Debt relief law: A double-edged sword
The consumer-centric legislation is likely to be signed in time for the elections, to show that work has been done to protect low-income earners from over-indebtedness.
Although the bill has been praised by Cosatu, the Banking Association of South Africa (Basa), the Consumer Goods Council and other bodies have warned it will cost the credit industry billions of rand, make credit more difficult to obtain, and feed a culture of non-payment.
The bill allows those earning less than R7500 a month who have unsecured debt under R50000 to apply for debt relief, which could come in the form of an interest-free payment suspension or an adjustment of interest rates, or for the loan to be expunged.
The bill applies only to debts that fall under the National Credit Act (NCA). It allows for the protection of a debtor’s assets, intervention by the minister of trade and industry in “crisis regions”, and harsher penalties for abusive lenders and loan sharks.
The process is similar to debt review, but doesn’t require any payment, says Riccardo Petersen, a director at Norton Rose Fulbright Attorneys. “It’s a debt intervention. The consumer can apply to the National Credit Regulator (NCR) asking it to consider rearranging debts over five years, and if income and assets don’t allow for it, he can get debt extinguished entirely.”
It means a potential write-off of a person’s debt, he says. For those who qualify, debts could be suspended in part or full for up to two years, to help them improve their situation. If it does not improve in that period, it could be written off.
However, Petersen believes the five-year process is too long and debt review is better.
He says with debt intervention, consumers are required to apply and made to jump through hoops - the regulator will investigate and decide whether you need to make a payment arrangement or the debt can be restructured.
They then recommend to the National Credit Tribunal a suspension of the debt in whole or in part, or that the consumer goes on a financial literacy programme.
“You need to balance the rights of both parties: creditor and debtor. The NCR is obliged after the tribunal has made the order to review the situation after eight months, which could be the balancing element. So potentially the consumer could still pay it back. I don’t think it’s dire for the banks but it affects the credit provider.”
Cosatu, however, has applauded the “progressive” National Credit Amendment Bill. It said: “The federation is calling on the president to move with speed and sign the NCA Bill into law. Workers have for too long battled to cope with the ever-rising levels of debt.”
Last year, the Consumer Goods Council told Parliament’s portfolio committee on trade and industry that the bill would put credit providers’ current debtor books at risk, create uncertainty in the market and place lenders at greater risk.
Basa is also concerned, saying although it supports measures to assist over-indebted consumers whose circumstances have changed for the worse, and who cannot access existing debt intervention mechanisms, existing debt intervention measures should be enhanced.
Cas Coovadia, Basa’s managing director, says banks have already forgone interest and fees, by way of voluntary concessions, worth R3.4billion in 2016 and R4bn in 2017, to assist over-indebted consumers under debt review.
“Following the amendments to the NCA as it relates to the prescription of debt, banks expunged a total of R9.6bn across various credit agreements. Banks continue to expunge sizable amounts of prescribed debt every month, in line with existing legislation and their own policies. This amounted to R32bn in 2016 and R30bn in 2017.”
Coovadia says Basa believes consumers can be better and sooner assisted by enhancing current debt review procedures. “The NCA Bill could have damaging unintended consequences for consumers, credit providers and the economy.”
The association is questioning the thresholds for eligibility, saying R7500 was “arbitrarily chosen, without supporting and detailed statistical information”. The bill gives the tribunal and courts the power to order a credit provider to expunge debt that was granted in a responsible manner.
“And because of the impact such orders can have on credit providers, they will likely decrease the credit that they extend to consumers, to mitigate against the risk that they will not be able to recover their loans. The uncertainty is exacerbated by the fact that the minister can adjust the income and total unsecured debt threshold,” he says.
Basa warns the unintended consequence will be that low-income consumers will struggle to obtain loans in the regulated credit market and will be forced to seek credit elsewhere.
Petersen believes indebted consumers need education and to change their relationship with credit - expunging debt allows them to repeat their behaviour.
“With debt review, you are trying to fix it and learn from your mistakes.”