BASA issues loan shark warning on draft bill on debt

Johannesburg - The Banking Association of South Africa (BASA) called for a balanced approach to the Draft National Credit Amendment Bill, when public hearings begin on Tuesday, warning that if it’s not managed responsibly, it could increase the cost of borrowing for poor and lower income consumers and send them into the arms of loan sharks.

Parliament's Portfolio Committee for Trade and Industry published the draft bill for public comment in November 2017, after hearing submissions about the high levels of indebtedness South Africans face.

According to the National Credit Regulator (NCR) there were 24.78 million credit-active consumers at the end of June 2017. Close to 10 million of these people had impaired records and could be considered over- indebted.

The issue of over-indebted consumers has been a political hot potato since the 2012 Marikana tragedy, when the loans and high interest repayments to micro lenders operating in the North West town were viewed as one of the reasons behind the miners’ strike for a R12 500 wage.

As it stands, the draft bill will allow a person who as of 24 November 2017 owed less than R50 000 in unsecured credit (retail cards, credit cards, short term loans) and earns less than R7 500 per month, to make an application to the NCR for debt intervention.

If the regulator believes that the applicant requires assistance, they can refer them to the National Credit Tribunal (NCT), which can suspend all credit agreements in part or in full for a period of 12 months. If the financial circumstances of the applicant don’t improve, the Tribunal can declare the debt cancelled. 

BASA, which represents more than 30 domestic and international banks briefed journalists at their offices in Parktown last week, ahead of their submissions to the portfolio committee.

The Associations’ managing director Cas Coovadia said that they support targeted and sustainable debt interventions as long as instability into the lending market isn’t introduced.

“The [banking] industry has already taken a number of [voluntary] measures to address over-indebtedness including restructuring, payment holidays and debt counselling.”

Coovadia pointed out that 76.3% of new credit comes from the banking sector and the measures to reduce indebtedness saw banks reduce interest payments by R3.9bn in 2017.

Moral hazard

Coovadia said that the banking industry is concerned about the impact of debt write-off on responsible borrowers who pay back their loans.

“Consumers who previously repaid their debt could be incentivised against doing this, this could introduce negative behaviour in the market and increase the cost of credit.”

He added that banks will find it difficult to price for the risk of debt cancellations and this could lead to poor and lower-income consumers being excluded financially which could then drive people into the unregulated credit market, or loan sharks.

The Association also pointed out  that the R50 000 threshold for possible write-off and the R7 500 salary figure, for a consumer to qualify hasn’t been subjected to an economic impact assessment, which Treasury is currently busy conducting.

Coovadia said final decisions about the figures shouldn’t be “driven by sentiment or anecdotal evidence”. 

Debt subsidy

Instead of debt write-offs which the Association said will send a “wrong message” to consumers, BASA will propose a subsidy, when it makes submissions to the Portfolio Committee for Trade and Industry.

“One of the biggest obstacles to debt restructuring is the fees for a debt counsellor which can be between R6 500 and R7 500,". [We propose to] subsidise that fee, Coovadia said.

BASA believes that the money for the subsidy could come from the fiscus, alternatively, people who’ve already been put under debt review may be required to pay a small fee or some of the credit providers could add a small fee to loan costs.

Unfettered powers 

In a second aspect of the draft bill, the Minister of Trade and Industry will be given the powers to alleviate household debt in certain sectors where there’s been widespread retrenchments or regions which have experienced a natural disaster.

BASA said it’s completely opposed to this “as it’s an unfettered power that can cause chaos in the market”.

The Association said that they’re uncertain whether recent political developments within the ANC will ensure that the committee looks at the draft bill differently.

Public hearings into the Draft National Credit Amendment Bill will be held in Parliament on 30 and 31 January and 2 February and the Department of Trade and Industry, Treasury and individual banks are expected to make submissions, alongside BASA.