The National Credit Amendment Act – and what can be done The National Credit Amendment Act – and what can be done
16 October 2019
On 16 August 2019, the president signed into law the National Credit Amendment Act. it was met generally with strong opposition from the credit industry, economists and market commentators.
This brief begins with an overview of the Act’s most pertinent provisions, followed by a review of both the general negative reactions and the counter arguments to these. Additional concerns are raised, after which the briefs concludes with a preview of what could be done to try and assist, in a sustainable way, the millions of South Africans who would benefit from formal unsecured micro-credit.
OVERVIEW OF THE NATIONAL CREDIT AMENDMENT BILL
The National Credit Amendment Act amends the National Credit Act, 2005, so as to enable the courts, National Credit Regulator (NCR) and the National Credit Tribunal (NCT) to provide free of charge debt intervention services to qualifying debtors.
The Amended Act will now allow natural persons earning R7 500 or less a month, and who owe less then R50 000 in unsecured debt, to apply to the NCR for debt intervention at no cost. A magistrate’s court or the NCT may then at their discretion, after due process discussed below, eliminate all or a part of the individual’s debt.
Debt intervention prior to Act was done by debt counsellors registered with the NCR. For a fee the councillors would help clients renegotiate interest rates with credit providers, and also possibly extend the repayment period.
The NCR is also now required to keep a register of all debt intervention applicants, and the NCT is empowered to declare unlawful credit agreements void and make a binding order concerning unlawful credit agreement provisions.
Furthermore, where a debt intervention applicant has been found to have submitted false information, intentionally misrepresents information or deliberately alters their financial circumstances to qualify for debt intervention, he or she will be liable for a jail sentence of no more than two years, and or a fine.
THE GENERAL REACTION
The Act did not go down well with the largest credit providers, including banks and retailers, as well as a range of economists and market commentators.
The Banking Association of South Africa (Basa) claims that the Act will hurt the economy by providing for arbitrary debt write-offs, which will cause a 53% decline in credit access to consumers earning R7 500 and below, as banks will no longer take on the risk. And when they do extend credit to the affected market, it will be at increased rates in order to accommodate the increase in risk.
Capitec CEO, Gerrie Fourie, said that “[d]uring the last two years leading to the amendment, Capitec Bank planned and managed our exposure to the consumer market earning less than R7 500 per month, being well aware of the regulatory development.” This market segment now accounts for less than 5% of Capitec’s loan book. According to market analysts, Capitec is the only big bank heavily serving the low-income unsecured debt market. The CEO of another large player in this market, Basani Maluleke from African Bank, also stated that banks will start limiting their exposure to this market segment.
According to Treasury, over nine million consumers could qualify for debt intervention under the Act, accounting for up to R20.7 billion worth of debt, and has pointed out that retailers, too, could be hard hit.
The National Clothing Retail Federation – which includes Mr Price, Foschini, Woolworths and others – is considering legal action over the passing of the Act. The Federation’s director, Michael Lawrence, says that the law was passed without Parliament looking at a socioeconomic impact study conducted by the Department of Trade and Industry. Lawrence says the study was never made available to stakeholders and that the Federation may go to court to get Parliament to release a copy.
Other concerns voiced by commentators have been around moral hazard and the informal lending industry. Critics argue that less financially literate debtors may think that their loans will simply be written off if they cannot pay them, and that a decrease in access to credit in the formal sector will force consumers to instead approach loan sharks for needed financing.
There is no commencement date for the Act as yet, and even if debtors were eligible to apply to have their debt written off or suspended, applicants may instead be placed in debt review by the NCR. According to Riccardo Peterson, a director at Norton Rose Fulbright, this means that a significant portion of the cases is likely to result in a long process that will have to precede any decision to eliminate the debt. The NCR will first assess whether the debt can be paid off through debt rearrangement – a lower instalment over a period of no more than 5 years. If a debtor has no income the NCR will recommend to the NCT that the debts be suspended for 24 months, and if there has been no subsequent improvement in the debtor’s circumstances, only then will the NCR apply to NCT for the debt to be written off. Furthermore, only those consumers not in debt counselling, who have not been sequestrated and who are not subject to an administration order may apply to have their debt extinguished.
In the past lower-income consumers very seldom had to access statutory debt relief, because debt counsellors generally avoided them due to the low fees as compared to assisting more affluent consumers for the same administrative burden. Furthermore, no or low income consumers could not be placed under debt intervention because in order to qualify, a reasonable partial payment towards their debt was required.
It is also highly unlikely that every eligible consumer who qualifies will apply for debt intervention due to the consequences of applying – such as if you apply you may not enter into any concurrent credit agreements. Treasury’s figure of R20.7 billion, which represents only 1% of the credit industry’s total debtor book, thereby mitigating the potential effect on the economy, is by the industry’s own admission a worst case scenario figure. And due to the practical difficulties in implementing the Act (discussed further below), Clark Gardner, CEO of Summit Financial Partner which has helped consumers claim back over R500 million from lenders since 2004, argues that it is doubtful if even up to R100 million will be written off within the first two years.
With regards to the potential increase in the cost of credit, this risk may be overstated as many of the credit providers to this portion of the market are already charging the legal maximum interest rates and fees. While there might be room in some instances for an initial increase in rates, as happened with the introduction of the National Credit Act in 2007, Gardner further argues that the the industry will likely adjust and settle at more reasonable rates after a few months.
If however the above reactions to the Act are valid, there are still some causes for concern which may lead the Act to fall short of its intended relief to over indebted low income earners.
Consumers will need to be well informed of the debt intervention benefits and the complex processes involved, as well as have access to the digital means to apply for assistance. The NCR however only has one office in Midrand and it is not clear yet how they will cater to the applicants, given the large financial, personnel and logistical costs that will have to be incurred. Gardner also points out that the NCR’s record for managing its current functions is a cause for concern, and it is doubtful if they will be able to attend to the new applications timeously and efficiently.
Under the Act, the National Credit Regulator (NCR) must assess each application and propose a solution to the courts or the National Consumer Tribunal (NCT). The courts or NCT then review the application, consider counterarguments by the credit provider and make the final decision. In the past however, the NCT would take on average two to three months to finalise uncontested cases that came before it. So long delays are to be expected going forward.
Finally, in order to try and avoid moral hazard problems and improve consumer’s understanding of credit generally, the Act makes financial literacy training compulsory for those who apply for debt intervention nationwide. This is by no means a small task and it will be interesting to see how the NCR goes about tackling it.
While one hopes that the counter arguments to the general negative reactions to the Act hold sway, what remains is that the South African economy is currently in no state to start improving the prospects of the 29% of the total population which finds itself without formal employment.
In a previous brief on informal sector traders, Foreign Nationals in the Informal Retail Sector, mention was made to a recent FinMark Trust study which showed that there is inadequate knowledge among South African small business owners of the benefits of credit, and that access to and knowledge about formal micro credit will help them improve their fortunes. So while big lenders such as Capitec have decided start pulling away from unsecured lending, perhaps a smarter move would have been to adjust their business model for this market segment, and copy the successes of micro lenders such as the Small Enterprise Foundation (SEF). Founded in 1992, SEF boasts the following achievements so far:
It has given out R8.7 billion in unsecured loans
Created over 200 000 jobs
The average loan size is around R4 000
84% of clients re-borrow after paying back the initial loan
The average interest rate is 32% per annum
99% of borrowers are poor, black women
The percentage of its portfolio at risk is just 0.2% (versus 12.2% for Capitec).
How does SEF do it? Modelled on the highly successful Grameen Bank in Bangladesh, SEF actively seeks out poor borrowers, predominately those below the poverty line. Borrowers are introduced by existing clients who also serve as a first line of credit defence. New borrowers are allocated to a cell of five or six other borrowers, and every member undertakes to cover the cell’s total loan payments. At the first sign of repayment difficulties, SEF employees contact the borrower to see what debt intervention is required to get the repayments up to date. Furthermore, SEF does not aim to make a profit and, instead, surpluses are channelled back into new loans and poverty reduction programmes that involve financial and savings education.
John de Wit, a founder of SEF, says there are ways for the traditional banks to get involved, but claims that they are unable to forgo their traditional lending models. That being so, perhaps it is time for the big banks, and government too, to think outside the box to help the county’s poor in a sustainable way – as has been shown possible by the likes of SEF.
By Charles Collocott, Researcher, HSF, 17 October 2019