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21 Apr 2011

Bank’s Customers Bear The Brunt of Court Ruling

Banking, Legal No Comments

Eva Smith (Attorney) @ Lucid Living

A new ruling by the Supreme Court of Appeal (SCA) is good news for the indebted, who will be able to get out of debt faster, but holds a worrying prospect for the banks.


The SCA considered the in duplum (double the amount) rule. According to the rule, once in default you never have to pay back more than double the unpaid capital borrowed – even if more interest has been accruing.

Say you borrowed R100 and didn’t pay the debt. With interests and charges, the R100 soon ballooned to R200.

If you pay off R50, the banks would classify it as a payment to settle part of the interest, and then charge interest and charges on the remaining R150 until it reached R200 again.

That would happen every time you made a payment which did not settle the capital amount.
In its recent ruling, the SCA found that the NCA differs from the common law rule in that it is not only limited to interest but also includes initiation fee, service fee, credit insurance, default administration charges and collection costs.

So if you borrowed R100, and interest and fees amounted to R200 but you had paid R50 of the capital – you would only owe R100 – double the unpaid capital of R50.

The in duplum rule has been in SA common law for many years, but didn’t really protect clients.

This meant you would struggle for years to get out of debt. But in 2007, the new National Credit Act (NCA) attempted to place a real cap on debts.

It imposed a fixed limit on the total amount of interest and charges on unpaid debt, so that you will only ever owe double the unpaid capital amount at the time of default.

More interest and charges cannot be added as you make payments.

In 2009, following opposition from the banks, the National Credit Regulator (NCR) got the high court to confirm that a ceiling is in place, but the banks took the case to the SCA.

“The court said this section of the law helped to prevent unreasonable over-indebtedness of the consumer,” says NCR manager of strategy and education, Peter Setou.

Banks have responded to the ruling by threatening to clamp down on clients who fall behind on payments, and intend pushing up the cost of credit.

Nicky Lala-Mohan, a general manager at the Banking Association South Africa (BASA), says the ruling may compel credit providers to enforce agreements vigorously where consumers default and fail fully to pay the default, however small.

For example, whereas previously a credit provider may have waited three months before it sent you a section 129 notice, it may now decide to send you one as soon as you default, Lala-Mohan says.

Which, you now have to avoid at all cost. (See blog post: Court Ruling Leaves Over-indebted Consumers Vulnerable)

“Furthermore, credit assessment criteria and the terms of credit extension may need to be adjusted by the credit industry to accommodate the possible consequences of this portion of the judgment in terms of anticipated additional default costs and risks,” BASA went on to say.

BASA also pointed out that,”these adjustments may detrimentally affect both access to and the terms and conditions and pricing of credit for all consumers.”

Bank’s slogans like “Moving You Forward” and “How Can We Help You” reveal their true “public relations” rhetoric. Banks have responded to this judgment by threatening to increase the costs of credit,  make access to credit more difficult and be less sympathetic to its customers when they experience financial difficulties.

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