Even tougher financial times ahead for consumers, warns Banking Ombudsman

The Ombudsman for Banking Services is warning consumers that tough financial times are waiting for them in 2023.

Inflation is the highest it has ever been and the repo rate has steadily increased with more increases expected in the near future.

The majority of consumers are further stressed by regular and significant increases in fuel prices which not only impact car owners, but also have a knock-on effect on the prices of other items, such as food and transport.

“All of these increases wiped out the financial relief initially offered by the rate reductions of 2020. Our concern is that South Africans are now feeling the brunt of these increases, with rising living costs eventually influencing the number of consumers forced fall behind with their debt payments,” Reana Steyn, the Ombudsman, says.

The problem is that increasing numbers of defaulters may in turn increase the number of creditors instituting legal action for the foreclosure or repossession of financed goods in tough financial times.

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Increasing interest rates

Steyn says while there has been a significant decrease in interest rates since the 2008 great financial crisis, where interest rates were close to 12%, consumers had to endure a year where the interest rate increased significantly over a very short period.

“This is bad news for many consumers who are paying off bonds and vehicle finance agreements. Statistics show that many people borrow money to get them to the end of the month. Without a workable plan in place, there will be increased instances of consumers defaulting on their credit payments, which puts them in a compromising position,” Steyn says.

Rising fuel prices in tough financial times

We all need fuel in one way or another to get around, which means that the pockets of many consumers are also under threat from regular increases in the prices of petrol and diesel.

While there have been some reductions in the fuel price, this may not continue later on in the year as many countries around the world continue to face an energy and supply chain crisis unlikely to end in 2023.

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The implications include a further reduction in oil availability and a potential surge in crude oil prices. Oil is a key component of petrol and with South Africa being a net importer of petrol, the country bears the brunt of any increase in the oil price.

Statistics show that the price of inland petrol has increased significantly over the past decade, with the price moving from just R10,65 per litre in 2012 to its current high of R24.99 in 2022.

“For many South Africans, this is worse than rising interest rates. Not only does the fuel increase impact consumers directly, but these increases also exert an indirect impact on food and clothing prices as well in tough financial times,” says Steyn.

Overcoming the financial challenges 

Many people feel a sense of dread as they are forced to come to terms with their own potential financial crisis, but studies show that the way that to approach this issue helps to determine the probability of overcoming the problem.

“Managing this crisis will cause a lot of stress in households, but partners and families need to come together and formulate a plan to meet their financial needs. They need to draw up a monthly budget, make provision for emergency savings and look at their monthly expenditure, making cuts where necessary. This is the first step towards resolving this crisis in tough financial times,” Steyn says.

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How to deal with credit in tough financial times

Many South Africans use debt as a way to manage the worst effects of the financial crisis. The latest information from RCS Loans shows that consumers save on average -0.3% of their salaries per month. This means that the vast majority of South Africans do not save but borrow to make ends meet at the end of the month.

“This is a problem for obvious reasons, but there are instances where people are left with little choice but to turn to debt. In these cases, my office encourages consumers to use reputable credit providers and avoid loan sharks because they are notorious for charging very high interest rates which will take years to pay off.”

She warns that consumers will battle to get out of this cycle and have to borrow more and more, causing them to go into a debt spiral, made worse by the tough financial times.

 Steyn points out that all South Africans are in the same boat when it comes to the financial pressures associated with the current financial crisis. She advises all individuals who are struggling to repay their debts, or anyone who foresees that they will not be able to pay their debts in the near future, to urgently contact their credit providers to seek assistance.

“This may be the difference between keeping your assets or having them repossessed and while not ideal, making alternative arrangements may be the only way to avoid having a judgment and an impaired credit profile in your name.”

Her office has found over the years that most banks are open to offering some form of assistance to customers who find themselves in financial difficulty. Therefore, her advice for consumers is to be open about their situation and talk to their banks about their financial problems before it becomes a problem.

“It is our experience that banks will explore multiple options to find the best possible solution tailored for the specific issue faced by the customer.”

Steyn says banks offer these payment options to rehabilitate the account in arrears or minimising the losses for the customer and the bank in the event of a rehabilitation not being possible:

• credit restructure agreements, where the monthly instalment payable is reduced but the repayment term is extended. The outstanding balance will increase due to the additional interest, fees and other charges that must be added
• holiday payment arrangements where the consumer is absolved from making monthly payments towards the debt for a period of up to 6 months. This option is available for an account in good standing (not in arrears) and may also result in the repayment term being extended as well as the outstanding balance increasing due to the interest and relevant charges
• voluntary or statutory debt review processes according to the National Credit Act
• debt consolidation, where a credit provider offers to consolidate a number of the over-indebted customer’s credit products into a new consolidated credit product such as a loan. The customer is left paying one loan as opposed to the multiple agreements
• the surrender of movable goods, such as a vehicle or furniture in line with section 127 of the National Credit Act. Consumers have the option of selling the goods themselves but may need approval from their credit provider
• in the case of property, bank assisted sale programs where the banks market and sell the property becomes an option. Different banks offer various benefits, such as writing off 50% of the shortfall balance subject to conditions, fi the property is sold at a loss.