There is a misconception that debt intervention proposals currently being considered could mean that some debts are likely to be written off.
The high levels of indebtedness in South Africa have led to parliamentary hearings, held by the portfolio committee on Trade and Industry, for amendments to the National Credit Act (NCA) which includes proposals for debt intervention.
This has created the perception that a debt amnesty may be offered. However, this is not necessarily the case and various proposals have been put forward as to what debt intervention measures could be considered.
At a press briefing on Monday this week, Cas Coovadia, managing director of the Banking Association of South Africa (BASA) argued that there are already sufficient provisions within the NCA to deal with over-indebtedness and reckless lending. What is required is that these mechanisms should be more fully utilised and made more accessible to lower-income earners through subsidised fees.
He argues that debt review remains the main recourse for over-indebted consumers. In 2016 over R3.4bn of interest was written off and last year credit providers wrote off over R3.9bn in interest from over-indebted consumers by agreeing to lower interest rates under the Debt Counselling Rules System (DCRS).
Over R9.2bn has been written off due to provisions in the NCA that related to prescribed debt. This is where no payment has been made for a period of three years; the debt has “prescribed” and effectively been written off.
The Banking Association believes that by strengthening the debt review process, by including the DCRS in the National Credit Act and ensuring that all credit providers adhere to the DCRS, greater progress can be made in terms of helping over-indebted consumers.
One of the major challenges to debt review remains the cost of between R3 500 to R5 000 per consumer. The Banking Association has proposed a subsidy which can be used to cover the costs of debt review for individuals with incomes of R7 500 or less. The Association has proposed that the subsidy come from government as credit providers are already giving concessions in terms of reducing interest rates, fees and charges.
There also needs to be more oversight of debt counselling practices as there are complaints about unscrupulous debt counsellors who sign consumers up for debt review without their consent.
Cutting off credit lines in low-income sectors
Coovadia says that appropriate debt intervention measures should be aimed at rehabilitation, educating consumers, and re-introducing consumers to the credit market in a more sustainable way. His concern is that legislation forcing credit providers to write off the debts of some customers will have serious consequences.
“It conveys the wrong message to consumers which is a moral hazard,” says Coovadia who adds that it will also increase the risks for lending in low-income sectors and therefore cut off credit lines in this sector. Consumers would then have no option but to turn to loan sharks who operate outside of the law, so any recommendations around debt intervention would not apply to them.
According to figures from the National Credit Regulator, credit extension to individuals earning R7 500 or less has declined significantly over the last four years. In the first quarter of 2013, 46% of new unsecured credit was granted to individuals with an income of R7 500 or less compared to only 26% in the third quarter of 2017. This means that credit access to this segment is already reduced and the Banking Association argues that if credit providers become more uncertain of receiving repayment from this segment due to debt intervention, this could lead to financial exclusion.
Addressing areas of concern
Many of the areas of concern raised by the parliamentary review have already been addressed. Its focus was primarily on unscrupulous credit providers and debt collectors who were circumventing the law and requiring consumers to pay well above the legally acceptable charges.
In its parliamentary submissions the Department of Trade and Industry focused on reckless lending, unlawful deductions relating to Emolument Attachment Orders (also known as garnishee orders) especially on social grants, and mis-selling of credit life insurance products.
Last year progress was made on the illegal issuing of garnishee orders in a landmark ruling by the constitutional court. In terms of credit insurance, the National Credit Regulator investigated immoral practices around credit life insurance and National Treasury conducted a review of the industry resulting in new legislation that limits the amount that can be charged.
Although there have been cases that have gone to court over reckless lending, it remains a challenge to prove reckless lending in cases where a consumer did not provide accurate figures about their expenses or other debt exposure.
While we still await a finalisation of the National Credit Amendment Bill, indications are that any debt relief will focus on voluntary agreements as already provisioned for with debt review with an emphasis on making debt review more accessible to lower-income earners. This will be combined with financial education and rehabilitation of the consumer.
There will also be greater oversight by the National Credit Regulator in monitoring reckless lending and unscrupulous practices by credit providers, debt collectors and debt counsellors. In cases where the credit agreement is deemed reckless, the agreement will be suspended.
Debt Counselling Rules System
A central system, DCRS (debt counselling rules system), has been developed through negotiations between the credit providers and the debt counsellors whereby a revised payment plan can be created and, if it falls within a specific range, is automatically approved by the credit providers and the application goes to court uncontested. This is primarily for unsecured debt and includes a reduction in the interest paid, a suspension of service and administration costs.
This article first appeared in City Press.