The big problem with South Africa’s ‘debt forgiveness’ plan

Government’s mooted debt forgiveness programme would plunge consumers deeper into debt in the long term, says debt management expert, Neil Roets.

He said that recommendations by the Department of Trade and Industry (DTI) that the National Credit Act be amended to allow the minister to prescribe debt relief measures (debt forgiveness) to over-indebted households also poses a major threat to the finance sector.

In a discussion document presented to Parliament, MacDonald Netshitenzhe, acting deputy director general at the consumer and corporate division of the DTI, said the National Credit Act currently makes no provision for the minister to provide any debt relief in specific circumstances.

Such amendments would make it possible for the minister to introduce relief measures for certain classes of debtors such as those who had been retrenched.

Roets, who is the CEO of debt management company Debt Rescue, said if the measures currently being investigated by the DTI were put into place it would bring welcome short term relief to deeply indebted consumers but that the longer term consequence could be extremely negative.

“Lenders which included both banks and the retail sector already have to cope with prescription legislation which means if a consumer has not paid back any instalments on the outstanding amount for a period of three years it is said to have expired.”

The DTI came to this conclusion after a number of deliberations were held by the portfolio committee last year during which banks and other credit providers cautioned against legislated debt relief measures.

Trade unions and consumer bodies, however, welcomed the move, Debt Rescue said.

The DTI’s input came after the portfolio committee last year held a number of deliberations on the debt situation in South Africa, following a decision taken earlier in the year to gain input from the public on the possibility of debt forgiveness.

According to Debt Rescue, the department recommended that certain criteria be developed under which retrenched consumers, victims of unlawful grant deductions as well as those who fall prey to reckless lending may qualify for debt relief.

“If lenders are compelled by legislation to write off even minimal amounts of debt, it would shake confidence in the South African economy to the core. Loans of all kind would become subject to stricter conditions making it much more difficult for the poor to secure credit,” Roets said.

“Should the government decide to go ahead with this idea which is currently in the planning stage, it will ultimately be the banks who will lose out when lenders are unable to service their loans. The only way that the banks will be able to recoup their losses will be by charging higher interest rates for what will be perceived as high-risk loans.”

Roets said consumers would find it more difficult to get loans because unsecured debt will be viewed as ultra-high risk if there was the possibility that it could be written off.

He said figures released by the National Credit Regulator and Statistics South Africa showed that more than half of all consumers were three months or more behind in the repayment of their loans.

A World Bank review noted that South Africans currently owed R1.63-trillion to lenders, and were some of the most indebted consumers in the world.

Economist Magnus Heystek said that the proposed debt forgiveness programme was an ANC election ploy – trying to buy votes from the more than 50% of South Africans who were deeply indebted.

Read: Life for debt-trapped South Africans is about to get a whole lot worse