Debt relief law misses the mark
Given the costs and complication of the new process, it may be simpler to write off debt of people who cannot repay it
The extremely high rate of overindebtedness among South Africans is well documented. The situation's seriousness was reflected in a headline in The Economist last year: “In SA, more people have loans than jobs”.
With more than 40% of credit-active consumers in arrears and a debt book totalling R1.7-trillion, the economy and society are under threat. Crisis intervention is needed.
This is recognised by the government, which has commissioned much research on the issue. In August, the president assented to the National Credit Amendment Act, geared to providing an intervention.
But in its current form the legislation is not what is needed. Nor are many of the comments from industry. It has been suggested that the debt-relief proposals could put the banking industry at great risk because R13bn-R20bn of debt could be written off through the act's provisions. This creates an environment of fearmongering and panic. Comments of this sort from industry players are reckless, especially because a deeper look at the legislation makes it clear that there is little likelihood of any sizeable amount of debt being written off.
As the most vulnerable debtors are least likely to have access to tools such as computers and smartphones with Wi-Fi availability, the NCR would presumably need thousands of field agents with a physical presence countrywide
The act provides for debt relief only for some debtors: those with household incomes of less than R7,500 a month with unsecured debt of less than R50,000 and whose income vs the amount owing reflects a situation of overindebtedness. Because all these factors must apply for an application for debt intervention to be considered, only a small portion of debtors will qualify for it.
The onus falls on debtors to apply for debt intervention, assuming they have the knowledge, understanding and resources needed to do so. There are huge communication issues in explaining the concept, process, rights and obligations of the process to people who are among the most vulnerable in society, and we have significant concern about how this will be achieved.
We also wonder about the practicality of many of the provisions in the act. It is unclear how the authorities can carry out an assessment for overindebtedness in the required manner for each individual debtor who seeks relief. The sheer volume makes it highly unlikely that most people seeking relief will be helped.
Another issue that makes the act's provisions unworkable is that just one body, the National Credit Regulator (NCR), will have the authority to process these applications. This is not an organisation with a big national footprint. It has just one office, in Midrand near Johannesburg. So how would a North West mineworker, a rural Eastern Cape single mother surviving on a social grant or a Karoo farmworker access the NCR’s services?
As the most vulnerable debtors are least likely to have access to tools such as computers and smartphones with Wi-Fi availability, the NCR would presumably need thousands of field agents with a physical presence countrywide. How this will practically be implemented is unclear.
Cost vs benefit
The act also makes provision for a complicated financial-review process, stretching over two years, before a debt can be written off. The practical implications are that few consumers will reach the end of this process and have their debts written off, and this even among the small portion of consumers who manage to qualify and successfully apply for debt intervention in the first place.
It is estimated that R407m of taxpayers’ money would be needed to make the provisions of the act workable. This would include funds to communicate important messages about the processes, the foot soldiers who have to be employed and to finalise debt write-offs via the National Consumer Tribunal, among other costs. Considering that it is unlikely that more than R100m would be written off, the cost vs benefit of the exercise becomes questionable.
It may be a lot simpler to merely write off the debt of those who clearly have no chance of repaying, those earning less than R7,500 a month, for instance. That way, no industry will find itself at risk and we will not be using sizeable amounts from taxpayers to fund a process that seems to face many obstacles.
• Kreuser is legal adviser and audit manager at Summit Financial Partners.