The Ombudsman for Banking Services (OBS) is experiencing a slight upsurge of complaints from consumers who have run into financial trouble after accepting unsolicited offers of credit from one or more of the major banks.
This is according to John Simpson, the complaints investigation manager for the OBS.
Simpson says once people start falling behind on their repayments, the interest and legal costs snowball, often leaving borrowers with a life-long financial burden.
"We suspect, from what we have heard, that the banks are engaging in an all-out drive to gather as many clients as they can ahead of the National Credit Act coming into force in June 2007," he says.
Simpson says the National Credit Act is aimed at stamping out what it calls reckless lending, including providing credit that would leave a consumer over-indebted.
Credit providers will not be permitted to increase credit limits without first complying with the prescribed formalities.
Penalties for non-compliance with the Act range from suspending a loan agreement to a fine of up to 10 percent of the credit provider's annual turnover.
What the banks appear to have forgotten, Simpson says, is that the Code of Banking Practice already requires the banks to market and approve credit responsibly.
The code further requires the banks to properly assess a client's ability and willingness to repay the loan.
The OBS is, in effect, the enforcer of the Code of Banking Practice.
Simpson says the banks should view the complaints received by the OBS as an early indication that some borrowers will readily resort to the provisions of the National Credit Act to renege on their financial obligations if they run into financial difficulties.
He advises banks immediately to review their marketing and loan assessment procedures to prevent problems from arising.
Consumers, for their part, should be wary of unsolicited loan and credit card offers, particularly because it is highly likely that interest rates will increase, Simpson says.
Loan applicants should be honest when declaring their income and expenditure to credit providers and be realistic when assessing their ability to repay a loan, he says.
Simpson says some borrowers were flying so close to the wind that the recent half-a-percentage point rate hike was sufficient to capsize them.
- The latest edition of Personal Finance magazine (volume 28, third quarter 2006) contains a feature with extensive information about the National Credit Act, which is being phased in over a year beginning from June 1, 2006.
Personal Finance magazine is on sale at book stores and newsagents nationwide for R20.95.