Cas Coovadia on why debt forgiveness is a bad idea

Cape Town – The Banking Association of South Africa (Basa) does not support the principle of debt forgiveness, its managing director, Cas Coovadia, said on Tuesday.

The Banking Association was one of the entities that made a presentation to Parliament’s portfolio committee on trade and industry about measures to provide debt relief to over-indebted South Africans.

The portfolio committee mooted the idea of debt forgiveness in March this year when the National Credit Regulator briefed MPs on the state of South Africa’s credit market.

At the time, the ANC’s Adrian Williams suggested that the regulator consider a kind of “debt forgiveness programme”, which would release lower income groups from over-indebtedness. “But this shouldn’t be for the rich who have just been spending recklessly.”

Read: ANC calls for debt forgiveness as consumers owe R1.63trn

In Tuesday’s parliamentary briefing where the measures were further discussed, Coovadia said the banking system’s foundational principles is the need to efficiently and legally lend money to borrowers and to collect repayments from borrowers to settle loans.

“Any failure to perform on this principle will have severe consequences for the financial industry and the economy. It will increase the risk carried by depositors and savers, will impose a cost on society and will limit credit providers’ ability to extend credit.”

Coovadia said there should be a distinction between debt forgiveness and debt relief.  

The Basa already provides for extensive debt relief measures through its Debt Counselling Rules System, which includes payment “holidays”, which provides consumers with an opportunity to temporarily suspend payments, restructuring and consolidation of debt, bespoke arrangements for repayment and settlement campaigns.

Debt forgiveness on the other hand, would accelerate irresponsible borrowing and could be deemed as discriminatory to people who consistently repay their debt.

“Consumers who previously repaid their debts could become dis-incentivised to do so in future as standardised debt relief measures and criteria could reward negative repayment behaviour.”

Coovadia said debt forgiveness would cause access to credit to decrease. “It’s not practical to further legislate debt relief measures as consumers in distress are dealt with case-by-case and their individual circumstances are taken into account.”

During question time, the ANC’s Williams said it’s the banks’ fault that so many South Africans are over-indebted.

Coovadia responded, saying many South Africans are borrowing money because the country is not creating jobs and the economy is not growing.

“That’s a reality. If banks don’t provide credit many people won’t be able to make a living. The lack of jobs and inequality create a situation where people need to borrow money,” Coovadia said.