Debt relief bill will cut credit for poor, says Nedbank
The bill will result in the lower-income population seeking to obtain credit through informal channels where the law does not provide sufficient consumer protection
Nedbank is not in favour of a proposed bill on debt relief, saying it entails moral hazard and will harm lower-income groups because credit providers will limit the extension of credit to them in a bid to limit their risk.
Nedbank was one of a number of entities that made submissions on the draft National Credit Amendment Bill that has been proposed by Parliament’s trade and industry committee. Submissions were also made during the committee’s public hearings by the Association of Debt Recovery Agents, MicroFinance SA, the Agricultural Business Chamber, the Debt Counsellors Association of SA, the Credit Bureau Association and the South African Institute of Professional Accountants.
The bill proposes to give the National Consumer Tribunal the power to extinguish debt in certain circumstances. The targeted group for the envisaged debt relief would be individuals earning a gross monthly income of not more than R7,500, who have no readily realisable assets (excluding exempted items mentioned in the bill), are not subject to debt review and have debt of less than R50,000. The bill gives the tribunal various options of debt relief including the extinguishing of the debt after a 24-month period.
Nedbank head of retail and business banking Pragnesh Desai said the bank was opposed to certain mandatory debt relief interventions that required that the bank absorb the costs and the consequences. He noted that Nedbank had its own debt-relief mechanisms for its distressed borrowers, which cost more than R300m annually in interest income foregone.
"There is a surfeit of legislation penalising both banks and [their] directors for failing to act with the necessary diligence to protect various stakeholders, including consumers," Desai said.
Extinguishing debt would lead consumers to believe that they could incur debt and default on it without any repercussions, creating a systemic risk for credit providers.
"The bill may result in credit providers restricting credit to populations where stability of repayment cannot be guaranteed with a reasonable level of certainty. Credit extension will therefore reduce even further, impacting on lower-income populations. This will result in the lower-income population seeking to obtain credit through informal channels where legislation does not provide sufficient or practical consumer protection."
The Association of Debt Recovery Agents agreed, saying that the effect of the bill would be that credit would not be extended to those who qualified for debt-intervention measures, in particular those earning less than R7,500 a month. The association had several reservations about the bill, including the fact that the criteria as to who could benefit from the debt-intervention measures were vague and "draw arbitrary distinctions between different categories of debtors and credit providers."
It also argued that the process of applying for a debt intervention was unfair in that the input from credit providers was not required even though the effect would be to deprive a credit provider of its rights to repayment.
The association argued that there was sufficient existing legislation to protect consumers and that this should be enforced.
MicroFinance SA CEO Hennie Ferreira warned that debt-intervention measures including the write off of debt, "introduces substantive uncertainty in the short-term credit market and a further hazard of cultivating negative consumer behaviour and attitudes towards servicing debt obligations and upholding legal credit agreements. Such measures would jeopardise the stability of the credit system."
According to MicroFinance SA data, a total of 5.1-million people with unsecured and short-term credit of R3.2bn would be eligible for debt interventions. It argued that for the proposed measure to be manageable, consumers who owed more than R10,000 and earned less than R6,000 per month should qualify for debt interventions. This would be a more targeted approach.
The Debt Counsellors Association of SA did not believe the bill would provide the intended relief as it did not adequately define the application processes, while the evaluation process was overly ambitious and unworkable. Processes needed to be simplified, the association said.
It also did not think that the National Credit Regulator was best placed to receive and process applications for debt relief.