Credit information amnesty for consumers in balance

As embattled South Africans face high debt levels alongside ongoing economic and employment uncertainty, a recent report has revealed that consumers' financial vulnerability is growing more acute.

The most recent consumer financial vulnerability index, for the third quarter of 2013, shows that consumers' financial vulnerability slid below levels seen in the third quarters of 2012 and 2011.

The index, released by Unisa's Bureau of Market Research and MBD Credit Solutions, examines consumers' cash flow, including their ability to sustain spending, service debt and save money.

The index dropped to 45.9 points, lower than the 47.9 points registered in the third quarter of 2012 and the 54.3 points in the same period in 2011. The report noted that 75% of consumers were financially insecure, with 36.7% of consumers deemed to be cash-flow vulnerable or unable to cope financially.

The categories of lowest income earners, those earning up to R5 999 and between R6 000 and R11 000, were among the most vulnerable when it came to being able to service their debts.

"In [the third quarter of] 2013 the cash-flow situation of consumers was impacted [on] by labour strikes, as well as a lot of debt, affecting their cash inflows and subsequent transactions," said Professor Bernadine de Clercq, head of the personal finance research unit at Unisa.

Index measures cash flow could change
The index measures cash flow, she pointed out, and could therefore change from quarter to quarter.

Against this background, Parliament's portfolio committee on trade and industry held public hearings on the latest draft of the National Credit Amendment Bill this week.

The Bill, among other things, will empower the minister of trade and industry to declare a credit information amnesty, eradicating the adverse records of millions of borrowers.

But separate research done by Unisa and the Credit Providers Association suggests that, if implemented incorrectly, the proposed amnesty, combined with guidelines for proposed affordability assessment criteria, could severely dampen economic activity and culminate in job losses.

The consumer debt burden has, however, become a major worry for the government and amendments to the National Credit Act are among a number of financial sector and other reforms aimed at reducing household overindebtedness.

Treasury deputy director general Ismail Momoniat told Parliament that efforts to limit reckless lending and introduce affordability criteria under the Bill are a step in the right direction. But he questioned whether the Bill does enough to protect consumers from predatory credit providers, particularly so-called "payday lenders".

Caution against the proposed amnesty
Other issues such as the "perverse" incentive structures for debt counsellors need further consideration, he argued, and more has to be done to ensure improved co-ordination among regulators across the financial sector.

Momoniat did, however, express caution regarding the credit information review, noting that there is "little sense" in removing adverse information for unpaid debtors.

Industry players of all sizes, from microlenders to big banks, have cautioned against the proposed credit information amnesty.
In its written submission to the committee, Standard Bank warned that, without reliable information regarding a customer's credit history, credit providers could become more conservative when granting credit.

"Such an amnesty would be likely to reduce the supply of credit, raise the cost of credit and ultimately place more South Africans under unsustainable debt burdens," the bank said.

De Clercq said the proposed amnesty could assist some consumers and negatively affect others.

"If implemented together with the affordability guidelines, some part of the negative impact may be neutralised, assuming the affordability guidelines are correct," she said.

The economy may suffer
If it is not done correctly, the economy will suffer, she said. Research done by Unisa using 2012 data suggests that a credit information amnesty, had it been implemented at the time, could have potentially reduced nominal household consumption by R3.5-billion.

The proposed amnesty, combined with the mooted affordability criteria guidelines, could have decreased household consumption expenditure by R106-billion, according to a summary of the research, and as many as 337 000 formal-sector jobs may have been affected, predominantly in the wholesale and retail sectors.

"These negative impacts stem from the indication that less credit will be extended due to uncertainty about creditworthiness of consumers. Less credit causes lower consumption expenditure and a decline in economic activity, which eventually will impact [on] jobs," the report noted.

Portfolio committee on trade and industry chair Joanmariae Fubbs said the intention is not to "destroy a banking system" but to create legislation that is "equitable, fair, economically efficient and impacts positively on the socioeconomic environment of the country".

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