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New debt relief bill poses a financial risk to economy and consumers

Aug 18 2019 09:36
Fin24 correspondent

The new debt relief bill could have dire unintended consequences, warned chief economist at the Efficient Group Dawie Roodt.

The National Credit Amendment Bill was drawn up by the portfolio committee on trade and industry in the fifth parliament. The law allows low-income workers to extract themselves from debt through debt restructuring if they earn a gross income of R7 500 or less per month, have unsecured debt of R50 000, or have been found to be critically indebted.

“We’re on the threshold of seeing the expropriation of land without compensation. Now the ANC government is fiddling with the financial system by condoning the write-off of anywhere between R13-billion and R20-billion (according to the National Treasury) of debt belonging to banks and other financial institutions.

“These loans are as much property as anything else and is supposedly protected by article 25 of the constitution. What kind of message is this sending to the ratings agencies such as Moody’s and Standard & Poor’s? As the Constitution stands at the moment, there is a strong possibility that the law is unconstitutional,” Roodt said.

DA MP and spokesperson on trade and industry Dean Macpherson said on Thursday the party was dismayed that President Cyril Ramaphosa signed into law the “deeply flawed and possibly unconstitutional” bill.

“The amendment bill will increase the cost of credit for low income earners, weaken the fight against illegal lenders and negatively disrupt the credit market while posing a financial risk to the state, when SA consumers are already under enormous financial strain,” said Macpherson.

Debt Rescue CEO Neil Roets welcomed the basic principle of providing debt relief for the poor, however he suggested that the government should be looking at a more inclusive manner in which relief could be provided.

“The process of debt counselling has been working superbly well for many years and has assisted many thousands of indebted consumers to pay off their debts by paying smaller instalments over a longer period of time through mutual agreement with lenders.”

Roets said it would be infinitely better to use the existing system of debt counselling rather than for the National Credit Regulator to set up another system from scratch.

“It has taken us more than a decade to get the debt review process to the point where it is running smoothly to the mutual benefit of consumers and lenders. To go and tinker with this process now would be foolish in the extreme.”

Roets said it was highly likely that financial institutions – who stood to lose billions should loans be written off – would tighten lending criteria to the point where most of these individuals would not be able to get loans in future.

“The very group that the debt forgiveness programme is allegedly aimed at according to the Department of Trade and Industry – retrenched workers and low wage earners – will be the very people who will not be able to source a line of credit when this policy becomes law,” he said.

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