/ 23 August 2019

Debt Act not a relief for everyone

Crowds at the Mall of Africa. The recently signed National Credit Amendment Act aims to provide debt relief for over-indebted consumers who earn less than R7 500 a month. It could have a knock-on effect on retailers.
Crowds at the Mall of Africa. File photo by Gianluigi Geurcia/AFP



The National Clothing Retail Federation — which includes retailers such as the Mr Price Group, Woolworths, The Foschini Group and the Edcon group — is not ruling out taking legal action over the recently signed National Credit Amendment Act.

The Act, intended to provide debt relief for over-indebted consumers who earn less than R7 500 a month, has prompted consternation from bodies such as the Banking Association South Africa (Basa) but retailers could also be hard hit, according to inputs made by the treasury during the lengthy parliamentary processes hammering out the new law.

Although the federation cannot yet quantify the effects the Act could have on its members, it has a number of concerns relating to it, said executive director Michael Lawrence. Among these concerns is that the law was passed without Parliament looking at a socioeconomic impact assessment study conducted by the department of trade and industry.

The study was recommended by the portfolio committee on trade and industry as a means to help members of Parliament better understand the implications the law could potentially have, including on the credit market and credit providers. This is according to a petition sent to president Cyril Ramaphosa by Democratic Alliance MP Dean Macpherson in April asking him to send the legislation back to Parliament.

Although the study was finalised in May, Macpherson told the Mail & Guardian it was never made available to any stakeholders.

“Now, for me, that is a serious deficiency in participation,” he said.

Without the study, no MP could have applied their minds sufficiently to what the costs of the Act would be to the economy, to the credit market or to the state, said Macpherson.

The department of trade and industry did not respond to emailed requests for comment, nor did the newly appointed chair of the portfolio committee, Duma Nkosi.

But Lawrence said he may have to go to the courts to get Parliament to release a copy of the study, which should have been public information.

“I would have thought that before the president signed it there should at least have been an opportunity for all of us to look at it, so we could advise the president accordingly,” Lawrence said.

The federation had also advised the president that it believed that the Act was unconstitutional, he said. “We now need to look at what exactly our options are … and when the legal triggers are appropriate, if necessary,” he said. But the federation would give the matter careful consideration, Lawrence added, saying that: “We don’t want to rush in blindly.”

Lawrence said there is “no question” that consumers earning less than R7 500 are likely to be affected, as they now have to be identified as a risk. “We have very sophisticated scorecards that calculate what our lending risk is for every consumer and obviously this is now entering our scorecard methodology and is prejudicing the consumers who would ordinarily have been able to access credit,” he said.

The Act allows individuals who earn R7 500 a month or less, and owe less than R50 000 in unsecured debt to apply to the National Credit Regulator (NCR) for debt intervention. The process potentially allows a court or the National Consumer Tribunal (NCT) to extinguish all or a portion of an individual’s debt. These changes were intended to address the inability of poor consumers to access formal debt-relief processes.

According to research conducted for the treasury, more than nine million consumers potentially qualify for the intervention, with between R13.5-billion and R20.7-billion worth of debt possibly affected.

Basa has warned that the new measures could see these consumers unable to access credit. Research conducted for the body suggested that credit granted to people the Act is aimed at could decline as much as 57%, while credit extension to those customers earning between R7 500 and R10 000 a month could decline 35% due to a “scpillover” effect.

Capitec Bank — a key lender to lower-income earners — released a statement this week saying that, in preparation for the introduction of the law, it had begun managing its exposure to these consumers. They now represent less than 5% of its lending book, Capitec said.

But union federation Cosatu, which supports the law, has dismissed these concerns as scaremongering. In a statement, Cosatu’s parliamentary co-ordinator, Matthew Parks, noted that there is a process of interventions that first allows consumers to have their debt restructured to make repayments over five years. If this is not possible, then credit payments can be suspended for 12 to 24 months with regular reviews.

Finally the debt or a portion thereof can be extinguished if after two years the consumer is still unable to repay it.

The interventions “come with compromises,” said Parks, including that those consumers would not be able to access further credit for a set time.

Others who have been critical of the “initial hysteria” that has accompanied the Act, have concerns about the law for different reasons.

Clark Gardner, chief executive of Summit Financial Partners, said the introduction of a new debt-intervention framework for poorer consumers is much needed.

“In both debt review and insolvency proceedings, more affluent consumers benefit from some form of credit write-offs, but good faith low- or no-income earners are forced to pay their full debt obligation and additional — and often exorbitant — legal costs,” he said.

Lower-income consumers seldom access statutory debt counselling, he noted, possibly because debt counsellors avoid taking them on as clients due to the low fees that can be recovered from them for what amounts to the same administrative burden.

Gardner was critical of the industry’s response to the Act, however, arguing that the predictions are based on a highly improbable “worst-case scenario”.

Not every consumer in the applicable income group is going to apply for debt intervention, he said, and of those that do, not everyone will be successful. Even fewer will be entitled to debt extinguishment.

The bulk of South Africa’s gross outstanding debtor’s book, totalling R1.73-trillion, is owed to banks and vehicle financiers. Secured credit, backed by an asset such as a car or house, accounts for 74% of the outstanding debt, and will not be affected by the law, he said.

Nevertheless Summit did have concerns about the Act, notably about the NCR’s ability to implement the reforms. It is unclear how applicants without the necessary infrastructure or know-how will be able to access the relief, Gardner said.

Summit was also “greatly concerned” that the NCR will be unable to perform its administrative role in this process.

“The NCR’s capability in managing their current functions is already cause for concern,” said Gardner “It is doubtful that the NCR will be able to attend to these applications in a timely and efficient manner.”

It is unclear how much additional money will be needed to implement the Act, with one estimate putting it at R100-million.

The NCR’s company secretary, Lesiba Mashapa, said, however, that these criticisms are “simply not true”. The regulator has submitted its plans and proposed budget for implementing this Act to the department, The plans, he said, demonstrate the additional capacity that will be created in the NCR to enable it to implement the Act. He could not, however, divulge the exact details of the plans, or the budget. But Mashapa did say that the plans outline channels that will enable consumers to apply for debt intervention at the NCR “from where they are”.

The arguments being put forward by the industry had no merit, said Mashapa, and had been thoroughly dealt with in the parliamentary process. “The cost of credit is already high for many consumers. Almost all credit providers price personal loans at the maximum interest rates, and charge credit fees at their maximum levels,” he said.

But Basa is not convinced and said its members are “considering their options”. Sue Hatton, the body’s programme manager for debt review, said its key concerns with the Act included the premise that this class of consumers cannot access existing debt-intervention mechanisms.

Credit bureaux information shows that 25% of the consumers who are currently undergoing debt review are consumers from the target population, she said, adding that the thresholds for eligibility had been arbitrarily chosen, without supporting and detailed statistical information.

The Act also created inequality among consumers, in that a small number will gain access to a better debt intervention solution than the rest, namely through expunging their debt, Hatton said.

She added that the mechanism to expunge debt creates significant uncertainty for credit providers and that this uncertainty is exacerbated, as the minister can adjust the gross monthly income and total unsecured debt thresholds.

In addition, the law does not cover all types of debt such as municipal fees, water and electricity, and school fees and so will “not achieve the goal of relieving over-indebtedness for the consumers,” Hatton said.