The National Credit Amendment Bill, signed into law by President Cyril Ramaphosa earlier this week, is not a mechanism to expunge debt for the over-indebted. Rather, it’s an instrument allowing the low-income market access to debt review at no cost.
Once Gazetted, debt intervention will be accessible to a market that doesn’t qualify, or is economically viable, for debt review – those earning less than R7 500 a month with unsecured debts of up to R50 000.
But in a country where households spend almost three-quarter of their available funds on servicing debt, high default rates and disposable income under increasing pressure, the banking sector and opposition parties are warning that the act will make access to credit even more difficult and expensive.
What is debt review?
Debt review, or debt counselling, is like rehab for your finances: it’s a mechanism for over-indebted consumers to manage their finances better and start afresh.
The National Credit Act of 2005 introduced the process as an alternative to sequestration. Debt counsellors, who must be registered with the National Credit Regulator (NCR), assess their clients’ debts and help restructure a debt repayment plan.
They help to renegotiate interest rates with credit providers and extend repayment terms. Once under debt review, clients cannot access further credit – and they don’t qualify for consolidation loans either.
Payment is made to a single monthly payment distribution agency, which then pays the client’s credit providers. Clients under debt review are also legally protected by the National Credit Act, so their creditors (included in the debt review order) aren’t allowed to pester them with phone calls, payment reminders and legal letters.
But because there are charges involved, this latest amendment to the NCA allows the low-income market access to debt relief, without incurring further costs.
The Act has given the NCR additional functions in respect of applications for debt intervention and suspending credit agreements considered to be reckless.
The regulator will be required to keep a register of applications for debt review. The National Consumer Tribunal has been included in the task, in terms of referrals: It’s now empowered to declare an unlawful credit agreement void and may make an order related to unlawful provisions in a credit agreement, says Avitha Nofal, the senior legal advisor at the Credit Ombudsman.
“A credit provider may not re-instate or revive a credit agreement where an order of the Tribunal was executed, or where the Tribunal ordered that the debt is extinguished, or that the credit agreement was reckless or void. A court must dismiss a matter before it where the credit agreement was declared reckless or void by the Tribunal or the Tribunal ordered that the debt was extinguished. Orders of the Tribunal are binding on credit providers and consumers as well.”
She says Section 43 of the Act is amended to add the receipt of reports on debt interventions to the business of credit bureaux.
“The credit bureaux shall be required to accept information related to successful debt intervention applications from the NCR, without any charge. The act will provide for the period within which credit bureaux must remove a listing related to successful debt intervention applications.”
Credit providers and debt counsellors are required to report suspected reckless credit. And if they fail to, the Tribunal may impose administrative fines. The National Credit Regulator can also suspend suspected reckless credit agreements, pending a declaration by the Tribunal.
Courts are able to refer matters directly to the NCR for debt intervention. And debt counsellors are duty-bound to always consider credit agreements for reckless lending and not only when the consumer requests it.
Nofal says the act provides for offences “where a person intentionally submits false information or intentionally misrepresents information when applying for debt intervention or has deliberately altered their financial circumstances to qualify for debt intervention and for offences related to acts that are currently prohibited by the act”.
News of the signing has gone down as well as a lead balloon with the credit sector.
The Banking Association of South Africa says the signing is of “extreme concern” to the banking industry and to low-income clients of banks.
In a statement, Basa said: “The Act, in its current form, will restrict ability of banks to lend to this vulnerable market and increase the cost of credit. Basa petitioned the president not to sign the act in its current form and offered to meet with the presidency to further detail our reasons. We did not receive a response to the petition.”
It says it has repeatedly, “in good faith” pointed out to government and the president that the amendment to the NCA is not a sustainable debt relief measure, as it fails to balance the rights of consumers and credit providers.
“Banks have a fiduciary duty to protect the savings and investments of their depositors, the workers, professionals and businesses of South Africa. Banks invest the country’s savings in productive infrastructure and employment creating commercial ventures, for the benefit of all South Africans Banks cannot extend other people’s money as loans – for education and entrepreneurship – if they cannot be sure these loans can be repaid.”
It says by providing 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.
“In 2017, banks expunged R30-billion in prescribed debt in line with existing legislation and their own policies. In addition, banks have forgone interest and fees, by way of voluntary concessions, to the value of R4bn in 2017 in order to assist over-indebted consumers in debt review.
The increased economic difficulty consumers are experiencing are a direct result of government not taking decisions on the economic reforms necessary to create jobs, tackle poverty and ease inequality.”
It says the act puts the country’s savings, investment and access to credit at risk. “The signing into law of the Act is a further example of the government acting in a way that continues to erode confidence in the SA economy. However, we will meet in the next few days to consider options to address the serious situation the passing of the act will create in the credit market.”
Dawie Roodt, chief economist at the Efficient Group, warns that this is “nothing less than the beginning of expropriation”.
He believes the amendment Act could have dire unintended consequences: “We’re on the threshold of seeing the expropriation of land without compensation. Now the ANC government is fiddling with the financial system by condoning the write-off of anywhere between R13-billion and R20-billion (according to the National Treasury) of debt belonging to banks and other financial institutions.
“These loans are property as much property as anything else and (are) supposedly protected by article 25 of the Constitution. What kind of message is this sending to the ratings agencies such as Moody’s and Standard & Poor’s? As the constitution stands at the moment, there is a strong possibility that the law is unconstitutional.”
DA spokesperson on Trade and Industry, Dean Macpherson calls it a “deeply flawed and possibly unconstitutional” bill.
“The amendment bill will increase the cost of credit for low income-earners, weaken the fight against illegal lenders and negatively disrupt the credit market while posing a financial risk to the State, when SA consumers are already under enormous financial strain,” says Macpherson.
And Neil Roets, CEO of Debt Rescue, says he welcomes the principle of debt relief for the poor but that the government should be looking at a more inclusive manner in which relief could be provided.
“The process of debt counselling has been working superbly well for many years and has assisted many thousands of indebted consumers to pay off their debts by paying smaller instalments over a longer period of time through mutual agreement with lenders,” he said.
He added it would be infinitely better to use the existing system of debt counselling rather than for the National Credit Regulator to set up another system from scratch.
“It has taken us more than a decade to get the debt review process to the point where it is running smoothly to the mutual benefit of consumers and lenders. To go and tinker with this process now would be foolish in the extreme,” Roets says.
Adding it’s highly likely that financial institutions – who stand to lose billions if loans are written off – will tighten lending criteria to the point where this segment of the market will be excluded from accessing loans in future.
“The very group that the debt forgiveness programme is allegedly aimed at according to the Department of Trade and Industry – retrenched workers and low-wage earners – will be the very people who will not be able to source a line of credit when this policy becomes law.”
* Georgina Crouth is a consumer watchdog with serious bite. Write to her at [email protected], tweet her @georginacrouth and follow her on Facebook