DEFINING OVER-INDEBTEDNESS

The steady growth in literature on over-indebtedness reveals some difficulties, both in definition and measurement. There is no universal definition of over-indebtedness. This has led, for example, to the formulation of different definitions and measures, each with its own strengths and weaknesses (Kearns, 2004; Oxera, 2004; Haas, 2006; Betti, Dourmashkin, Rossi & Yin, 2007; Stamp, 2009). Even in Europe, where household indebtedness is considered to be prevalent, the literature is inconsistent. Causes of over-indebtedness are broadly categorised into supply and demand factors, with the former focused on deregulation, marketing and innovation by financial intermediaries. Demand factors look at consumer behaviour and the related aspects that influence credit decisions (Civic Consulting of the Consumer Policy Evaluation Consortium, 2008; Fatoki, 2015). According to Fatoki (2015), over-indebtedness experienced by households had adverse effects on, amongst other things, consumption, investment and economic growth.

In the UK, over-indebtedness is defined as a state where households are in arrears, or at a significant risk of being in arrears on a structural basis (Oxera, 2004). Although this definition justly excludes the situation of being temporarily in arrears, it does not present the precise meaning of ‘significant’, and for how long in arrears a household should be for debt to be considered a structural problem. Haas (2006, p. 4) proposed a definition derived from the German Federal Ministry, which defined over-indebtedness as follows: “A household is regarded to be over- indebted when its income, in spite of a reduction of the living standard, is insufficient to discharge all payment obligations over a longer period of time.” A longer-term view of the definition requires the estimation of minimum living standards and potential income, which is difficult to ascertain. Kearns (2004) used a summary indicator termed ‘debt at risk’ (DAR), which captured the borrowing capacity and a share of all debts with a high probability of falling into arrears for Irish households and corporate borrowers. According to D'Alessio and Iezzi (2013), in France an individual is considered over-indebted when he or she is incapable, although willing, of fulfilling his or her debt obligations obtained for non-professional reasons. In a cross-country study, Betti et al. (2007)

introduced a subjective definition that focuses on the individual’s own assessment of debt burden. This definition is prone to error, as people may have a problem with disclosing their debt difficulties, and may suffer from different interpretations of what repayment difficulties actually are.

Given the difficulty in defining over-indebtedness, the European Commission appointed researchers to develop a common operational definition in Europe (Davydoff et al., 2008).

The researchers identified some common elements that can be applied as criteria:

 The household is used as a unit of measurement, since individual resources are typically pooled within it.

 All financial commitments are incorporated, such as the mortgage, vehicle finance, consumer credit, utility bills, and rent.

 It is impossible to resolve the problem by simply borrowing more.

 To resolve the issue, a household needs to significantly reduce its expenses or increase its income.

Based on these criteria, an over-indebted household is defined as one whose existing and foreseeable resources are insufficient to meet its financial commitments without lowering its living standards. This has social and policy implications if this means reducing those standards below what is regarded as the minimum acceptable in the country concerned (Fondeville, Ozdemir, & Ward, 2010). In Ireland, Stamp (2009) also borrowed criteria from the European definitions, and stated that “People are over-indebted if their net resources (income and realisable assets) render them persistently unable to meet essential living expenses and debt repayments as they fall due”.

In South Africa, over-indebtedness is generally seen as the inability to repay debts as they become due. Academic literature does not provide a conceptual, comprehensive definition for over- indebtedness. Nonetheless, it is clear that definitions are derived from the indicators or measurements that are being used. The National Credit Regulator, established in terms of the National Credit Act (NCA) of 2005 (Department of Trade and Industry, 2006), is the institution responsible for the regulation of the South African credit market. It therefore appears appropriate to adopt its definition. According to the prescripts of the NCA, Part B, Section 3 of the NCA sets out the objectives of the NCA, and, among other things, lists:

a) Promoting the development of a credit market that is accessible to all South Africans, and in particular, to those who have historically been unable to access credit under sustainable market conditions.

b) Addressing and preventing over-indebtedness of consumers, and providing mechanisms for resolving over-indebtedness based on the principle of satisfaction by the consumer of all responsible financial obligations. (Department of Trade and Industry, 2006)

Over-indebtedness is defined in the NCA as a situation that arises when a consumer, given the information at the time, the current financial prospects and obligations, and the consumer’s debt repayment history, will probably not be able to service or meet all debt obligations in a timely manner (Department of Trade and Industry, 2006). In terms of the provisions of regulation 24(7) of the Act:

a) “A consumer is over-indebted if his/her total monthly debt payments exceed the balance derived by deducting his/her minimum living expenses from his/her net income.

b) Net income is calculated by deducting from the gross income statutory deductions, and other deductions that are made as a condition of employment.

c) Minimum living expenses are based upon a budget provided by the consumer, adjusted with reference to guidelines issued by the NCR”. (Department of Trade and Industry, 2006: 23)

This definition prioritises basic necessities over debt repayment, as households’ well-being should not be compromised by debt service in view of the socio-economic status of many South Africans. The inherent difficulty with this definition lies in determining the minimum living expenses.