There is no question that the debt crisis faced by lower-income households needs to be urgently addressed, however the provisions for debt intervention in the National Credit Amendment Act raise many questions about how and when it will be implemented.
The banks have already indicated that they will challenge some of the provisions. In a statement issued by the Banking Association of South Africa (BASA) it made it clear that this will have a knock-on effect in terms of future lending.
In its statement it noted that “banks cannot extend other people’s money as loans – for education and entrepreneurship – if they cannot be sure these loans can be repaid. By making provision for the arbitrarily expunging of debt, the Act effectively prevents banks from extending responsible credit, particularly to those in low-income households, who often need it most.”
BASA believes that any expunging of debt undermines the banking system which has “as one of its foundations, an undertaking by borrowers to repay the loans that they obtain from banks. Any compromise to this principle will have severe consequences for depositors (consumers), the industry and for the economy.”
Listen to Maya and Mapalo Makhu discussing this in the My Money, My Lifestyle podcast.
Capitec commented that during the two years that the bill has been debated, it has reduced its credit exposure to lower-income earners. “During the two years leading to the amendment, Capitec Bank planned and managed our exposure to the consumer market earning less than R7 500 per month, being well aware of the regulatory development. We did this to such an extent that we can confidently say that we have sufficiently prepared for this. Our current exposure is less than 5% of our book.”
Credit will become less available
This confirms fears that the amendments to the National Credit Act will reduce availability of credit to low-income earners. BASA argues that this could even be extended to higher-income earners as the Act increases uncertainty by allowing the Minister to adjust the gross monthly income and total unsecured debt thresholds. Currently industry statistics show that 56% of credit applications are declined.
Benay Sager, chief operating officer at IDM which operates debt counselling firm DebtBusters, says there is no detail as yet on how the National Credit Regulator (NCR) will verify payslips to confirm income levels both for the application of debt intervention and to prove whether or not the individual has sufficient income to service the debt.
There is a real risk that individuals could use fraudulent payslips to qualify for debt intervention. There will also need to be clarity on how the income and assets of an individual married under community of property would be determined as both spouses would have to enter debt review. “It will take many months just to agree on these points and then they still need to put the systems in place,” says Sager.
The NCR has sent a business plan to the Department of Trade and Industry on how it will create the platform to offer debt review. Currently the Regulator has no offices outside of its headquarters in Midrand, and an electronic system may not be appropriate for low-income earners who may not have access to the internet or affordable data.
Substantial funding required
Indications are that the NCR will be asking for a further R100 million in funding, however Paul Slot, head of the Debt Counselling Association of South Africa (DCASA) believes this amount will be just the start.
In its presentation to parliament, DCASA estimated that if the NCR was to process 500 000 applications over five years, it would need to process 8 333 applications a month. This would require a staff complement of 832 people in the first year, at a cost of R97.8m, growing to 1 754 staff members in the fifth year at an annual budget of R213.8m. The growing staff complement would be necessary to meet the requirement to conduct an annual review of each consumer under debt review.
BASA’s analysis has revealed that if the NCR appoints the same number of debt intervention officers as there are currently debt counsellors, that it is likely that after three years, only one in four applications would have been processed because of the broad scope and significant number of consumers that could apply. “This could mean that the debt-intervention mechanism that is aimed at assisting consumers could leave them frustrated and result in their financial distress and over-indebtedness increasing.”
BASA believes that the existing mechanisms available under debt review have proven to work, as 25% of consumers currently under debt review fall into the low-income category. It also argues that the income levels on any debt intervention should be less subjective and based on an economic measure such as the minimum wage.
While questions are considered and the industry debates the best approach, what is clear is that the debt intervention envisaged in the Act will take a long time to implement. It is also likely that, as with any free service, consumers will get what they pay for. At this stage the Act seems to be creating more hype and confusion than providing an urgent solution to a very serious problem.
Amendment gives more clout to reduce interest rates
While the debt-intervention clauses in the amendments have been the focus of news reports, Paul Slot, head of DCASA says two very important changes have been made that will benefit consumers under debt review:
- Magistrates who are ruling on a debt review application will now have the discretion to reduce interest rates. This becomes binding on the credit provider. Slot explains that although there is a Debt Counselling Rules System which is an industry agreement on how to reduce interest rates, not many credit providers agree to it. Now a debt counsellor can make the application for lower interest rates through the magistrate courts.
- Debt counsellors will also be required to report reckless lending. This will increase the number of reckless lending cases that go before the courts. Slot believes that successful prosecution of reckless lending will curb excessive lending and undesirable lending practices.
This article first appeared in City Press.