Debt relief and credit under microscope
… sent to clients 22 Dec 2016…. Further powers for the National Credit Regulator to regulate against reckless lending have been reaffirmed as necessary and the subject of debt relief for needy persons considered.
This conclusion was the result of a series of hearings conducted by Parliament and criteria are to be developed for the application of debt relief measures and how this could be achieved are now being studied.
Such criteria could include target groups of debtors who would be eligible for the relief; the period in which the measure would apply; the type of debt that would be covered and how the measure could be implemented.
An earlier study, commissioned by the National Credit Regulator (NCR) some months ago, concluded that there was a need for the National Credit Act to make provision for the introduction of some form of national debt relief but the NCR decided to consult Parliament and to involve public input.
Growing debt bubble
Whilst reckless lending and irresponsible borrowing which led to the disastrous housing bubble in the US, Joanna Fubbs, as chairperson of the Portfolio Committee on Trade and Industry, acknowledged that the situation regarding any retail debt bubble is not as bad in SA. Nevertheless, she said that for some time she has been concerned that the National Credit Amendment Act is not working in the best interests of vulnerable groups.
On the issue of debt relief, whether from reckless lending or not, it was agreed some time ago by the Committee that it was important for stakeholders to be consulted to establish a better picture. A parliamentary select committee, chaired by MP Eddie Makue of the same Committee, was formed to investigate whether debt relief would be an acceptable policy for SA and to organise parliamentary hearings focusing on banking input and debt control aspects.
The Portfolio Committee also recommended to this subcommittee that there needed to be a better understanding between the excesses of lending, the plight of borrowers and a view established on regulations which should refrain from fostering any culture of not paying debt in the hope that it might be written off.
Meanwhile, it has been proposed by the Department of Trade and Industry (DTI) to extend the powers of the National Credit Regulator to conduct proactive investigations into reckless lending . They would also be asked to impose administrative fines and to empower the Minister to provide debt relief mechanisms through further regulations, yet to be drafted.
Also, NCR submitted that it had already laid out its own proposals to tighten up existing regulations and penalties for perpetrators of reckless lending which the Regulator was currently entitled to enforce under the Act but the views of the Regulator were to be sought on debt relief by Makue’s Committee.
DTI has since confirmed to this Select Committee that it was their view was that the Minister of Trade and Industry, Rob Davies, should be given the power to prescribe debt relief measures, the nature of which must be carefully thought through . At the time, DTI acknowledged that banks and credit providers had to make their views known preferably in a series of hearings now conducted.
National Credit Regulator, Nomsa Motshegare, has confirmed to the Select Committee that in their view some form of debt relief is necessary given the reasons of the country’s slow economic growth; retrenchments that were taking place; and rising unemployment figures.
In general, she said, these factors had already diminished household income and led to difficulty for consumers to repay loans. The NCR had found, they said, that there was a willingness in general amongst banks to find ways to relieve the financial burden of indebted clients, many of them stating that they did this already, but there was considerable doubt on whether this should or could be backed up by any enforcement measures and regulations.
In this regard, during further public hearings, Cas Coovadia of the Banking Association of SA (BASA) emphasised that legislated debt relief for all would have negative consequences since this was far too prescriptive. He called for “a customised debt relief approach that would suite various portfolios” as a better principle to follow.
At the outset of the discussions, Coovadia stated that BASA did not support the principle of debt forgiveness as an objective. One of the banking system’s foundation principles, he said, was the need to efficiently and legally lend money to borrowers and to collect repayments from borrowers to settle the loans.
He told parliamentarians. “A confluence of pricing, regardless of individual consumer risk, will arise at a portfolio level to offset the inability to price for the risk. This will mean that consumers who have a good repayment history will no longer be rewarded for such behaviour when they apply for further credit.”
He warned that blanket debt forgiveness would accelerate irresponsible borrowing and said all banks offered means to repay and gauged the circumstances when lending. Any failure to perform on this principle would have severe consequences for the industry and economy; would increase risk to depositors/savers; would impose a cost on society; and would limit credit providers’ ability to extend credit, he said.
Making a plan
Nedbank said that the option of rehabilitation was always a preferred course rather than hard legal collections and the bank had recently adopted a philosophy in general banking terms that to become proactive in terms of debt relief solutions was the far better solution for those who had over-extended themselves.
They said the situation between credit provider and consumers should remain “mutually beneficial”, which principle bore in mind that the economy of the country was less affected. Nedbank confirmed that a satisfactory low, in their view, of 4.6% of their clients could be classified as technically in total default without the any possibility of rescue, as at the end of 2015.
Individual banks, such as Standard Bank, Absa, First Rand, Capitec and African Bank generally supported BASA’s view that prescriptive laws or regulations regarding lending, collection and debt relief would remove the principle of case by case treatment which in turn, they said, would probably inhibit loans being granted or drive up their cost
Debt and labour
Chamber of Mines was blunter and took the view that employee over-indebtedness was a major problem in labour relations and “fed into unrealistic wage demand” scenarios. Indebtedness, they said, was one of the major catalysts in recent mining unrest.
They were clear that education on family accounts and the implications of over borrowing had to be stepped up, rather than complicated prescriptive measures on relief that would favour one and not the other. More important they said was that loan sharks should brought under control and whose malpractices were rife amongst the mine working community.
Ms Sue Fritz, speaking for the Chamber, said that any form of debt relief provisions must consider the danger of undermining the basic principle that with the ability to borrow came the understanding such debt had to be repaid or quality lending would cease and debt might increase.
Cosatu’s Matthew Parks urged that some form of debt relief be provided to a defined base of categories, such as retrenched workers; those only on social grants; the poor; working-class and middle-class students with student loans and borrowers who had paid off a large part of a loan but fallen on hard times. He also appealed to parliamentarians that there was a need to crack down on loan sharks, formal and informal.
Paul Slot, speaking as president of the Debt Counsellors Association, said some form of debt relief was necessary to counter the current high level of household debt, noting that according to the association, 54% of those in financial trouble simply applied for more debt to extricate themselves.
Conclusions in process
The Select Committee has now made a call upon on the National Credit Regulator to tighten regulations further on loan sharks and the registration process. Chairperson Eddie Makue has now reported back on the hearings to the Portfolio Committee but has noted in Parliament that he was deeply concerned that a large amount of vulnerable people remain exposed to unregulated credit and can become victims purely because of greed alone on the part of the lender.
On reckless lending, it was noted that often ridiculously high repayments from the poor were a weapon used to gain control of assets. Makue said, “The NCR has to protect poor South Africans against such lending by unregistered and immoral micro-lenders. In most rural and semi-urban areas people maintain their existence through borrowing and the interest they sometimes get charged is shocking, and interest rates should be capped by law”, Makue said.
State debt relief and debt relief regulations
The “jury is still out” therefore for 2016 on the issue of DTI tabling a Bill and the subject of debt relief generally.
Parliament closed 7 December and will resume this debate early in 2017
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