Debt relief Bill may be a ‘hazard’

AFFECTS: BANK PROFITABILITY, IMPAIRING CREDIT ACCESS Some consumers will default in the belief the debt will be expunged, says Banking Association SA.

The Banking Association South Africa (Basa) is warning that legislated debt relief would create instability in the credit market and reduce access to credit for poor and low-income consumers.

This comes ahead of public hearings on the Draft National Credit Amendment Bill, to be hosted by parliament’s Trade and Industry Portfolio Committee next week.

The Bill seeks to provide capped debt intervention for poor and low-income consumers, with those eligible for the proposed debt relief earning a gross monthly income of R7 500 or less. It aims to provide relief for consumers with unsecured credit, but only for debt accrued up to November 24, 2017, not exceeding R50 000 and may only be used once per lifetime.

Basa will oppose the bill at the hearings. It says legislated discharge of debt obligations will send the wrong message. Basa’s Cas Coovadia said the legislation would fundamentally change consumer behaviour and create a potential moral hazard. Some consumers would default, believing the obligation would be expunged.

Basa also said the legislation would have severe consequences for the banking industry and the economy. The loss rates on banks’ unsecured loan portfolios would increase if they can’t recover loans, leading to changes in risk appetite and pricing to ensure the profitability of said portfolios. Then access to credit for poor and low-income people would be restricted due to higher costs for it.

To ensure access to credit isn’t unnecessarily constrained, Basa said the success of both debt intervention measures provided by the National Credit Act and voluntary measures by the industry should be considered. The voluntary measures, including debt counselling rules, payment holidays, restructuring and debt consolidation, offered by banks saw a reduction in interest of R3.43 billion in 2016.

Citing data from the National Credit Regulator, Basa said consumers with impaired credit records have since reduced to levels last seen in 2008 and credit granted has become stagnant over recent years. Given the success of voluntary measures, Basa sees no need for legislated debt relief measures.

Coovadia said work on the amendments to the Bill began in 2016, at a time of populist rhetoric and horror stories – and not on data-based rationale. It proposes a subsidy – from either the fiscus, credit providers or a fund comprising fees from people already accessing debt review – to pay costs for consumers to use debt review. It said one of the biggest obstacles to indebted consumers seeking help is debt counsellors’ fees.