On Tuesday (10 September), parliament’s Portfolio Committee on Trade and Industry was briefed on the new National Credit Amendment Act.
Assented to by president Cyril Ramaphosa in August, the act will write-off the debt of consumers who receive a monthly income of less than R7,500 and are over-indebted.
As part of the briefing, parliament received a socio-economic impact assessment study (SEIAS) on how the act will impact banks, government and consumers.
The SEIAS acknowledged the legitimate need for the measures introduced by the act.
However, it also raised a number of possible unintended consequences to the target group, such as an increase in the cost of credit and reduced credit supply to this group due to the increased risk.
“After consideration of the all the evidence of positive and negative impact, the main conclusion of this report is that the Bill, as proposed, will result in a socio-economic impact that is net negative for South African society and the economy,” the study states.
“The main drivers of negative impact is the unintended consequences of the bill on 11.7 million low-income earners, extra fiscal stress created by the DI system, and the long-term effects of bi-furcating risk assessment in the credit market at the R7,500 income point, and splitting the credit system into one for the rich and one for the poor,” it said.
“This is not conducive to creating a more inclusive society.”
According to the study, the biggest positive impacts of the act are on:
- 177,759 over-indebted consumers who benefit from debt restructuring and debt relief under the debt intervention system (see slides 61 to 66 who gain statutory protection and much-needed relief;
- 85,815 over-indebted consumers who benefit from having debts extinguished who gain statutory protection and much-needed relief;
- Insurers, who benefit from the introduction of mandatory credit life insurance.
- The informal market (Mashonishas) which perversely gains about R7.6 billion in new demand.
According to the study, the biggest negative impacts of the act will impact:
Consumers earning less than R7,500 who are not over-indebted
“There are about 11.7 million low-income consumers in the wider R7,500 – R50,000 segment,” the study stated.
“While it is not credible that credit providers will stop lending to this market (it accounts for 54% of total credit consumers), it is credible that formal credit providers will adjust lending patterns to the perception of higher risk created by the debt intervention system, compounded by low levels of trust in the capacity of the regulator to undertake the process efficiently and fairly.”
As any consumer in the R7,500 – R50,000 category will theoretically qualify for debt intervention and debt extinguishment, and as credit providers cannot be certain in advance which consumers will become over-indebted, they will apply a precautionary higher risk assessment to all consumers in this category.
“Credit providers will increase the cost of capital for this group and once this is at maximum regulated levels, will tighten lending criteria and affordability assessments, as well as redirecting some capital allocation to other consumer segments.”
There may indeed be some benefits in reckless credit providers rethinking affordability assessments to inappropriate borrowers.
However, the study noted that the act doesn’t target only reckless creditors and reckless debtors – the impact is on the whole R7,500 – R50,000 market.
“The gains in preventing unhealthy practices need to be weighed against the costs created for the bigger part of the R7,500 – R50,000 market who are using credit appropriately,” it said.
Lending is falling
Data from the National Credit Regulator (NCR) shows that formal sector credit to the R7,500 – R50,000 market has fallen rapidly for six consecutive years.
“From 2011 to 2018 it fell by 46%. It is clear that formal credit markets as a whole have already lost interest in some mass market provision. Our view is that the unintended consequence of the Bill will be to accelerate this trend,” the study stated.
“The net result of the act is that formal credit extended to all consumers in the R7,500 – R50,000 income segment will fall by another R12.8 billion or 17,9%. This represents a drop in formal credit of 17.9%.”
The study estimates that of this R12.8 billion, it is estimated that 60% (R7.7 billion) will be taken up by the informal credit market (mashonisas).
“Given that much of the demand for credit in the R7,500 – R50,000 income segment is non-discretionary we do not expect a fall in demand for credit.
“Given the endemic nature of the informal sector, its popularity and easy substitutability, it is estimated that at least 60% of the formal sector credit withdrawn from this group will be met instead by the informal sector.”
The study says that consumers will be worse off in the informal market than in the formal market.
“Where consumers turn to the informal market to make up lost credit extension, it will leave them without regulatory protection.
“They will be more exposed to usurious rates of interest and illegal methods of collection. This harm on all lower-income consumers is a major unintended consequence of the act.”
As such, the study shows that the act is expected to have an adverse impact on financial inclusion.
“The net effect of the act is to diminish access to formal financial markets for low-income consumers which will be detrimental to financial inclusion,” it said.
Banks and credit providers will lose money
The study shows that the impact of the act for formal credit providers is contained relative to the size of the market.
It estimates that formal credit providers will face total losses of R3 billion (0.8% of unsecured credit book).
It also predicts second-round losses for retailers in the form of lost sales of R1.9 billion.