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Navigating through South Africa’s Debt Relief Programme and the Implications for Indebted Consumers – Shapiro Shaik Defries and Associates

DEBT RELIEF PROGRAMME

When South Africa went into a national lockdown on 27 March 2020, no one fully comprehended the deep, complex and devastatingly profound consequences it would hold for individuals, businesses and entire industry sectors.

South African banks rapidly responded to the imminent crisis facing their account holders, and as at 7 July, 2020 had approved more than R30,6 billion in relief to individuals and businesses affected by the  Covid-19 pandemic and national lockdown¹.

According to Managing Director of the Banking Association South Africa (BASA), Bongiwe Kunene: “Cash flow relief for eligible individuals and businesses is critical to the preservation of jobs and businesses and to maintain a functioning economy. Banks hold in trust the salaries and savings of South Africa’s workers, professionals and businesses. It is therefore essential that we continue to extend credit responsibly and avoid blanket debt write-offs or any other actions that might place depositors’ funds at risk or otherwise undermine the integrity of the financial sector.”²

The three-month debt repayment holiday that banks offered to struggling consumers have now expired, however, many consumers remain under tremendous pressure and many have lost their livelihoods. Things have not returned to normal and may not do so for many months to come. The big question is, after the initial reaction of providing relief for distressed consumers has passed, how will this impact the response and recovery phases for South Africa’s financial services sector, as well as the millions of individuals who continue to find themselves under significant financial duress?

…no one fully comprehended the deep, complex and devastatingly profound consequences it would hold for individuals, businesses and entire industry sectors.

This report has been prepared by Shapiro Shaik Defries and Associates to unpack and interrogate the way forward as the financial services sector looks to calm the waters and how it can help consumers get back to some semblance of stability in increasingly uncertain times.
1, 2: Https://www.banking.org.za/news/june-debt-relief-update/)

OVERVIEW

Since the arrival of COVID 19 on South African shores,
a timeline of three distinct phases defines the actions taken and response by the Financial Services industry:

#1
REACTION
PHASE
MARCH – JULY 2020

#2
RESPONSE
PHASE
AUG 2020 – MARCH 2021

#3
RECOVERY
PHASE
TO BE
DETERMINED

#1 REACTION PHASE

Banking institutions reacted swiftly and uniformly, introducing a three-month payment holiday. However, given the urgency demanded in the circumstances, this was done on a
general and broad-based account and product level, and not on a customer-specific level. As a result, clients could have more than one payment relief running across different products, all activated at different times, and potentially all with varying terms and conditions.

Customers on CD 0 (up to date) and in some cases CD 1 (one missed payment) and CD 2(two missed payments) were made the offer. This will significantly impact the Response phase, where a single client will  potentially need to negotiate several agreements, with several different departments, with different information available on the client.

Due to the severity, speed and far-reaching impact of the global pandemic and subsequent lockdown to livelihoods, there was an urgency to provide relief, with little to no time to accurately assess, vet and address each situation on individual merit. Bulk communications were sent out, with little validation. There was no data or analytical insights into the offer, and no scoring or upfront risk assessment.

…there was an urgency to provide relief, with little to no time to accurately assess, vet and address each situation on individual merit.

While this was entirely outside of the usual and normally stringent requirements of South Africa’s financial services sector, it was an entirely necessary and empathic response to the extraordinary circumstances and existential threat posed by a raging global pandemic.

#2 RESPONSE PHASE

With the React phase closing out and as the financial services sector enters the Response Phase, it is now imperative to implement and understand “What exactly is appropriate for each customer”, given their unique and individual circumstances. This can only be achieved accurately through primary data, obtained directly from the customer.

It is crucial that communication is delivered in a uniform and consistent manner across all divisions and product offerings, and that financial institutions avoid the trappings of siloed approaches. The value for any bank is to have direct line of sight of the primary transactional account which will clarify the position of the customer.

The responsibility then falls on the financial services provider to get clarity from the customer as to when they expect to return to full employment, and whether there are any extenuating family circumstances or health issues that could impact the customers’ ability to financially recover.

…what exactly is appropriatefor each customer given their unique and individual circumstances?

While this was entirely outside of the usual and normally stringent requirements of South Africa’s financial services sector, it was an entirely necessary and empathic response to the extraordinary circumstances and existential threat posed by a raging global pandemic.

#3 RECOVERY PHASE

It is a matter of time before distressed consumers and the market start engaging with the Financial Services Regulator. In the React phase, single, unqualified offers were acceptable given the crisis circumstances. However, as we get deeper into the pandemic, each customer must be managed and engaged on a merit basis.

Commercial impact to the consumer:

  • VAF: Ave R250k loan – Duration: 5 years.
  • 3-month payment freeze creates indebtedness to an already vulnerable consumer.
  • Affordability will most certainly become an issue with the regulator.

Credit bureau information is retrospective thus it cannot be relied on to provide insights in these radically altered circumstances. Our post-Covid circumstances have redefined radically different futures and in this
scenario, credit history is exactly that – history! It is no longer indicative of what can be expected from consumers going forward.
FSPs need to ask:

  • Are we acting in the best interest of the customer?
  • Has the appropriate action been taken?
  • Will the issue be resolved?

External and extenuating circumstances are crucially important factors:

  • Has the customer been retrenched and or spouse, or family member, lost their job?
  • How will the Financial Regulator view the situation?

Traditional statistics and approaches cannot be amplified to the present situation, as this is a completely new phenomenon, unprecedented in scope and nature.

TRIAGE APPROACH

Least Affected

Will Recover

Dire Situation

Hospitality, entertainment, gyms, travel, tourism, restaurants.

KEY CALLOUTS

Post Covid – In this economy there is a limited market to buy & sell repossessed cars or homes – secured assets are not the same as pre-Covid.
The landscape has changed dramatically for traditional collection companies. They can no longer work on a success basis, and success cannot solely be measured in Rand Collections alone.
The time to work at the response stage is now and make core decisions as they relate to General Banking, Secured and Unsecured Lending.

South Africa is facing a slow and painful recovery which will ultimately put an already distressed South African consumer under tremendous pressure.
Most financial systems are based on historic data. To gauge the future and navigate the way forward with a customer-centric approach will demand that financial services providers engage with their customers to obtain current primary data.

There are major challenges for banks and consumers on the horizon:

  • Post Covid – In this economy there is a limited market to buy & sell repossessed cars or homes – secured assets are not the same as pre-Covid.
  • The landscape has changed dramatically for traditional collection companies. They can no longer work on a success basis, and success cannot solely be measured in Rand Collections alone.

Collection companies need to act in the best interest of the customer due to Covid uncertainty.

  • Reaction phase will end towards the end of July. Are you prepared?

  • Response – Must be more considered and customer-focused. Data needs to be collected.

  • Recovery – At the very least 6-12 months’ time, assessed as circumstances unfold.

UK Legislation that South Africa will inevitably be following:

  • TCF – Treating Customers Fairly (Customer Centric Approach)
  • Persistent Debt – Comparable to the ‘In Duplum Rule’. If the customer is already paying more on fees and interest than the capital amount, the debt will need to be restructured.
  • Vulnerable customers:Where a life event caused trauma
  1. Capacity – to understand the terminology of the agreement in simple terminology
  2. Financial resilience
  3. Health conditions and external factors

Key considerations to address:

  • How many payment holiday agreements have been entered into and what is the split?
  • What are the overarching terms and or conditions of the payment holiday agreements?
  • Has there been any engagement with the regulator on the payment holidays and interest specifically?
  • Will you be connecting with your customers to understand all of this? Or will your focus be on collections and credit extension?

As South Africa continues to navigate through the pandemic, it is abundantly clear that there has been profound damage to every facet of livelihoods and the economy. The full and long-term impact is still unfolding before us and will continue to do so in the months ahead.

While the true magnitude of the financial distress facing both individuals and businesses remains to be seen, it is evident that there is no short-term fix for this mach 1, black swan disaster. It has taken South
Africa and its citizenry, and indeed the world, to the wall in terms of plummeting household income, soaring unemployment, widespread business closures and crippling consumer indebtedness.

Our post-Covid economy will demand that a new approach is developed, and as such, there must be a readiness to restructure, with a more customer-centric, empathetic approach driven by current, forward
looking customer data and analytics.

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