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Thursday Oct 17, 2013

Credit data amnesty 'will increase cost for borrowers'

Moody's Investors Service warns that the removal of adverse credit information from public records will have a negative impact on the rating of South African residential mortgage-backed securitisation and asset-backed securitisation transactions.

In a report released today, it advises that the removal 'will reduce the amount of information available to originators to assess the creditworthiness of new borrowers, and may impede responsible lending and borrowing practices, which will increase credit risk'.

The report was released in response to a cabinet statement issued last month, which said the cabinet 'approved the recommendations of the select committee on trade and international relations'. The committee's guidelines sought 'to address the issue of access to credit to those South Africans that can afford credit. These are consumers who may have paid their debts in full and are in a position to afford credit but whose access is currently impeded by negative credit information on their record.'

The government has not yet confirmed which of three options presented by the select committee will be implemented. The three options have been described as least risk, medium risk and high risk. The government has given the public until the end of this month to submit comments on the committee's proposal.

The Moody's report echoes warnings from banks, which have said that the absence of credit-related information would heighten the risk faced by lenders and would result in an increased cost to borrowers because of the increased risk.

Although the government's proposal is thought to be aimed at providing relief for the many consumers who have accessed 'unsecured lending facilities', Moody's highlights the fact that the proposed credit information amnesty will affect secured as well as unsecured lending activity.

It states that the ongoing removal of negative credit information from public records will reduce the incentive for existing borrowers to make good on their obligations.

According to the credit rating agency, borrowers' willingness to pay their obligations decreases when they expect that payment defaults will be removed from the credit bureau data that other financial institutions may access.

The rating agency says the new measure will add to previous limitations on information available to credit bureaus in South Africa and contrasts with improvements in the credit information being made available in other countries.

Andre du Plessis, the chief financial officer at Capitec Bank, which is a major player in the unsecured lending market, told Business Report yesterday that when the proposed information amnesty was implemented Capitec would still have access to sufficient information to be able to ensure continued prudent lending.

'Even if the amnesty is implemented there is still sufficient other information available from the credit bureaus to be able to predict the repayment behaviour of potential borrowers.'

Business Report


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