The National Credit Amendment Bill (NCAAB) gained significant attention after it proposed writing off billions of rands worth of debt from every-day South Africans – however, it has also been a major cause of concern for the banking sector.
The bill was officially passed by the National Assembly’s in September 2018 and was transmitted to the National Council of Provinces for concurrence.
It is now is one of the key pieces of legislation which is expected to be finalised this parliamentary term, barring any political decisions to halt it.
While there is currently no definite details on who will be able to have their debt written off, it was previously indicated that this will likely only apply to consumers who do not have more than R50,000 in unsecured debt and earn no more than R7,500 a month.
The Banking Association of South Africa (Basa) made it clear that it does not support the principle of debt forgiveness – for very obvious financial reasons, but also for what it would do to the lending and credit industry.
Aside from the costs banks would incur writing off the debt, the most likely reaction from banks would be to make lending conditions much tighter which would make it more difficult for the poor to secure credit, Basa said,
A figure on how much the bill would cost local lenders has not been nailed down, but according to Intellidex analyst, Peter Attard Montalto, the bill, if implemented, could force losses at local banks in the region of R25 billion.
“This bill is of serious concern to the banking sector and could, through the imposition of a new income-based personal insolvency and debt affordability regime, force losses on the banking sector of around R25 billion,” he said.
In a statement issued in late 2018, the South African Reserve Bank highlighted a number of consequences that could arise from the bill.
Specifically, the bill will have varying effects on lenders, depending on their exposure to the low-income groups targeted by the intervention.
Micro-lenders in particular, whose loan books are smaller than banks’ but more skewed towards low-income borrowers, are more likely to see write-downs affect their overall balance sheets than banks, it said.
Echoing comments from Basa, the SARB said that the bill may also adversely affect the supply of credit to the affected borrowers.
This may lead to the disruption of access to credit, not only for over-indebted households but for low-income consumers as well and this could have negative implications for financial inclusion.
There may also be an increase in moral hazard on the part of some borrowers who may enter into further credit arrangements in anticipation of debt being written off, the SARB said.
However, credit providers would still be required to apply strict affordability criteria on all credit applications.