Debt write-off bill may end up raising the risk bar for consumers
For a long time, South Africans have been warned that the level of personal debt in the country is out of control.
Much of the responsibility for this has quite rightly been attributed to credit providers, who in the past have forced consumers to use up to 80% of their monthly income to repay debt.
This practice was reckless and immoral, which is why the National Credit Act was eventually promulgated.
In 2017, a draft bill giving the National Consumer Tribunal the power to extinguish debt in certain circumstances was published for public comment by Parliament’s trade and industry committee.
The South African Institute of Professional Accountants was one of many entities that made submissions on the draft National Credit Amendment Bill.
The debt-intervention powers that are being proposed set out a process that credit providers and credit bureaus must follow when they are lending money, and the institute’s submission highlighted certain aspects of the proposal that require further consideration and discussion. Some in the profession are wondering if the intervention is needed at all.
Treasury is supporting the proposal that the unsecured debt of particular over-indebted individuals be extinguished completely as a once-off intervention. The group of people who would be eligible for this are individuals with gross monthly income of not more than R7,500, who have no readily realisable assets (excluding exempted items), are not subject to debt review and have unsecured debt that is less than R50,000.
Certain consumers will be excluded completely because they will be considered too risky
In other words, a debt intervention applicant may apply once to the National Credit Regulator in the prescribed manner for a debt intervention, if as at November 24 2017 that applicant had a total unsecured debt owing to credit providers of no more than R50,000.
During the parliamentary hearings, certain stakeholders argued that the debt intervention bill wasn’t necessary as the targeted group could well be candidates eligible for "poor man’s sequestration". So instead of extinguishing debt, it is also crucial to consider whether to put the responsibility on over-indebted individuals to apply for sequestration.
The debt intervention that is proposed targets relief from unsecured debt, specifically lower-value loans to lower-income consumers. This has the potential of increasing the risk associated with unsecured lending, because the debt intervention process is focused exclusively on the circumstances of the debtor.
If credit providers are denied input into the process, the inevitable imbalance of risk and return will lead people who have historically been unable to access credit to find it even more difficult to access credit in future.
Instead of developing a credit market accessible to all South Africans, certain consumers will be excluded because they will be considered too risky.
In addition, according to the current proposal credit providers will be tasked with reviewing all of the credit agreements prospective clients have with other credit providers. This would require that the consumer request these documents from all their providers of credit.
This process alone would be a brake on the industry as it would be extremely time-consuming for both borrowers and lenders.
Once the consumer is in possession of these agreements the prospective credit provider would need to review each agreement and determine whether they were granted recklessly at the time. Consider how long this process would take. This additional obligation would burden the credit industry and have an array of unforeseen consequences.
One unexpected ripple effect could be that competing credit providers would use this opportunity to report their competitors’ agreements to the National Credit Regulator, thereby reducing competition by restricting competitors’ ability to efficiently grant credit.
In addition, there could be unwarranted impairment of credit providers’ reputations if allegations are made that turn out to be false. As an organisation representing businesses in the credit industry, the institute views these scenarios as potentially very problematic consequences of the bill.
That said, while some credit providers see the bill as negatively affecting the industry, it also has the potential to bring much-needed relief to financially stressed individuals who do not have the income to service their debts.
The institute supports the debt intervention proposed in the bill, but also wants to highlight these crucial aspects so that the legislation that is eventually passed is fair and does not have any unintended negative consequences.
• Ngwenya is technical executive at the South African Institute of Professional Accountants.