The new credit law and what it means for you
A new law could see millions of people’s debts wiped out – but it’s controversial
SHE rises before the crack of dawn, travelling long distances from her home in the suburb of Kraaifontein to her jobs in central Cape Town and other parts of the Mother City. Noloyiso Lombo (46) is a domestic worker, earning up to R4 000 in a good month. “It’s difficult because I work on commission,” she tells DRUM. “The one man I work for two days a week pays me R2 000 a month.”
Her second job involves working for a cleaning agency where she’s employed for three to four days a week depending on bookings, and the money she takes home isn’t enough to pay all her debts.
The single mom has to take care of her 28-year-old daughter and two grandchildren, making sure they have a roof over their heads and are fed and clothed. That means there isn’t enough money left over to pay her debts.
She owes around R20 000, an amount that’s crept up over the past five years. Her debtors include clothing retailers, and she owes money on her daughter’s
“It’s a real stress for me because I don’t have enough to pay what I owe,” she says. “And I can’t buy anything because if I do, my debtors are after me.”
Noloyiso is one of millions of South Africans who’ve increasingly tightened their belts yet still can’t make ends meet. She can’t survive without the debt she’s incurred – yet it’s stopping her improving her life.
But soon Noloyiso’s worries might all be over. Thanks to a new law, low earners like her could see their debts wiped out.
That’s right – it will be as if it never happened.
But, of course, it’s not just as simple as saying you want it gone and so be it.
The National Credit Amendment Act 7 of 2019, recently ratified by President Cyril Ramaphosa, won’t apply to everyone or to all debt.
The part of the act that refers to debt being cancelled – praised by some but seen as reckless by others – is aimed at households within a certain income category. It applies only to people earning R7 500 a month before deductions.
There will also be several other factors to consider before someone qualifies, and a lot must happen before the new act can be put to practical use.
Experts warn this step can also make debt more expensive in the long term, and could end up harming the very people it’s intended to help.
But those who support it say it will make a huge difference in the lives of many poor South Africans who simply can’t get on track because of the huge burden of debt they have to carry. These are consumers who have no other option but to incur debt to survive from day to day.
We break down the details.
WHAT IS IT ABOUT AND WHO BENEFITS?
The proposed measure to strike debt is part of a series of amendments to the National Credit Act.
The new amendment act, also called the Debt Relief Bill, is meant to help the poorest and most indebted South Africans.
Its overarching purpose is to strengthen the Credit Act and prevent exploitation of especially lower-income households. But what’s made most consumers
sit up and take notice is the prospect of having their debt written off.
The new law is specifically aimed at helping debt-ridden consumers who earn less than R7 500 a month and have unsecured debt, such as credit and store cards or personal loans, of a maximum of R50 000.
If you owe more than R50 000 you may not apply to the National Credit Regulator (NCR) for debt intervention. But after considering factors such as inflation, the relevant minister may adjust this total debt amount once a year.
The amendment won’t apply to those who are in debt counselling, sequestrated or in court-ordered debt administration. And it doesn’t include home and car loans.
NO FREE PASSES
But this won’t just be a free-for-all – your debt won’t automatically be expunged if you qualify for it.
Once the legislation is implemented, you’ll have to apply to the NCR for the process to start.
The NCR will be in charge of administering these regulations and will assess each application and decide whether the situation is dire enough to warrant the debt being written off.
You could say the NCR will act as a type of debt counsellor or debt manager – but without the fees this usually comes with.
It might decide that the applicant is capable of getting themselves out of debt with the necessary guidance and debt restructuring.
Details about implementation still need to be worked out but for the time being the process and time frame look something like this:
The NCR assesses whether the applicant is overburdened with debt, and whether any of the credit agreements constitute reckless lending.
The NCR then has several routes it could decide on. It could deny your application in its entirety, recommend voluntary debt restructuring, or investigate reckless lending agreements to see if the lenders are liable.
If the NCR finds the applicant is unable to pay off their debt, it might suspend repayments for a year.
The NCR will reassess the situation at the end of this period. If the applicant is then in a better position and able to pay off their debt within five years, the NCR can negotiate new repayment terms and interest rates on the applicant’s behalf.
But if it’s found that the situation hasn’t improved, the NCR may suspend repayments for another year.
Then, if the applicant is once again found to be unable to repay their debt, the debt might be expunged, either fully or in part.
This will be a lengthy process and critics say the NCR doesn’t have the necessary resources to help the many debtridden consumers who’ll apply.
THE SITUATION NOW
Under the new amendment act, an estimated 9,5 million indebted South Africans could be eligible to have their debt expunged.
But applications can only be made once a start date has been advertised in the Government Gazette.
“It’ll take some time – possibly up to two years – for regulations to be finalised so the law can be implemented,” says Benay Sager, COO of debt-counselling firm DebtBusters.
Meanwhile consumers should be wary of getting into more debt, Sager warns.
“Taking out more credit than you can afford isn’t a good idea and could have long-term implications for your credit record.”
A ‘NO’ VOTE
So will the new laws be a godsend to society’s most vulnerable or put them at even more risk? It depends who you ask. The banking sector hasn’t been positive about the changes. The amendment act in its current form “doesn’t achieve the intended objective of helping overindebted consumers”, says Cas Coovadia, managing director of the Banking Association South Africa (Basa).
Banks have been voluntarily helping embattled consumers for years by providing billions of rands’ worth of relief in the form of interest rate cuts, he says.
Debt intervention measures “shouldn’t introduce uncertainty and instability into the credit market, as this will have a further negative effect on consumers and the SA economy,” Coovadia says.
The banking sector absolutely supports debt-relief measures to over-indebted consumers whose income circumstances have been weakened beyond their control, he adds.
But he believes the new amendment will disrupt the credit system, which is carefully calibrated to function in a certain way.
“By making provision for the arbitrary expunging of debt, the act in effect prevents banks from extending responsible credit, particularly to those in low-income households who often need it most.”
Why? Because of the risk involved in lending to people who might not be able to pay and who might then eventually have their debt written off.
The act will make credit providers even more cautious of extending credit to people who, for example, earn less than R7 500 a month, Coovadia says.
And if banks aren’t giving people loans and consumers still desperately need money, they’ll find it elsewhere, critics argue. This might drive desperate consumers
‘It will provide badly needed debt relief to millions’
straight into the clutches of unscrupulous so-called loan sharks – unregulated microlenders who charge impossible interest rates and extend loans to those who’ve run out of borrowing options.
“An unintended consequence of the new act could be that credit providers will have to review their lending criteria for the category of consumers involved as they’ll be perceived as a higher risk,” says Neil Roets, CEO of debt counselling firm Debt Rescue.
“And if such consumers don’t meet the criteria, they’ll be left with little option but to turn to unregulated lenders – which will have a detrimental impact on their rights and their financial circumstances in the long term.”
The Democratic Alliance (DA) is worried the act will encourage South Africans to get into debt.
“The DA is concerned that this act will increase instead of decrease the appetite among low-income earners to incur more debt, with no intention of paying it back,” says Dean Macpherson, DA shadow minister for trade and industry.
“The act in its current form fails to make adequate provision for dealing with illegal and unregistered rogue lenders who take advantage of consumers who have no recourse or protection from the state.”
The National Clothing Retail Federation has also expressed its concern over what the future holds for retailers.
Michael Lawrence, the federation’s executive director, emphasised that many clients in the retail sector fall into the category the Debt Relief Bill applies to. As a result, many credit providers in the industry will be hesitant to extend credit.
Roets acknowledges that consumers, especially in the below R7 500 income bracket, can’t always afford the legal fees often associated with debt counselling, despite these legal fees being quite reasonable, as debt counsellors negotiate them with attorneys. “Since 2007 debt counselling has proved to be a successful solution to assist consumers who are over-indebted,” he says. This might have been a better route to follow instead of writing off the debt, Roets believes. “A much better solution would’ve been for government to subsidise the legal fees for consumers within the defined criteria, thus enabling them to make use of debt counselling.” Roets says SA’s consumer debt problem is largely a consequence of poor financial literacy. Most consumers receive little or no financial education at any stage of their life. “When people start earning an income, they are often not equipped to handle the pitfalls that come with taking up credit. “Over-indebtedness in SA can be dramatically reduced if the government provides thorough financial education at school level around topics such as the cost of credit, responsible use of credit, living expenses and good and bad debt.”
A ‘YES’ VOTE
Trade federation Cosatu praised Ramaphosa for signing “one of the most propoor and pro-worker laws”, and reckons the banks are overreacting. “It will provide badly needed debt relief to millions of over-indebted and exploited workers and their families,” says Matthew Parks, Cosatu’s parliamentary coordinator. “It’s a helping hand to those who need it most.” But he urges South Africans not to take it as a licence to shop. “It’s critical for consumers not to mistake it for a green light to engage in reckless borrowing or financial behaviour.”
‘This will have a further negative effect on consumers’
President Cyril Ramaphosa recently ratified the so-called Debt Relief Bill.
Trade federation Cosatu says the Debt Relief Bill will benefit the poor but Basa’s Cas Coovadia (BELOW) believes it won’t meet its objective.