Last week, the National Credit Amendment Bill, which includes details related to debt relief, was approved by the National Assembly, but it still has a while to go before it is signed into law. The so-called Debt Relief Bill still needs to be sent to the National Council of Provinces for consideration and must then be signed into law by the president.
What is important to understand is that this bill is not going to automatically expunge debt, it is simply a mechanism to provide debt review at no charge to individuals earning less than R7 500 a month who have unsecured debt of up to R50 000. The debt review process will be conducted by the National Credit Regulator and the National Consumer Tribunal, and will be funded by government.
The concern over the proposed bill is that it creates a false sense of hope for low-income consumers that their debts are going to suddenly disappear. Firstly, the process is still a long way from being available to consumers, as only once the president has signed the bill will the mechanisms be put in place by the National Credit Regulator, which could take several months to implement.
If a consumer stops paying their instalments before applying for debt relief, the credit provider can take legal action, after which the consumer will no longer qualify for debt relief. So not paying your instalments could see you disqualified automatically.
Furthermore, Lesiba Mashapa, company secretary at the National Credit Regulator, says the same rules under the current debt review process will apply. Under debt relief, low-income earners who are deemed indebted, in other words are unable to pay their debts using their current income, will have their debts restructured so that they can repay them over 60 months. Where appropriate, the interest rates will be reduced, even to zero in some cases. During the debt review process, the individual may not access any further credit and this will be flagged on their credit records.
Mashapa says that, in cases where the individual has no income, their agreements will be suspended for 12 months, which can be extended for a further 12 months. If they have still not found work after 24 months, the debt can be extinguished. If the debt is extinguished, this information will reflect on the credit bureaus.
Mashapa also warns that strong action will be taken against individuals who falsify information about their income to qualify for debt relief.
Will credit providers switch the taps off?
Lenders have indicated that they will review their risks if they believe that any debt will be extinguished.
While assurances have been made that the extinguishing of debt will only be considered for people with no income, the bill states that if a consumer cannot pay off the amount within 60 months, extinguishing the debt could be considered. There are also concerns that, unless the process is followed correctly, consumers who do not qualify could have their debt extinguished.
According to the Banking Association of SA (Basa), considering that this bill will affect 1.25 million to 3.2 million consumers with a total debt exposure of R8.8 billion to R23 billion of unsecured debt, “banks will have to seriously consider the risk implications posed by the bill. This could lead to a contraction of credit and/or to an increase in the cost of credit.”
This could mean that low-income earners will have less access to credit. While this could be positive as it will mean fewer people will be in debt, many households rely on access to credit, so there could be a rise in illegal lending, where loan sharks charge as much as 50% a month in interest and use illegal collection mechanisms.
The bill makes strong reference to the prosecution of illegal money lenders, however, the ability to investigate and take action is constrained by the limited resources at the National Credit Regulator.
Basa is concerned that the committee has not conducted an in-depth socioeconomic impact assessment to understand what the impact of the bill will be on the economy and society.
A contentious issue in the proposed bill is that the existing debt counselling network will not be utilised. The department of trade and industry has recognised that it is unaffordable for debt counsellors to service low-income earners, however, a proposal by the Debt Counsellors’ Association of SA (Dcasa) that credit providers subsidise these costs, allowing existing debt counsellors to process debt review for low-income earners, was rejected by the committee.
The current proposal is that government will use its resources to increase funding to the National Credit Regulator (NCR) to provide new offices, staff and systems to cater for the estimated 1.7 million low-income earners who are overindebted.
NCR company secretary Lesiba Mashapa says that the NCR has submitted a business plan to the department of trade and industry that outlines the funding required, however, he is not able to reveal the amount at this stage, nor provide information about how many staff will be employed or how they will access people in rural areas.
In its submission to the committee, the Dcasa estimated that if the NCR was to process 500 000 applications over five years, it would need to process 8 333 applications a month. This would require a staff compliment of 832 people in the first year at a cost of R97.8 million, growing to 1 754 staff members in the fifth year with an annual budget of R213.8 million. The growing staff complement would be necessary to meet the requirement to conduct an annual review of each consumer under debt review.
Paul Slot of the Dcasa says that the proposed bill will not negatively affect traditional debt counselling as this is a segment of the population that cannot afford to pay the required fees. However, with subsidised funding, the debt counselling industry could facilitate the debt relief programme.
“There is wide support for proposed debt relief for the poor at no cost, and debt counsellors requested a simplified process for low-income earners many years ago, but this was not forthcoming. The current view of the department of trade and industry committee that debt counsellors do not want to be part of the solution is not true and was not discussed with debt counsellors,” says Slot.
Mashapa says that, while he cannot comment on the committee’s decision to use the NCR and taxpayers’ funding, he did question why the credit industry had not made this proposal years ago.
“Funding has never come from the industry, it has always been a government allocation. If the industry genuinely wanted to provide funding, it should have been done earlier.
“There is nothing stopping them from contributing funding to the NCR.”
The concern is that, without significant funding and proper oversight, the debt relief programme under the NCR will ultimately fail consumers.