Is there a business disaster lurking within the introduction of the National Credit Act?
On the 1st of June 2007, the new National Credit Act (NCA) (no. 34 of 2005) came into force. In simple terms the act is intended to ensure that borrowers are protected from themselves and from unscrupulous or reckless lenders. The process of borrowing requires the borrower to declare all information, which is pertinent to the loan, to the lender. This will include information related to earnings, financial position and other debt. The act also places responsibility upon the lender to ensure that the borrower can afford the loan. Failure by the lender to ensure that the borrower can afford to repay the loan will make the lender responsible for having granted credit recklessly. Should a lender grant credit recklessly, then in the event of non-repayment, it will be extremely difficult to recover the amounts.
All this may be no more than interesting to many of us. After all this is supposed to be an article about business continuity. Why this topic? To answer that question each of us needs to understand what the problems are in relation to our ability to do business in a sustainable fashion.
Consider the following issues and then try to determine whether your business will be affected, and what the effects will be:
1. The process of granting credit will now be strictly regulated. If your business grants credit it must be registered to do so, and must have all of the correct regulatory procedures in place. Beware of fallout from this issue as it is likely that the National Credit Regulator (NCR) will be looking for a few cases on which to test out his new found teeth. Are you likely to get bitten?
2. Staff loans will now require your company to be registered? A previously innocuous act of assisting an out of pocket employee, will now be illegal, unless your company goes to a lot of effort.
3. The South African consumer is currently burdened with a vast amount of debt. Many of those consumers now rely upon renewing their stream of credit in order to survive. These consumers will be forced to restructure their finances very rapidly. Defaults and insolvencies could be the result. In macroeconomic terms the failure of a single consumer is insignificant. If vast numbers default or have to restructure at the same time, this could spell widespread disaster.
4. My company has engaged in some consulting work related to the introduction of the NCA and the risks involved. The loan granting simulations related to the granting of in-store credit, indicated that at least 30% of the deals granted under the old dispensation, would not be granted under the NCA. This translates into a substantial loss of turnover for the companies concerned. This is compounded by the fact that during the test simulations, there was no National Credit Register. The information in the Register could make the rate of declined loans even greater.
5. Information gained from other clients in the motor and banking industry indicate that loans being granted for the purchase of motor vehicles are down by 50%. This is disastrous for both industries.
6. A well-known organisation in the mortgage granting industry has indicated a concern that, should their existing clients be subject to debt counselling, the flow of mortgage repayments may be interrupted. The process of debt counselling is a measure put in place to permit a borrower to restructure the financial position. Delays in flows of income from debtors could be the result, and could take many months or even years to correct. If this happens to one or many of your debtors what will the effects be?
Certainly the risks related to this issue have changed. It is a good time to consider how this may affect your company.
Are you likely to suffer as a result of a sudden drop in turnover directly related to dramatic reductions in credit granting?
Are you likely to have your debtors stop paying you, due to inability, insolvency or interruption due to debt counselling?
Will any of your suppliers have problems resulting from this or related issues?
Will any of your clients have problems? Cash flow, insolvencies or reduced purchasing by your major clients could affect you badly.
At the time of writing the introduction of the NCA is still very fresh and less than a month has passed. Soon the effects will become apparent and we will be able to quantify the effects. These effects will be severe in some places in the short term and may affect other areas in the medium and longer term. Certainly some industries are under threat.
Each of us needs to examine our exposure to the problem and to determine the possible consequences. If these consequences are great enough, pre-emptive action needs to be taken. This may be a short-term crisis or the effects could be with us well into the future. It is however, time to determine whether your company's future existence and profitability is threatened.