There is no question that the debt crisis faced by lower-income households needs to be addressed. However, the provisions for debt intervention in the National Credit Amendment Act raises many questions about how and when it will be implemented.
The banks have already indicated they will challenge some of the provisions. The Banking Association of SA (Basa) made it clear this will have a knock-on effect in terms of future lending.
In its statement this week, Basa noted that “banks cannot extend other people’s money as loans – for education and entrepreneurship – if they cannot be sure these loans can be repaid”.
“By making provision for the arbitrary expunging of debt, the Act effectively prevents banks from extending responsible credit, particularly to those in low-income households, who often need it most,” it said.
Basa believes any expunging of debt undermines the banking system which has “as one of its foundations, an undertaking by borrowers to repay the loans that they obtain from banks. Any compromise to this principle will have severe consequences for depositors [consumers], the industry and for the economy.”
Capitec Bank said on Monday that during the two years the bill has been debated it has reduced its credit exposure to lower-income earners.
“During the two years leading to the amendment, Capitec Bank planned and managed our exposure to the consumer market earning less than R7 500 per month, being well aware of the regulatory development. We did this to such an extent that we can confidently say we have sufficiently prepared for this. Our current exposure is less than 5% of our book.”
This confirms fears that the amendments to the National Credit Act will reduce availability of credit to low-income earners. Basa argues that this could even be extended to higher-income earners as the act increases uncertainty by allowing the minister to adjust the gross monthly income and total unsecured debt thresholds. Currently, the industry statistics show that 56% of credit applications are declined.
Benay Sager, chief operating officer at IDM, which operates debt counselling firm DebtBusters, says there is no detail on how the National Credit Regulator (NCR) will verify payslips to confirm income levels for the application of debt intervention and to prove if the individual has sufficient income to service the debt.
There is the real risk that individuals could use fraudulent payslips to qualify for debt intervention. Clarity is also needed on how the income and assets of an individual married under community of property would be determined as both spouses would have to enter debt review. “It will take many months just to agree on these points and then they still need to put the systems in place,” says Sager.
The NCR has sent a business plan to the department of trade and industry on how it will create the platform to offer debt review. The regulator has no offices outside its headquarters in Midrand and an electronic system may not be helpful for low-income earners who may not have access to the internet or affordable data.
Indications are that the NCR will be asking for a further R100 million in funding. But Paul Slot, head of Dcasa, believes this will be just the start.
In its presentation to Parliament, Dcasa estimated that if the NCR was to process 500 000 applications over five years, it would need to handle 8 333 applications a month.
While the debt intervention clauses in the amendments have been the focus of news reports, Paul Slot, head of the Debt Counselling Association of SA (Dcasa), says two very important changes have been made that will benefit consumers under debt review:
- Magistrates who are ruling on debt review applications will now have the discretion to reduce interest rates. This becomes binding on the credit provider. Slot explains that although there is a Debt Counselling Rules System, which is an industry agreement on how to reduce interest rates, not many credit providers agree to it. Now a debt counsellor can make the application for lower interest rates through the magistrates’ courts.
- Debt counsellors will also be required to report reckless lending. This will increase the number of reckless lending cases that go before the courts. Slot believes that successful prosecution of reckless lending will curb excessive lending and undesirable lending practices.
This would require a staff complement of 832 people in the first year, at a cost of R97.8 million, growing to 1 754 staff members in the fifth year at an annual budget of R213.8 million.
The growing staff complement would be necessary to meet the requirement to conduct an annual review of each consumer under debt review.
Basa’s analysis has revealed that if the NCR appoints the same number of debt intervention officers as there are currently debt counsellors, it is likely that after three years, only one in four applications would’ve been processed because of the broad scope and significant number of consumers who could apply.
“This could mean that the debt intervention mechanism that is aimed at assisting consumers, could leave them frustrated and result in their financial distress and over-indebtedness increasing,” it said.
Basa believes the existing mechanisms have proved to work as 25% of consumers currently under debt review fall into the low-income category. It also argues that the income levels on any debt intervention should be less subjective and based on an economic measure such as the minimum wage.
While questions are answered and the industry debates the best approach, what is clear is that the debt intervention envisaged in the act will take a long time to implement. It is also likely that, as with any free service, consumers will get what they pay for.
Right now the act seems to be creating more hype and confusion than providing an urgent solution to a serious problem.