Debt amnesty will send wrong signal, banks say

Ann Crotty

The Banking Association of SA (Basa) and all the large retail banks oppose the proposal by the Department of Trade and Industry for another credit amnesty for heavily indebted borrowers with low incomes.

Executives from the major banks told the trade and industry portfolio committee yesterday that the 2006/07 amnesty had failed to protect low-income borrowers, and a second amnesty would send out the wrong message.

Cas Coovadia, the chief executive of Basa, said that the amnesty proposal, which would include expunging the adverse credit records of individuals earning under R15 000 a month with debts less than R10 000, would create additional risk that would have negative implications for the very people that the government was trying to protect.

“If negative credit information was expunged it would mean banks would be lending without the proper data. This would not only be irresponsible but would also result in fewer and more expensive loans,” Coovadia said, noting that another amnesty would send out the message: “You can get into debt and every five years you will get amnesty.”

Coovadia told the committee that the attraction of unsecured lending for the banks was its comparatively high profit margin of 30 percent. He noted that unsecured lending had a comparatively high bad debt rate of 10 percent.

For non-banks, such as microlenders and clothing and furniture retailers, the profit margins were typically between 40 percent and 60 percent. By contrast mortgage lending offered margins of less than 5 percent and bad debt rates of about 1 percent.

Standard Bank told the committee that unlike any other country in Africa, South Africa had good quality data on borrowers and that without access to this information banks would have to increase the price of loans in order to cope with the increased risk.

Executives from FNB, Nedbank, African Bank, Absa, Standard Bank and Capitec said the government should be more focused in its bid to address concerns around the rapid growth in unsecured loans. They supported efforts to stop the abuse of garnishee orders, which was facilitating over-borrowing by customers.

Tami Sokutu, a director at African Bank, said the retail bank was concerned that in the past year or so the perception had been created that unsecured loans were the “devil of lending”.

“We are very proud that we opened access to credit for South Africans who didn’t have access… at the time unsecured lending was dominated by microlenders and loan sharks who had very bad practices,” Sokutu said.

Christian van Schalkwyk, the executive for risk management at Capitec, warned that the committee should “take careful cognisance of the environment” in which the banks were operating and “the history of credit granting in South Africa”.

In considering how to deal with the industry he said the government “shouldn’t hark back to the past but should manage the future”.

In response to a question by Van Schalkwyk about the capacity of the National Credit Regulator to ensure “fair play” in the market, Nomsa Motshegare, the chief executive of the body, told Business Report that the regulator had a highly qualified staff of statisticians, analysts and legal advisers.