Insist on finding long term sustainable solutions for Sector MFSA - - PowerPoint PPT Presentation

RHLF PRESENTATION

Revised Caps on Rates, Fees and Credit Life Insurance Presented by: Mark Seymour

CREDIT LIFE

CREDIT LIFE: PROCESS

• 24 November 2015: Meeting with

Norton Rose Fulbright

• 1 December 2015: Meeting with DTI
• 3 December 2015: Meeting with DTI
• 15 January 2016: MFSA Submission

HARMONISATION AND RATIONALISATION

• Necessary acts needs to be

explored before any decisions are made

• Harmonisation & rationalisation of

legislative changes

ACTUARIAL STUDY OF CREDIT LIFE INSURANCE

• Actuarial study and economic

impact analysis required

• Business must be financially

sound

POWER TO PASS THE REGULATIONS

• Views of the DTI & Department of

Finance be taken into consideration

• Details of such consultation

APPROACH AND ATTITUDE

• Insist on finding long term

sustainable solutions for Sector

MFSA SUBMISSION: 15 JANUARY 2016

Definitions Costing Financial Soundness Actuarial study Powers of Regulators Rationality

IF WE DO THIS WRONG…

RATES & FEES

ECONOMIC MODEL

• Reliable supply of

unsecured loans:

• credit providers must
• perate profitable & earn a

reasonable return

• Efficiency is key

COST DRIVERS

2007 - 2015

Costs for Credit Increase Since 2007

Increase Annual

Audit Fees 89%

11%

Bank Charges 367%

46%

Travel: Fuel & Oil 112%

14%

Printing & Stationary 138%

17%

Telephone & Postage

• 21%
• 3%

Rent & Utility 48%

6%

Salary 48%

6%

Management Fee 100%

12%

APPROACHES TO IMPROVING

EFFICIENCY

• Increased scale through

growth

• Require funding,
• Enables lower cost structures

(buying power).

CURRENT CHALLENGES

• Credit industry operating in mature market
• limited ability to grow in the short term market
• Funders exiting SA market
• high risk and uncertainty,
• limiting the ability to grow,
• High level of compliance requirements
• Increasing the cost to grant credit

NCR STATISTICS: GROWTH IN ST DISBURSEMENTS

2007 – 2015 (qtr2)

2007 2015 Up to 1 month 442,305,973 2,617,028,179 2-3 Months 231,493,652 177,582,979 4-6 Months 209,397,352 1,132,109,476 Total 883,196,977 3,926,720,634

NCR STATISTICS: DEV. CREDIT

DISBURSEMENTS

2007 – 2015 (qtr2)

2012 2015 Total 7,650,773,837 3,879,390,955

GROWTH IN NO OF ST LOANS

2007 – 2015 (qtr2)

2007 2015 Up to 1 month 608,675 1,489,832 2-3 Months 116,953 66,071 4-6 Months 81,461 441,960 Total 807,089 1,997,863

NO OF DEV. CREDIT AGREEMENTS

2007 – 2015 (qtr2)

2012 2015 Total 293,204 125,443

AVERAGE LOAN SIZE ST LOANS

2007 – 2015 (qtr2)

2007 2015 Up to 1 month 726.67 1,756.59 2-3 Months 1,979.37 2,687.76 4-6 Months 2,570.52 2561.56 Total 1,094.30 1,956.46

100 200 300 400 500 600 700

All Fixed Costs Corp Costs Salaries Variable Costs Bad Debt COF

Costs Composition per loan – R1,880 x 2 Months

Total Cost R575 (31% of Loan Value)

100 200 300 400 500 600

Total Initiation Maintenance Risk/COF

Cost of Granting Credit – R1,880 Loan x 2 Months

100 200 300 400 500 600

Total Initiation Maintenance Risk/COF

Cost of Granting Credit – R1,880 Loan x 2 Months

Current Income: R498 (26% of Loan Value)

Total Cost R575 (31% of Loan Value)

DTI Proposed Rates: R486 (25% of Loan Value) MFSA Proposed: R610 (32% of Loan Value)

PRINCIPLE APPLIED

• Initiation Fee
• Table B Reg 42(2) – Max initiation fee:
• Unsecured - R165, plus 10% on amount above R1,000,
• Developmental – R550, plus 10% on the amount

above R1,000, but

• Reg 43(3) provides that initiation fee may never

exceed 15%.

• Principle applied in Impact Assessment:
• 15% of the Loan Amount up to R1,100,
• With Unsecured, if larger than R1,100, then R165

plus 10%,

• With Developmental, if larger than R1,100, then

R550 plus 10%.

PRINCIPLE APPLIED

• Service Fee:
• Regulation 44
• Pro-rata principle per Calendar Month that loan

agreement is entered in,

• With a loan opened and closed in the same

calendar month, fee is pro-rata,

• In a multiple month loan, the 1st month (that the

loan is entered into) the service fee is pro-rata, for the following months it is R60 per month.

• Principle Applied in Impact Assessment:
• 1 month loan (22 days) = R44,
• 4 month loan = R44 + (R60 x 3).

PRINCIPLE APPLIED

• Interest:
• Regulation 42(1)
• Short-term Loans
• Interest of 5% per month can be charged
• n the 1st loan in a calendar year,
• Interest of 3% per month can be charged
• n follow-up loans in a calendar year.
• Unsecured Loans
• Repo-rate + 21%.
• Developmental Credit
• Repo-rate + 27%.

Post New Caps Current Scenario 1st Loan of Calendar Year Scenario Multiple Loan Scenario Mixed Portfolio Scenario

AVERAGE SHORT-TERM LOAN R1,880 OVER 2 MONTHS

Post New Caps Current Scenario 1st Loan of Calendar Year Scenario Multiple Loan Scenario Mixed Portfolio Scenario Loan Amount 1,880 1,880 1,880 1,880 Initiation Fee 238 243 243 243 Monthly Fee 100 104 104 104 Loan Term (days) 52 52 52 52 Interest Rate (per month) 5% 5% 3% 3.2% Interest 183.56 183.99 110.40 117.76 Installment 1,200.78 1,205.50 1,168.70 1,172.38 Total Payment (Excl VAT) 2,401.56 2,410.99 2,337.40 2,344.76

AVERAGE LOAN R1,880 OVER 2 MONTHS

AVERAGE LOAN R1,880 OVER 2 MONTHS

Post New Caps Current Scenario 1st Loan of Calendar Year Scenario Multiple Loan Scenario Mixed Portfolio Scenario Loan Amount 1,880 1,880 1,880 1,880 Initiation Fee 238 243 243 243 Monthly Fee 100 104 104 104 Loan Term (days) 52 52 52 52 Interest Rate (per month) 5% 5% 3% 3.2% Interest 183.56 183.99 110.40 117.76 Installment 1,200.78 1,205.50 1,168.70 1,172.38 Total Payment (Excl VAT) 2,401.56 2,410.99 2,337.40 2,344.76 Revenue Earned per loan 521.56 530.99 457.40 464.76 No of Loans per month 140 140 140 140 Revenue Earned per month 73,018 74,339 64,035 65,066 Expenses 66,107 66,107 66,107 66,107 Operating Expenses 54,000 54,000 54,000 54,000 Bad Debt 12,107 12,107 12,107 12,107 Profit 6,911 8,232 (2,072) (1,041)

AVERAGE LOAN R1,880 OVER 2 MONTHS

Post New Caps Current Scenario 1st Loan of Calendar Year Scenario Multiple Loan Scenario Mixed Portfolio Scenario Loan Amount 1,880 1,880 1,880 1,880 Initiation Fee 238 243 243 243 Monthly Fee 100 104 104 104 Loan Term (days) 52 52 52 52 Interest Rate (per month) 5% 5% 3% 3.2% Interest 183.56 183.99 110.40 117.76 Installment 1,200.78 1,205.50 1,168.70 1,172.38 Total Payment (Excl VAT) 2,401.56 2,410.99 2,337.40 2,344.76 Revenue Earned per loan 521.56 530.99 457.40 464.76 No of Loans per month 140 140 140 140 Revenue Earned per month 73,018 74,339 64,035 65,066 Expenses 66,107 66,107 66,107 66,107 Operating Expenses 54,000 54,000 54,000 54,000 Bad Debt 12,107 12,107 12,107 12,107 Profit 6,911 8,232 (2,072) (1,041) Capital Employed 263,200 263,200 263,200 263,200 Drop in Revenue

• 2%

12% 11%

12 MONTH LOAN OF R7,500

Developmental Credit Unsecured Credit

Current Scenario New Rates Scenario

Variance

Current Scenario New Rates Scenario

Variance Loan Amount 7,500 7,500 7,500 7,500 Initiation Fee 1,150 1,150

• 800

815 15 Monthly Fee 50 60 120 50 60 120 Loan Term (months) 12 12 12 12 Interest Rate (per month) 34.3% 33.5% 34.3% 27.5% Interest 1,689.97 1,648.70 (41.27) 1,621.59 1,289.98 (331.62) Installment 911.66 918.23 6.56 876.80 860.41 (16.38)

Total Payment (Excl VAT) 10,939.97 11,018.70

78.73

10,521.59 10,324.98 (196.62)

Revenue Earned per loan 3,439.97 3,518.70 78.73 3,021.59 2,824.98 (196.62) Revenue (%) 2.29%

• 6.51%

24 MONTH LOAN OF R17,500

Developmental Credit Unsecured Credit

Current Scenario New Rates Scenario

Variance

Current Scenario New Rates Scenario

Variance Loan Amount 17,500 17,500 17,500 17,500 Initiation Fee 2,150 2,150

• 1,000

1,050 50 Monthly Fee 50 60 240 50 60 240 Loan Term (months) 24 24 24 24 Interest Rate (per month) 34.3% 33.5% 34.3% 27.5% Interest 7,773.52 7,575.55 (197.97) 7,318.59 5,773.07 (1,545.51) Installment 1,192.65 1,194.40 1.75 1,125.77 1,073.46 (52.31)

Total Payment (Excl VAT) 28,623.52 28,665.55

42.03

27,018.59 25,763.07 (1,255.51)

Revenue Earned per loan 11,123.52 11,165.55 42.03 9,518.59 8,263.07 (1,255.51) Revenue (%) 0.38%

• 13.19%

36 MONTH LOAN OF R27,500

Developmental Credit Unsecured Credit

Current Scenario New Rates Scenario

Variance

Current Scenario New Rates Scenario

Variance Loan Amount 27,500 27,500 27,500 27,500 Initiation Fee 2,500 2,600 100 1,000 1,050 50 Monthly Fee 50 60 360 50 60 360 Loan Term (months) 36 36 36 36 Interest Rate (per month) 34.3% 33.5% 34.3% 27.5% Interest 18,428.01 18,002.24 (425.76) 17,506.61 13,686.34 (3,820.26) Installment 1,395.22 1,396.17 0.95 1,327.96 1,233.23 (94.73)

Total Payment (Excl VAT) 50,228.01 50,262.24

34.24

47,806.61 44,396.34 (3,410.26)

Revenue Earned per loan 22,728.01 22,762.24 34.24 20,306.61 16,896.34 (3,410.26) Revenue (%) 0.15%

• 16.79%

SHORT-TERM LOANS - IMPACT ON

REVENUE OF RATE, FEE & CLI CAPS

Loan Product Rates & Fees Rates, Fees & Cli 1 Month - Small (R500)

• 12.74%
• 17.24%

1 Month - Large (R1,500)

• 9.90%
• 16.12%

3 Month - Average (R1,900)

• 8.31%
• 16.99%

4 Month - Small (R2,000)

• 7.10%
• 16.62%

4 Month - Large (R4,000)

• 10.54%
• 21.10%

6 Month - Small (R3,000)

• 6.28%
• 17.86%

6 Month - Large (R6,000)

• 9.35%
• 21.86%

Average

• 9.18%
• 18.26%

UNSECURED & DEVELOPMENTAL CREDIT - IMPACT ON REVENUE OF RATE, FEE & CLI CAPS

Loan Product Rates & Fees 12 Month – Dev. (R7,500) +2.29% 12 Month – Unsec. (R7,500)

• 6.51%

24 Month - Dev. (R17,500) +0.38% 24 Month - Unsec. (R17,500)

• 13.19%

36 Month - Dev. (R27,500) +0.15% 36 Month - Unsec. (R27,500)

• 16.79%

DTI FINAL REGULATIONS

• Devastating impact on:
• Supply of formal short term and

unsecured credit

• Driving consumers into the

underground market to access credit

• Impact negatively on investor

community

• Economic instability (sectorial

systemic risk)

DTI FINAL REGULATIONS (CONT)

• Limited to no impact on:
• Supply of developmental credit

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