By Amanda Morrall
Caps on interest rates and fees, stricter lending criteria and greater transparency about the terms and conditions of easy credit are among proposed solutions being discussed today at a financial summit in Auckland aimed at tackling "problem debt.''
Consumer Affairs Minister Simon Power, speaking to a broad spectrum of financial service sector heads from across the country, said it was incumbent upon lenders to exercise greater responsibility to protect the nation's most vulnerable from a spiraling debt crisis.
"We need to address some of the problems that have traditionally affected this part of the sector, and if that requires legislative amendments, I won't shy away from that.''
Power said seductive advertisements that made borrowing from payday lenders and the like seem an attractive and easy fix was a "recipe for disaster'' if not a considerable danger to the social well-being of New Zealand's poor and financially desperate.
Power said it was not uncommon for desperate borrowers to be hit with loans as high as 700% taking into account exorbitantly high fees and interest rates and even more crushing compounding interest rates incurred by those who failed to make their payments on time.
Financial literacy on the agenda
Attendants at the conference will be debating (with a view to coming up with recommendations) issues such as: financial literacy, credit advertising, access to affordable credit/social and community lending, responsible lending and responsible debt, dispute resolution and ways to deal with those in financial difficulty.
Auckland City Missioner Diane Robertson said the exponential growth in the demand for food bank parcels was a troubling sign that increasing numbers of people were living in a state of chronic poverty.
She said it had grown the point where food had became a discretionary item for people. She said many were resorting to high-interest loans simply to put food on the table.
More than 50,000 children relied last year on food bank parcels for sustenance.
"Their parents are spiraling into debt,'' said Robertson.
"These are people with low income, and no assets who get forced into debt and then become reliant on the charities of others.''
'A spreading economic cancer all around the world'
PSIS chief executive officer Girol Karacaoglu said the issue was not a new one, and described it as a "5,000 year old problem.''
He said he defined the problem as "too much credit going to the wrong people at the wrong prices on the wrong terms.''
Karacaoglu cautioned participants against rushing into a quick fix arguing the wrong diagnosis would lead to the wrong treatment.
He said the situation was driven part by a grossly unequal and worsening distribution of income across society, "a spreading economic cancer all around the world." It was also made worse by financial illiteracy, more specifically an asymmetry of information.
"There's a gap in the information available to providers and the consumers of these products, that gap creates the potential for exploration and wrong decisions."
Also see Colmar Brunton puts spotlight on 3rd tier lenders revealing interest rates of 498% pa and ignorance among borrowers and Up to 40% of the country's 218 3rd tier lenders are breaking the law, Consumer Affairs Minister Simon Power says