Economic Assessment Report Warns Against Debt Intervention
When a new law is going to have a significant impact on the economy the Government calls for a Socio-Economic Impact Assessment Study to be conducted. This is to see what the new law might do to the economy as a whole. During the drafting (with so many changes along the way) of the recent Amendments to the National Credit Act which brings debt intervention (debt review done by the NCR) into existence, such a report was called for.
Unusually, however, the President signed the new Bill into law before the report was released to parliament and the public.
The idea of debt intervention is on the surface a good one. It is debt review for a specific group of people done by the National Credit Regulator (NCR) as opposed to the several thousand registered Debt Counsellors. This is designed to try to get more people in a lower income bracket (or even no income bracket) into the debt review process.
Expropriation Without Compensation
The laws do however contain the rather contentious issue of debt write off (an attempt at a “poor mans” sequestration). The challenge here is that the debt comes from money the bank is banking on behalf of their savings clients. It is seen internationally as the start of expropriation without compensation which looks set to drive foreign investors flying and the economy and currency sent into free fall as happened in other lands where such steps were taken. Even regular sequestration has a built-in minimum that is recouped by credit providers. The debt intervention system has the potential for total debt write off and may be seen as the thin edge of the wedge.
Loan Sharks Are Wating
The report says that since consumers in this particular category will be seen as the highest risk, formally registered credit providers will simply reduce lending to these consumers. Desperate for credit they will turn to unregistered people who will take advantage of them. Capitec Bank recently proudly announced that it has greatly reduced lending to consumers who fit this profile in anticipation of the new laws. Other banks are going to follow suit. This will exclude many people from the formal (taxable) credit market. Recent data from Finmark Finscope shows that though 80% of people in the country have a bank account nearly two-thirds still make use of loansharks as is to meet their financial needs.
The report also says that microloans providers will be hardest hit as they face the greater ratio of risk since most of their clients fall into this category.
Counting the Cost
The report also says that the NCR will require a lot more money than the NCR told Parliament they will need to get the project up and running. And this is based on rather conservative figures being used by those drafting the report (Genesis Analytics). The report says that the NCR (and NCT) will require at least R407 Million rand of taxpayers’ money to start helping people and the workload (and the costs) will ramp up every 8 months.
Some political parties say the amendments are not constitutional but the Presidency has come out strongly saying it is. During the process at public hearings at parliament, the Portfolio Committee’s legal advisors gave reports from legal experts that there were constitutional issues but that the committees expert felt these could be manoeuvred around.
The Way Ahead
The report raises a lot of concerns and even offers alternatives that might have been taken. It is unlikely however that the report will now have much of an impact on the progress of the bill other than to help with some budgeting (who knows where all that money will come from?).