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Johannesburg - The department of trade and industry (the dti) has jettisoned South Africa’s old formula for setting maximum interest rates on everything from credit cards to microloans.
When the SA Reserve Bank starts the process of raising its repurchase (repo) rate from its current low point over the next few years, the effect on most consumers will be far less dramatic than it would have been otherwise.
The dti gazetted the new regulations on maximum interest rates and fees on credit on November 6 after a draft regulation at the end of June.
The original draft had only proposed to slightly reduce the pro-cyclical nature of the interest rate caps.
At the moment, a 1% increase or reduction in the repo rate makes the maximum rate on most debts go up or down by 2.2%.
This does not apply to mortgages, but to credit cards, shop accounts and unsecured lending. The dti initially proposed dropping this multiplier to 1.7. Now there will be no multiplier.
This means a 1% increase in the repo rate will cause a 1% increase in all interest rate caps.
Some kind of change to the interest rate caps has been called for from various quarters, but the formulas decided on by the dti closely resemble a DA proposal.
The DA this week put out a triumphant press release claiming that the government had, in effect, adopted the submission made by the opposition party in July.
This claim is almost true. The dti has taken on the DA rates for everything except unsecured loans. Instead, these will have a higher maximum than in the draft. Whether these interest rate caps actually affect anyone will depend entirely on how many credit providers actually charge the maximum interest they can legally.
Banks tend not to do that with mortgages, but debt on store accounts tends to go as high as it can. Either way, the effect of the new caps is that the maximum interest rate on credit facilities like store or credit cards will fall from 22.65% to 19.75%. With unsecured loans, the fall will be from 32.65% to 25.75%.
The way interest caps on mortgages and short-term loans are calculated will stay more or less the same. But the effect of the new rules will be more dramatic when the repo rate starts rising. At its current 5.75%, it is near its historic low point.
If it rises back to 8% in the next few years, the result will be that the cap on credit facilities will be 22% instead of 27.6% under the old formula. For unsecured loans, an 8% repo rate will result in a cap of 29% while with the old formula, it would have been 37.6%.
While a drop in permissible interest rates will be a blow to credit providers who charge the absolute maximum, the separate issue of fees probably has wider-ranging effects.
The regulations have generally followed the June draft proposals. This means that pleas from particularly the microcredit industry have again been rejected.
MicroFinance SA (MFSA), the local lobby for microlenders, has called an urgent member meeting to discuss the new caps on Wednesday.
CEO Hennie Ferreira said it had made “extensive” submissions to the dti and was “highly disappointed” that this had seemingly achieved nothing. The regulations increase the maximum initiation fee on a credit agreement to R5 250 for mortgages from the current R5 000.
They also increase the maximum fee on a credit facility or unsecured loan to R1 050 from the current R1 000. This 5% increase is the first increase in 10 years, he added.
The maximum monthly service fee on a credit agreement will rise from R50 to R60.
“The expectation is that the price must be lower than it was 10 years ago. Our view is that it will take formal players out of the industry,” Ferreira said.
MFSA has long lobbied for much higher fees, arguing that the alternative is that rural South Africa will mostly have to resort to loan sharks because formal, regulated lenders cannot afford to serve them.
Ferreira claimed the dti has never shared any regulatory impact assessments.
If the dti has done any credible work that contradicted the MFSA’s dire warnings, that might possibly be accepted, said Ferreira.
