29 August 2019
The recently passed Debt Relief Bill that enables the suspension of debt, with the potential for it to be written off, could result in major losses for credit providers and the end of credit lines for many low income earners.
The Treasury estimates that the passing of the debt-relief bill could result in a write-off of between R13.2bn and R20bn of consumer debt.
Once implemented, the National Credit Amendment Act will allow people who earn less than R7 500 a month and have R50 000 in total unsecured debt - excluding car finance and home loans - and who are over-indebted to apply to the National Credit Regulator (NCR) for debt relief.
The NCR will then assess each individual submission. Should the NCR determine the consumer is unable to repay what they owe without its intervention, The NCR will suspend some or all of the repayments for a year. At the end of this period, the NCR will reassess the consumers position and should the consumer be able to repay their debts in five years, they may re-negotiate the period of the debt and interest rates.
If the consumer is still unable to repay, they may suspend repayments for another year. At the end of this period, if the consumer is still unable to settle their debts, all or part of it could be written off entirely.
“Realistically, if the government estimations of R 13.2bn are written off, the NCR would have to potentially review at least 264 000 agreements, assuming that all are approved. This equates to 22 000 per month and on an average basis implies the Regulator would review 1 000 applications per day. Conservatively assuming that each review takes 45 minutes, this implies a staff complement of close to 120 is required just to assess the case, excluding any review or sign-off process”.,ays Mark Young, CEO of smartadvance South Africa
Whilst the objective of the National Credit Act was to expand access to credit to a broader segment of consumers in South Africa, the last four years has seen a range of amendments and supplemental regulation that has constrained access to the market that we as credit providers were intended to service.
With lending criteria tightening under the law, millions of low-income credit users will no longer be able to get credit in future, for some the very lifeline they depend on monthly.
Besides the risk of many credit users being excluded, the new legislation will also increase the cost of credit, possibly create more opportunity for illegal lenders and loan sharks, as well result in a more turbulent credit market in South Africa. With the opportunity of having debt dissolved, this could result in low income earners incurring more debt without any intention of repaying their loans.
“For credit providers such as smartadvance that play a key role in the provision of credit for those unexpected life events and already have conservative credit assessment and affordability criteria in place, the risk is that we will no longer be able to play a role for the broad market that we service.” says Young,
“Despite this we remain committed to our customers and the broader market and will continue to create innovative products and channels to support the evolving market and consumer needs” concludes Young