Unsecured debt crisis: the DA's plan to protect vulnerable South Africans

Note to editors: The following statement was distributed at a press conference hosted at a small business in Gauteng today by the DA's Shadow Deputy Minister of Trade and Industry, Geordin Hill-Lewis MP, DA Shadow Minister of Finance,Tim Harris MP and DA Shadow Minister of Economic Development, Kenneth Mubu MP. The full document outlining the DA's plan to address South Africa's unsecured debt crisis can be obtained here.

The Department of Trade and Industry (DTI) recently published the draft National Credit Amendment Bill (NCAB) in an effort to address the crisis of over-indebtedness in South Africa. While the Democratic Alliance welcomes the DTI's recognition of the difficulties faced by vulnerable South Africans, we believe that the draft Bill does not go nearly far enough in addressing the most pressing issues in the unsecured credit industry. It is clear that the Bill has been hastily drafted, leaving out crucial areas that require urgent attention.

The explosion of easy, unsecured credit often extended unscrupulously and without proper checks, has left many South Africans owing more than they can afford to pay. According to the National Credit Regulator (NCR), more than 9 million South Africans have more debt than they can afford to service on a monthly basis. More than 16 million South Africans have an impaired credit account, which means that they have fallen behind on their monthly payments, or have stopped paying.

Many poor South Africans are being exploited by credit providers who charge exorbitant handling fees and add on exploitative premiums for credit insurance, regardless of the customers' risk profile and despite the loans being for small amounts. Many credit providers still illegally confiscate customers' property; force them to hand over their ATM or SASSA social grant cards and force customers to sign voluntary garnishee orders or emolument attachment orders.

Garnishee orders, in particular, require a set of urgent interventions which the DA will be championing. They are often abused by credit providers who effectively use employers as debt collection agents, and most people do not understand the implications of garnishee orders on their credit records and on their take home pay. The effect of garnishee orders on the net take home income of the workers has a severely adverse effect during wage negotiations, placing an additional burden on employers. 

Small, Medium and Micro-sized Enterprises (SMMEs) are often also dealt the blow of increased bank charges, lawyers' fees, time and lost opportunity costs of administering the garnishee orders against their employees. In an economic environment where we rely on SMMEs to be the back-bone of a growing economy and job creation, such additional burdens must be avoided.

There are several things that we welcome in the proposed NCA amendments, including: 

• Ending the inclusion of mortgages in debt review processes. This currently precludes consumers from accessing new credit for 20 or 30 years;
• Empowering the NCR to issue minimum standards on affordability tests
• Emphasising consumer education;
• Allowing consumers to enter debt counselling even after defaulting on loans
• Fixing a number of legal anomalies and errors.

In order to ensure that the draft Amendment Bill effectively deals with the unsecured lending crisis, the DA proposes the following additional measures be implemented:

• Banks and credit providers be required to update credit bureaus with customer payment information more frequently, and should send immediate updates when a customer has defaulted;
• All credit agreements to state the full monthly payment, inclusive of all fees, insurance and other costs, in a highlighted coloured box on the top of the front page of the agreement;
• The total repayment and the total cost of credit similarly be placed in a highlighted coloured box on the top of the front page of the agreement;
• The front page of all credit agreements should also contain a highlighted explanation of exactly what insurance is being purchased, the claims process, and the risks of missing even one monthly payment;
• A new formula be developed which establishes a directly proportional relationship between the repo rate and the maximum interest rate chargeable;
• There should be no charge for removing a default judgement from one's credit history, or indeed, that this should occur automatically once the loan in question has been fully repaid;
• The legislation makes it illegal for credit information to be requested, or used, in hiring decisions;
• Adopting a framework similar to that of the United States that places clear limits on garnishee orders, at 25% or less of an individual's gross income; and
• Credit providers be held responsible for all legal and administrative costs of garnishee orders on individuals earning less than R15,000 a month.

Access to credit, both secured and unsecured, is a necessary ingredient in any growing economy. In the South African context government has a responsibility to ensure that consumers are protected against exploitation that often leads to vulnerable people being swindled into effective debt-slavery.

A balance has to be reached where responsible lenders are provided the environment to operate credit businesses and consumers protected against exploitation by loan sharks and illegal operators. 

The DA believes that the proposals outlined here will contribute towards achieving that necessary balance, protect vulnerable South Africans and contribute towards the creation of an environment in which small businesses can start up, grow and create jobs. 

We will push for these reforms when the relevant legislation comes before Parliament and introduce legislation of our own where required to achieve them.

Statement issued by Geordin Hill-Lewis, DA Shadow Deputy Minister of Trade and Industry, July 10 2013

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