“You cannot change the circumstances, the seasons or the wind, but you can change yourself. That is something you have charge of.” – Entrepreneur, author and motivational speaker Jim Rohn
Autumn is always a colourful season, with the leaves gradually changing from green to copper to glowing red. Watching the trees shed their leaves is a reminder to us of the constant changing of the seasons.
In our personal and professional lives we are constantly experiencing change, and, as Jim Rohn puts it, the lesson of seasons is that although we have no control over change, we can learn to adjust to changing circumstances.
Changes to the National Credit Act
Nowhere is change more evident at the moment than in the lending industry in South Africa. On March 13, the National Credit Amendment Act (NCAA) came into effect, which has major implications for unsecured loans granted by financial institutions. The over-indebtedness of South African consumers is a major cause of concern for government, with the National Credit Regulator reporting that unsecured lending has quadrupled from R40 billion in 2008 to R172 billion in 2014.
Assessing whether consumers are able to repay a new loan is at the heart of the amended act’s Affordability Assessment Regulations. The rationale here is to minimise reckless lending in the industry.
Of course, responsible lending cuts both ways. Credit providers have an obligation to ensure that customers can afford the loan they are applying for by verifying their income and expenditure. The customer, for his part, must fully and truthfully disclose his financial position when applying for a loan.
But how do you as the credit provider make sure that a customer has enough money to repay a loan? This can be done by determining the customer’s discretionary income.
The discretionary income is the amount available to fund the proposed credit instalment and can be summed up as:
Discretionary income equals gross income minus debt repayment obligations minus minimum monthly expenses minus all other payment obligations
To determine a customer’s discretionary income, therefore, the first step is to verify the gross income. According to the Affordability Assessment Regulations, the following documents must be used to validate gross income:
•For customers receiving a salary from an employer, their last three salary slips or their latest bank statements showing their last three salary deposits.
•For customers that don’t receive a salary from an employer, their last three documented proofs of income or their latest three months’ bank statements.
•For customers who are self-employed or informally employed, their latest three months’ bank statements or their latest financial statements.
Once you have determined a customer’s gross income, the next step is to find out what his discretionary income is by subtracting all statutory deductions (such as income tax, unemployment insurance, maintenance payments), the minimum necessary expenses, and all other committed payment obligations as may appear from the applicant’s credit records, from the gross income.
When you have a clearer picture as to how much discretionary income an individual has at his disposal, it becomes easier to make a decision about whether the customer can afford the credit and will be able to keep up with his purchase repayments.
Because of unfair lending practices in the past, it’s understandable why the government has tightened up lending criteria through the NCAA. Now more than ever credit providers will have to ensure that customers can afford loans before granting them – or pay the price.