Debt relief bill would leave overindebted worse off, says govt commissioned study

The debt relief bill's impact on South Africa's society and economy is "net negative", an independent study commissioned by the government found.

The socio-economic impact assessment was conducted by Genesis Analytics for the Department of Trade and Industry earlier this year. Genesis collected evidence from January to March 2019 and the report was finalised in April 2019.

Members of the sixth Parliament's portfolio committee on trade and industry were briefed on the socio-economic impact assessment study on Tuesday. The National Credit Amendment Bill was originally drawn up by members of the committee in the fifth Parliament and was assented to by President Cyril Ramaphosa in August.

There has been mixed reaction to the bill, with some economists and analysts warning that it would have a negative impact on the economy.

Genesis' assessment noted that although the bill seeks to benefit those who are overindebted with debt relief mechanisms, it also has "unintended consequences", chairperson Duma Nkosi said in a statement following the briefing.

Bill still supported

The socio-economic impact assessment is not mandatory, Nkosi said. According to Nkosi, Minister of Trade and Industry Ebrahim Patel has undertaken to address the unintended consequences and the committee will continue to support the bill's implementation.

Parliament had passed the bill to address a market failure – the inability of lower income consumers to have access to debt review service through debt counsellors because they cannot afford it. The bill creates a separate review process for a defined lower income consumer segment – those earning up to R7 500 per month, who have an aggregated unsecured debt amounting to as much as R50 000 and who are over-indebted. The process is also called debt intervention and not debt review, the Genesis report stated.

Nkosi stressed the intended benefits of the bill – such that it would curb reckless lending, empower magistrate's courts to reduce interest rates, fees and charges when considering debt review applications, among other things.

Unintended consequences

But Genesis' findings indicate that although the bill intends to address financial inclusion, the impact would be the opposite.

"Parliament may not have had sight of all the unintended consequences of the Bill.

"We respectfully suggest that the proposed solution may not be the most appropriate to achieve the laudable goals of helping vulnerable consumers, in fact it is likely that the proposed solution will ultimately harm the wider group of lower income earners," the report read.

According to Genesis, about 177 700 of over-indebted consumers would benefit from debt restructuring and debt relief under the debt intervention system. About 85 800 of over-indebted consumers would benefit from having their debts extinguished - and, surprisingly, the informal market of lenders or mashonisas/ loan sharks would gain R7.6bn in new demand.

Cons outweigh pros

The benefits are outweighed by the negative impact, Genesis found.

Any consumer earning less than R7 500 who is not over-indebted - approximately 11.7 million consumers with outstanding debt of R71.4bn - would not benefit, the report said. It is expected lenders will adjust lending patterns due to the perceived higher risk created by the new debt intervention system, coupled with their distrust in regulators to undertake the process efficiently and fairly, Genesis highlighted.

"As credit providers cannot be certain in advance which consumers will become over-indebted, they will apply a precautionary higher risk assessment to all consumers in the ≤R7 500; ≤ R50 000 category.

"Credit providers will increase the cost of capital for this group and once this is at maximum regulated levels, will tighten lending criteria and affordability assessments, as well as redirecting some capital allocation to other consumer segments," the report read.

Additionally, formal credit extended to this segment of consumers is estimated to drop by R12.8bn or 17.9%.

"Of this R12.8bn, it is estimated that 60% (or R7.7bn) will be taken up by the informal credit market (mashonisas)," the report read.

Consumers flocking to the informal lending market will be worse off than those in the formal market, Genesis warned. "Where consumers turn to the informal market to make up lost credit extension, it will leave them without regulatory protection.

"They will be more exposed to usurious rates of interest and illegal methods of collection. This harm on all lower income consumers is a major unintended consequence of the bill," the report read. "The bill is also expected to have an adverse impact on financial inclusion."

Formal sector credit providers will lose R3.9bn from the existing loan book and there will be second-round losses for retailers who will lose sales amounting to R1.9bn.

Cost to the fiscus

The fiscus, in turn, will take on additional costs of R407m a year to pay for debt counsellor activities of the National Credit Regulator (NCR) and National Consumer Tribunal. In turn, the debt counsellor industry will lose a small amount of revenue (R5.2m), a portion of their consumer base and approximately 36 jobs, Genesis warned.

There is also a risk that the bill would erode the status of the NCR, which could become a service provider.

"It is also not clear how the debt intervention activities of the NCR will be overseen, and to whom the NCR will be accountable," the report read.

Genesis made a number of recommendations – which include implementing the debt intervention system within the bounds of the existing debt review system by offering subsidies for low income consumers. This would ensure the goal of financial inclusivity is achieved. It would also be "cost effective" as it will not require new capacity from the state and credit providers would be responsible for subsidising debt review for lower income earners (on a case by case basis).

'Information vacuum'

In a separate statement on the assessment, DA MP Dean Macpherson lambasted the ANC for rushing the passing of the bill and the president signing it into law.

"The president has signed into law legislation in an information vacuum which will now have disastrous consequences for consumers, the cost of credit and the restriction of credit for low income South Africans," Macpherson said.

In a written parliamentary reply to a question from Macpherson about whether he consider the socio-economic impact assessment, Ramaphosa said he had no constitutional reservations about the bill before signing it into law.

"In considering bills passed by Parliament, I am always guided by the Constitution. The Constitution requires that I apply my mind to the constitutionality of the bill.

"I could not find any constitutional defect in the bill. I consequently signed the bill into law," Ramaphosa said.

There is no date yet set for when the amended National Credit Act will become operational. There are certain provisions of the bill which require regulations and certain information must be prescribed before the provisions are put into operation, Ramaphosa added.

"The implementation of the bill will also require readiness from both the Department of Trade and Industry and National Credit Regulator. The Minister of Trade and Industry will advise me when all conditions to bring the Act into operation are met," he said in the written reply.

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