The adoption by the National Assembly of the National Credit Amendment Bill is likely to do more harm than good due to unforeseen consequences.
This is according to independent economist Dawie Roodt, who said that the actual outcome of the legislation, once passed into law, may see poor and deeply indebted consumers having to pay more for a loan – or if they can get a loan at all, they’ll pay more for that loan.
He added that despite the various provisions in the draft legislation that are meant to protect consumers, the most indebted would likely end up worse off.
“Because there will be a greater risk factor for banks and other lending institutions of having these loans written off by a magistrate or the National Credit Regulator, they are going to have to cover themselves through higher charges,” Roodt said.
Aimed at persons earning R7,500 or less a month, the first step is to allow indebted consumers a period of five years to pay their debt.
If this procedure does not achieve its objective, a number of other provisos – including ultimately wiping away debt – will leave banks and financial institutions out of pocket and may well be challenged in the constitutional court for infringing on property rights, Roodt said.
Neil Roets, CEO of Debt Rescue, welcomed the basic principle of providing debt relief for the poor, but said that the government should be looking at a more inclusive manner in which that relief could be provided.
“The process of debt counselling for middle and higher income groups has been working superbly well for many years and has assisted many thousands of indebted consumers to pay off their debts by paying smaller instalments over a longer period of time through mutual agreement with lenders,” he said.
He said the debt review process as it is currently structured, is not suitable for the poor because they are unable to afford to pay the legal fees involved in the procedure.
“One way of addressing the problem would be for the state to subsidise the process of debt review for debtors earning less than R7,500 a month and with total debt of less than R50,000,” Roets said.
He said the concept of writing off debt that has been legally incurred by consumers and where all the proper procedures have been followed is unacceptable because it is in direct contrast to section 25 of the Constitution which guarantees property rights.
“A loan whether extended by a bank or another financial institution is as much property as anything else and cannot be written off willy-nilly unless it was entered into illegally,” Roets said.
He said that it is highly likely that financial institutions – who stand to lose millions should loans be written off – will likely tighten their lending criteria to the point where most of these individuals will not be able to get loans in future.
“The very group that the debt forgiveness programme is allegedly aimed at according to the Department of Trade and Industry – retrenched workers and low wage earners – will be the very people who will not be able to source a line of credit if or when this policy becomes law,” he said.
“The National Credit Regulator and the National Consumer Tribunal will be placed under a tremendous amount of unnecessary strain due to the expected volume of consumers that will approach them for relief, and debt counselling is already in place and is successful in providing a legal solution over-indebtedness.”