Treasury and NCR Discuss “Extinguishing” Debt at Parliament
Efforts to garner votes in the past has led to strange political publicity stunts like the so-called credit “amnesty” which confused the living daylights out of consumers (as it was intended to). In that case, politicians rendered the credit bureaus toothless for a few months as they insisted some information be removed short term – presumably so that consumers who had bad records could run out and try get more credit during the time some figures were hidden. The intention may have been otherwise but this led to a number of problems, as you can probably imagine.
With future amendments to the National Credit Act once again being discussed focus has shifted from the all-important wording and reference changes needed in the Act to the bandying around of concepts like “extinguishing” debt. The National Credit Regulator (NCR) and National Treasury met with the Parliamentary Committee on Trade and Industry this month to discuss options to help over-indebted consumers including the poorest citizens who have borrowed too much.
‘This is one of the reasons why they are so supportive of the debt review process’
Credit providers, of course, would like to get their money back from consumers even if it takes a long time. They need to get their money back and make a profit if they are to stay in business and continue to employ people and pay salaries. This is one of the reasons why they are so supportive of the debt review process and willingly make huge concessions for consumers who are willing to repay their debt. Many credit providers even drop interest and fee charges entirely for consumers in debt review in an effort to just get their capital back. This also makes things much more affordable for consumers who can then repay a realistic amount each month (just for a bit longer than first planned).
Economies run on spending though and recently it has become increasingly difficult for credit providers to get consumers to spend. With a global recession underway for several years and now an ‘official’ recession in South Africa (after 2 quarters of negative growth), consumers have little to spend on luxuries. Rather, consumers have been using credit to cover the basics. This is obviously unsustainable as credit limits are eventually reached and cannot be used indefinitely.
‘consumers have been using credit to cover the basics’
Increased regulation has made it harder for credit providers to grant credit to consumers who may possibly default. These days they cannot simply increase premiums to cover that risk but are asked to avoid it entirely. They are now being asked to only give credit to those who will definitely pay it back. This places strain on sales staff that are commission driven. There have been cases of staff learning how to defeat internal checks and balances to make sales they should not. This has lead to reckless credit granting and huge fines being issued by the National Consumer Tribunal (NCT). Take African Bank, for example, who did not survive just a few such matters (there were a bunch of other factors too surrounding reckless credit involved).
‘40% of all credit users are already in deep trouble for not paying the money they already owe back’
The NCR’s recent report on credit users shows that 40% of all credit users are already in deep trouble for not paying the money they already owe back. So, that removes around 10 million credit users from the equation. The stats show that another +- 10% are in trouble and are not paying well. This means they too probably can’t be granted more credit and are over-indebted. That’s half of all credit users in South Africa. Normally it is people who are strapped for cash that credit providers are approached by to try to get more money. These are the consumers who used to be the potential cash cows for risk taking credit providers. The NCA and Amenemdnets have changed all that.
With unemployment rampant among the youth of South Africa the normal influx of new credit users that normally enters the credit market (and hits the shops) has slowed down putting further pressure on retailers in particular.
In the past, credit providers used to deal with bad debts by claiming on insurance or selling off bad debts to collections agents. Recent clarification on prescription has cut that option down drastically and consumers are becoming increasingly wise to securitisation schemes.
The noose is tightening on the economy and new legislation may actually be drying up consumer spending in an effort to try to get consumers to only spend what they have and not be so reliant on credit. This is much better for a consumer on a personal basis but not great for a commercially driven economy which is already in a tailspin.
Treasury Talk About Extinguishing Debts
At the recent discussion with the Portfolio Committee, it was the Treasury who bandied around the term of extinguishing debt (which some members of parliament would like to see done for the poorest of the country). However, at the same time, they were insistent that those who can pay their debts should do so. The thought of a ‘fresh start’ is appealing but the truth is that these consumers who would receive any such possible relief would then face increased future costs of credit (which the credit providers would have to force on credit users to try stay
The thought of a ‘fresh start’ is appealing but the truth is that these consumers, who would receive any such possible relief, would then face increased future costs of credit (which the credit providers would have to force on credit users to try stay afloat) and would probably not be able to gain access to credit in any case, due to affordability issues (unless their situation greatly improves financially). This would then dry up another risky portion of the consumer market for retailers and ultimately collection agents (and the accountants who make things look ok when the are actually not that great) making investors scared.
Suggestions have been presented to the Portfolio Committee (for example, by the Debt Counsellors Association of South Africa) which would allow the debt review process and concessions made by credit providers become available to a greater amount of consumers who presently do not fall easily within the current ‘norm’ of debt review. These possible changes could be included in future amendments to the NCA. Hopefully along with much needed changes regarding common industry issues currently being experienced and further clarity on certian sections of the Act.