South Africa’s economy is languishing on the brink of one of the deepest recessions since 1992 with joblessness and retrenchments on the rise across all industries and economic sectors. While South Africa has been struggling with stagnant economic growth for some time, the COVID-19 pandemic and subsequent lockdowns have exacerbated the fallout. Banks and credit providers are bracing for a potential torrent of bad debt as joblessness surged to 35% in the second quarter, according to a Bloomberg survey of economists.
“One of the lasting impacts of COVID-19 is, unfortunately, going to be a significant increase in distressed, financially vulnerable consumers. We cannot and should not assume a “business as usual” approach post-COVID-19. Collections businesses are alive to this fact and are working collaboratively with our partners to help indebted consumers find their way through their constraints to create a repayment plan that works for them in their current circumstances,” explains Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates.
“Many people are facing tremendously challenging times as a direct result of the pandemic, however the fact remains that their debt is not going to go away, and ignoring it could have serious implications for their financial health and ability to secure finance or credit in future. If you are facing difficulties, rather proactively approach and negotiate with creditors and lenders. If contacted by a collection’s agent, explain your situation so they can work with you to find a solution. Different types of debt have different options – you might be able to temporarily suspend payments with a loan modification or lower the monthly repayments or interest rates by reaching an agreement with the lender. Discuss your circumstances with the collections agent who will then feedback to the lender to make alternative arrangements where appropriate. But don’t ignore the calls and hope the debt will go away. A lack of any response from you will simply see it role into the legal stage and this becomes imminently more challenging and negatively impacts your credit rating and future personal financial health,” explains Levinsohn.
The aftermath of COVID-19 will leave an incredibly delicate balance to strike. Right now, millions of South Africans remain in deep financial distress as the payment holidays provided during the hard lockdown have ended. For companies, unpaid debt hurts already distressed cash flow, which in turn will limit the ability of the business to recover, invest and grow. On the other end, customers who were previously in good standing and, through no fault of their own, may now find themselves defaulting on their financial commitments.
“Banks are already working on how to manage the aftermath of the payment holidays which have or are coming to an end, and the fact that their customers may be facing restructured loans on different financial products, at different times – from credit cards, bonds, overdrafts and asset loans. What is encouraging for consumers is that lenders realise that blanket, one-size-fits-all approaches to recovery and collections will not suffice given the changed circumstances. The most important advice right now is for consumers to proactively engage and be a part of finding a workable solution with lenders that protects their financial integrity and interests,” explains Levinsohn.
Indebted consumers should also look at ways to manage or mitigate some of the financial strain. For example, you may not even realise that you have credit insurance on some of your loans, retail accounts and credit cards. Check all your loan agreements and see whether a credit insurance policy is active – these usually are in place for the full term of the loan or credit arrangement. This insurance may cover you for up to 12 months of your debt repayments if you are retrenched, subject to the terms of the policy. If you have any bonuses or other income coming in, pay at least the minimum amount and avoid the impact of late payments on your credit report. If you really cannot afford the minimum amount, make alternative arrangements with your credit provider and find out how they can assist you.
“There is a readiness by South Africa’s credit providers to restructure debt with a more customer-centric, empathetic approach driven by the fact that South Africans are grappling with the impact of a globally synchronous, black swan reality. Indebted consumers should use the opportunity to reach out proactively and protect the integrity of their financial wellbeing and credit record,” concludes Levinsohn.