For consumers living hand-to-mouth, the National Credit Amendment Act - also known as the debt relief act - offers some welcome respite.
The act, signed into law by President Cyril Ramaphosa but yet to be promulgated, provides for debt intervention for a market that previously hadn’t qualified for debt review: those earning less than R7500 a month with unsecured - that is, credit card, “pay-day” or short-term loans debts - of up to R50000.
It requires involvement by the National Credit Regulator (NCR) and the National Credit Tribunal, which can order that credit agreements are suspended in part or in full for up to two years. After eight months, the NCR must conduct a review of the applicant’s financial circumstances. If the applicant does not have sufficient income or assets to allow for his or her obligations to be re-arranged, the matter is referred back to the tribunal, which can consider extinguishing their debts in whole or in part. The applicant cannot access further credit for a minimum of six months.
But with credit-hungry consumers already borrowing from Peter to pay Paul, high living costs, a lack of education, a weak economy and almost 30% unemployment, many are warning that the amendment may cripple the working class financially.
Lending criteria were tightened in 2015, when affordability assessments became a requirement. But those who accessed unsecured credit through multiple sources prior to that are now saddled with debts they cannot repay.
In a country where more than three-quarters of household expenditure goes towards servicing debt, high default rates and disposable income under increasing pressure, concern has been raised that the legislation will shut out the lower-income market from the formal lending channels. Debt forgiveness is also likely to send the wrong message to consumers and investors - and force more people to seek credit from loan sharks.
Already, the banking sector says writing off about R20billion in bad debt for about 10million consumers will not only send the wrong message of debt forgiveness, but also make lending to that market unviable.
Not worth the risk
This week, Capitec’s chief executive Gerrie Fourie announced that the bank had already reduced its exposure to the lower-income market significantly. He said in the two-year lead-up to the amendment, it had planned and managed its exposure to the consumer market earning less than R7500 a 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.”
In other words - Capitec, which was once known as a micro-loan lender to poorer people - started the process years ago.
In 2016, Reuters reported the bank had announced that it had limited credit extension to lower-income earners, because workers in industry and small-scale retail are “at high risk of having unstable income”.
The Banking Association of South Africa (Basa) notes in a statement that in 2017 banks expunged R30bn 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.”
Basa warns the act puts South African’s savings, investment and access to credit at risk.
Simone Steinmar, spokesperson for debt counselling firm Debt Hero, says the bill provides for a “well-regulated solution in terms of which a consumer can become completely debt-free after three to five years”.
But the problem is that most consumers are unable to stick to the time frame. And because debt review flags consumer credit profiles and stops them from incurring further debt, “unfortunately, we have far more South Africans calling in requesting us to remove their debt review status, than asking for the relief it offers”.
The NCA’s ambitious goals, she says, requires a stable economy “where food, rent, transport and other basic expenses are not continuously on the rise.
“It begs an economy without large-scale unemployment and retrenchments. It is, therefore, no wonder that families cannot afford to go without credit and therefore cannot commit to debt review to resolve their over-indebtedness.”
Steinmar warns that the act is a “dangerous and temporary fix”.
“At this rate, South Africa’s most vulnerable would need a debt relief bill every few years to extinguish debt caused by desperate problems yet to be resolved.”