The real problem with debt relief? It’s probably not what you think
Help for low-income people is welcome, but there has been misplaced anxiety about the size of write-offs and the higher cost of credit
Although the National Credit Amendment Act introduces several changes to the current law, the inclusion of debt intervention is most significant. It is welcome for consumers who have previously been excluded from formal debt relief procedures. This inequality in our credit and insolvency legislation has left many desperate consumers to face the full impact of debt enforcement without any avenue for surrender.
In both debt review and insolvency proceedings, more affluent consumers benefit from some form of credit write-offs, but good-faith low- or no-income earners are forced to pay their full debt obligation and additional, often exorbitant, legal costs.
The lower-income segment of the consumer market seldom accesses statutory debt counselling as a solution. One reason for this may be that debt counsellors generally avoid these consumers due to the low fees that can be recovered for the same administrative burden. Consumers with no or low income can furthermore not be placed under debt review as the process requires them to make a reasonable partial payment towards their debt.
The concerns raised by the credit industry gravitates towards the possible economic impact of debt extinguishment and the risk of increasing the cost of credit to low-income earners. Although these two aspects are significant considerations, their severity has been overstated.
Considering that 10-million of the 24-million credit-active consumers are in arrears and cannot afford their debt instalments, a meagre 1% debt extinguishment … is justifiable
The representatives of the credit industry’s own submission allude to a maximum impact of debt interventions of about R20bn. This fatalistic prediction is based on the highly improbable worst-case scenario. Not every consumer who falls within the applicable income group will apply for debt intervention, as there are personal consequences for applying. Of those who do apply, not everyone will succeed and even fewer will be entitled to debt extinguishment. Further, the R20bn suggested impact is a mere 1% of the gross debtors’ book.
The gross outstanding debtors’ book in SA amounts to R1.73-trillion, of which 85% is owed to banks and nonbank vehicle financiers. Secure credit makes up more than 74% of the gross outstanding debtors’ book. Secured credit will not be affected by the proposed debt intervention.
Considering that 10-million of the 24-million credit-active consumers are in arrears and cannot afford their debt instalments, a meagre 1% debt extinguishment — aimed at providing much-needed relief to already debt-stressed consumers — is justifiable. A total 25% of unsecured debts are already in arrears and will form part of the 1%. Most of the debts that will be subject to debt intervention would therefore already have been provided for in the lenders’ books.
The threat of an increase in the cost of credit is also somewhat overstated. Many credit providers servicing this portion of the market are already charging the maximum prescribed interest rates and fees. There might be an initial knee-jerk reaction to the new process, as was seen at the introduction of the National Credit Act in 2007, but the industry will probably readjust and settle within a few months.
Although the introduction of debt intervention fills a gap in our insolvency legislation, it is doubtful that it will be able to provide the intended relief. The practical application of the process may prove to be more complex than anticipated. It is thus doubtful whether even as little as R100m of applicable capital outstanding will be written off in the first year or two.
The primary reason is that the application process requires a consumer to apply to the National Credit Regulator (NCR), and successful applications must then be considered by the National Consumer Tribunal. This poses the following main concerns:
- This segment of the market will need to be informed of debt intervention benefits and the application process, and be provided with the digital means to apply accordingly. The soon-to-be-released regulations may enlighten us further, but considering that the NCR has one office, in Midrand, it is unclear how applicants without the necessary infrastructure or know-how will be able to access the relief.
- We are greatly concerned that the NCR will not be able to perform its administrative role in this process. The NCR has not indicated how it plans to prepare for the additional, and pivotal, role it will be fulfilling in this new process. The NCR’s capability in managing its current functions is already a cause for concern. It is doubtful that the NCR will be able to attend to these applications in a timely and efficient manner.
- Once an application is received, the NCR is required to assess and propose a solution to the National Consumer Tribunal. The tribunal must then review the application and make a final decision. The tribunal will also be required to consider any counterarguments posed by credit providers. Currently, the tribunal takes on average two to three months to finalise unopposed consent orders. It seems idealistic to assume that the tribunal will be able to reasonably attend to the proposed additional queries.
- The act introduces financial literacy training, which is made compulsory for consumers who apply for debt intervention. The NCR is tasked with providing this service to consumers nationally. How this mammoth task is to be executed is unclear.
The purpose of the introduction of debt intervention in the SA legislative framework is supported. This form of so-called poor man’s sequestration is not an original construct and has been introduced in some form in several other countries.
The initial hysteria over the possible consequences of the process must be unpacked and filtered. The likely consequences of the bill must be addressed without the sensational being overstated or it being oversimplified.
The procedural challenges posed are still unanswered. Many of our clients originate from the SA mining sector, in which we have learnt that debt-ridden consumers often require assistance in accessing debt relief, whether in the form of debt counselling or challenging their credit providers on unlawful charges or reckless loans. The NCR is yet to give clarity on how these consumers will be assisted.
Many commentators on this issue are protecting their industry or constituents with false narratives. Regrettably, such comments could have a devastating impact on the economy that will increase the cost of credit and fuel the loan shark industry. At best these commentators are ill-informed, but most likely they are creating a false narrative to support their profit motive.
In its current form, it is doubtful that the impact of this legislation will amount to more than R100m in capital written off over the next year or two.
• Gardner is founder and CEO of Summit Financial Partners.