximum interest rates applicable to the various credit
products in the National Credit Act, Act 34 of 2005;
(2) whether research has been conducted on the impact of these
formulae for the calculation of maximum interest rates on the
(a) number of impaired consumer profiles, (b) over-indebtedness
generally and (c) effect on the poorest credit consumers
particularly; if so, would he make such research available to Mr
G G Hill-Lewis;
(3) will he make a policy statement on whether he will support the
revision of these formulae? NW2907E
Response according to the National Credit Regulator:
1. The Department of Trade and Industry conducted a review of the
consumer credit legislation from 2002. The review found that there was
unfair differentiation in the charging of interest based on different
segments of the market. Consumers who were prime clients with prime
mortgages could obtain vehicle finance at the same rates as their
mortgages and could also obtain credit card finance and store card
finance at rates varying from prime rates to the Usury Act cap of
about 29%. The other consumers (marginal) who were not in the prime
segment of the market could obtain vehicle finance and personal loans
at very high interest rates of up to 35%. The prime market was
actively contested and competitive while the marginal market had
limited competition on the price of credit.
It was clear that the interest rate regime at the time caused the
division between the prime market and the marginal market and that the
cost of credit was very high in the marginal segment of the market.
2. The National Credit Regulator monitors the level of consumer
indebtedness and impaired credit records and consumers through the
Credit Bureau Monitor which is published on a quarterly basis. The
causes of consumer indebtedness are multi-dimensional and complex.
These include, amongst others, reckless lending, inadequate assessment
of affordability, job losses, inflation, increases in administered
prices, unplanned changes in the personal circumstances of consumers.
The formula for the calculation of interest is not per se the cause of
consumer indebtedness. The formula presents an objective manner in
which the rate of interest is calculated and provides flexibility for
the benefit of consumers. As the formula is linked to the Reserve
Bankâs repurchase rate, consumers have benefited from interest rate
reductions when the repurchase rate was decreased by the Reserve Bank.
3. The NCR is embarking on a review of the cost of credit which focuses
on the appropriateness of the rates and not the formulae used to
calculate the rates.