The benefits and unintended risks of new debt relief law
The National Credit Amendment Act will come as a relief to the many South Africans stuck in debt traps, but banks warn that there’s a downside
Solani Rivele, a single mother of four, earns about R800 a week but owes 100 times that amount in loans. Millions like her rely on credit to feed their families.
Rivele has borrowed about R80,000 since losing her job as a security guard due to injury in 2016. Now she owes about R3,500 in monthly instalments, more than her monthly income.
“I can’t afford to pay because I’m a single parent, I’m the one who is providing food on the table,” the 44-year-old said in a shopping centre on the outskirts of her home in Alexandra.
“I can’t sleep.”
The situation of people like Rivele shows both the potential benefits — and unintended consequences — of a new law signed by President Cyril Ramaphosa in August, aimed at protecting vulnerable borrowers.
The National Credit Amendment (NCA) Act comes as some lenders make healthy profits on loans while many of the country’s poorest people spend huge chunks of their income on repayments. It could see some South Africans have their debts suspended or wiped entirely, and force more responsible lending.
This could be good news for many who, like Rivele, are stuck in debt traps. However, a number of big banks told Reuters that the new rules, and the potential risks entailed for lenders, meant they had or would cut back on lending to those low-income customers who might qualify for relief in future.
“You are asking yourself, do you want to play in that particular market, or do you move away?” said Gerrie Fourie, CEO of Capitec, SA’s fifth-largest bank.
This could cause serious difficulties for some families in a country where the unemployment rate is almost 30% amid sluggish economic growth, living costs are rising, and millions of people cannot make ends meet.
About a third of the population rely on loans for necessities like food, according to financial inclusion organisation FinMark Trust.
African Bank, a smaller lender that targets low-income consumers, said it already had and would further reduce its lending to qualifying borrowers in response to the NCA.
Arrie Rautenbach, the retail bank CEO of Absa, told Reuters it would cut back on new lending to the riskiest borrowers among those who qualify for NCA relief, while Jacques Celliers, his counterpart at another of SA’s big four lenders FNB, said it had already gradually trimmed new lending to the group in anticipation of the law.
Capitec said in August it had, over the past two years, reduced the proportion of borrowers who would qualify for NCA relief in its lending book to less than 5%.
Fourie told Reuters the figure has previously stood at 12%-15%, with the reduction mostly driven by a deteriorating economy, but with the upcoming credit law also a factor.
The other two members of SA’s big four — Standard Bank and Nedbank — said they were watching how the situation developed.
Loan sharks circle?
Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since lawmakers began looking at debt forgiveness in 2016.
It dropped from R3.64bn in the final quarter of 2015 to R2.27bn in the second quarter of this year, data from the National Credit Regulator (NCR) shows.
Cas Coovadia, who heads the Banking Association SA, said the law would either raise the cost of credit for some of the most vulnerable borrowers or stop banks lending to them.
This risks some being pushed back into the informal sector, dominated by a large network of illegal loan sharks known as mashonisas, Coovadia, bank executives and some debt counsellors say.
“You don’t want people to end up in the informal sector, that is never good,” said Absa’s Rautenbach. “It’s a very bad unintended outcome.”
This was echoed by Brett van Aswegen, SA CEO of payday lender Wonga. He said his company’s research showed mashonisas were already widely used, adding it would be “naive” to think consumers in need of cash would not go there.
Mashonisas like 31-year-old Dani, who operate in and about Northam, a mining town in Limpopo, commonly charge interest rates as high as 50%, and sometimes use violence to get their money back, according to debt campaigners.
Dani, who declined to give her surname as she is breaking the law, takes identity documents and bank cards as security, and if clients don’t pay on time, hikes the interest to 100%.
It boosts her business when people can’t go to the bank for loans, she told Reuters.
“If the economy is bad, it is good for me, like if there is a strike at the bank, [customers] have to come to me,” she said.
The NCR, and Clark Gardner, CEO of consumer advice firm Summit Financial Partners, disputed that borrowers would be pushed into the hands of loan sharks and said it would not be a bad thing if they had less access to credit.
Lesiba Mashapa, NCR company secretary, said big lenders granted loan sizes he viewed as excessive.
Gardner provided Reuters with loan agreements from two big banks in 2016 and 2017 respectively, with repayment periods of three and four years, where the cost of credit — interest rate plus charges — was 60% and almost 100%.
Differential Capital, an asset manager, agreed in a report published in August that irresponsible unsecured lending was far from the preserve of mashonisas, with formal providers “preying on financial illiteracy”.
The NCR moved to protect borrowers in the wake of a leap of almost 290% in unsecured lending between 2007 and 2012 following measures to tackle racial discrimination in the credit market.
Differential Capital’s report said two-thirds of the 7.8-million, usually low-income, consumers with unsecured loans spent more than a quarter of their net income on servicing their debt, while about half are in default.
The new law will see the credit regulator take over debt counselling for indebted consumers earning less than R7,500 per month — who are largely unable to afford private fees — and with unsecured loans of less than R50,000.
It will allow all or part of their debt to be suspended for up to 24 months and wiped entirely in some circumstances, for instance if they lose their job.
Estimates vary, but the National Treasury projected in October 2017 that up to R20bn of consumer debt could qualify for forgiveness. That’s small in an overall consumer debt stock of R1.9-trillion.
Brendan Pearce, CEO of FinMark Trust, said measures to open up the credit market in SA had worked “almost too well”.
He said that while the NCA credit amnesty could provide some short-term relief, it was not a long-term solution because so many people depended on debt to put food on the table.
“I can’t sit here and say we shouldn’t be allowing more credit to consumers who otherwise wouldn’t be able to survive.”
More was needed to tackle the problem, Pearce added, including working to address its roots: the state of SA’s economy.