New law will not achieve debt relief
Since more than 40% of credit-active consumers in the country are in arrears and we have a total debt book amounting to R1.7 trillion, our economy and our society are under threat. Clearly, an intervention to relieve this crisis is needed. This is recognised by the government, which has commissioned a great deal of research into the issue. In addition, Parliament recently passed legislation that is geared to provide an intervention: the National Credit Amendment Act. The president signed the act in August.
While recognising the dire situation facing South African consumers is important on the route to relieving this crisis in our country, this legislation, in its current form, is not what is needed. Nor, in fact, are many of the comments from the industry. For instance, it has been suggested that the debt relief proposals could place the banking industry at great risk, because R13 billion to 20bn of debt could be written off through the provisions of the act. This is creating an environment of fearmongering and panic that we believe is not valid.
Industry players who make comments of this sort are being reckless, particularly since a deeper look at the legislation makes it clear that there is little likelihood that any sizeable amount of debt will actually be written off.
First of all, the act provides for debt relief only for some debtors: those with household income of less than R7 500 a month, who have unsecured debt of under R50 000, and whose income versus the amount owing reflects a situation of over-indebtedness. Since all these factors must apply for an application for debt intervention to be considered, only a small portion of debtors will qualify for debt intervention.
The onus then falls on the debtor to apply for debt intervention, presuming that they have the knowledge, understanding and resources needed to do so.
There are huge communication needs relating to explaining the concept, process, rights and obligations to those most vulnerable in our society, and we have significant concerns about how this could be achieved.
Second, we wonder about the practicality of many of the provisions in the act. It is unclear, for instance, how the authorities will be able to carry out an assessment for over-indebtedness, in the required manner, for each individual debtor who seeks relief. The sheer volumes make it highly unlikely that most people seeking relief will be addressed at all.
Another issue that makes the provisions of the act unworkable is that only one body will have the authority to process these applications: the National Credit Regulator (NCR).
This is not an organisation with a large national footprint - in fact, it has only one office, located in Midrand near Johannesburg. So how would a mineworker from North West, a rural Eastern Cape single mother surviving on a social grant, or a farmworker from the Karoo be able to access the services of the NCR?
The most vulnerable debtors in our society are the least likely to have access to tools such as computers and smartphones with wi-fi availability, so the NCR would presumably need thousands of field agents with a physical presence across the entire country. How this will practically be implemented is unclear.
The act also makes provision for a complicated financial review process, stretching over two years, before a debt can be written off. Again, the practical implications suggest that few consumers will reach the end of this process and have their debts written off, and this even among the small portion of consumers who manage to qualify and successfully apply for debt intervention in the first place.
It is estimated that R407million of taxpayers’ money would be needed to make the provisions of the act workable. This would include funds to communicate important messages about the processes, to pay for the foot soldiers who would have to be employed, and to finalise debt write-offs via the National Consumer Tribunal, among other costs.
Considering it is unlikely that more than R100m would be written off, the cost versus benefit of the exercise becomes questionable.
It may be a lot simpler merely to write off the debt of those who clearly have no chance of repaying - those earning less than R7500 a month, for instance.
That way, no industry will find itself at risk, and we will not be using sizeable amounts of revenue from taxpayers to fund a process that seems to have many obstacles to success.
Mareesa Kreuser is legal adviser and audit manager at Summit Financial Partners.