Credit Amnesty Review update and status report on the debt counselling process

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Trade and Industry

12 August 2013
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Portfolio Committee on Trade and Industry met to receive an update on the Credit Amnesty Review from the Department of Trade and Industry (DTI) and a status report from the National Credit Regulator (NCR) on debt counselling in South Africa.

In a briefing on the Credit Amnesty Project, the DTI explained that credit was a key enabling mechanism for investment and development, and a failure to facilitate widespread access to credit often resulted in a significant opportunity cost to entrepreneurs and the wider economy. Credit spurred consumer spending, which was a key driver of economic growth, while inaccessible or expensive credit hindered growth.

After the aims of the credit amnesty project had been outlined, the Select Committee on Trade and International Relations had been presented with three options resulting from an impact assessment done by the National Credit Regulator. The Committee had opted for the perceived medium risk proposal.  This option involved the removal of all adverse information listings, irrespective of value and irrespective of non-payment. It also included the removal of all paid up adverse information listings and all paid up judgments on an on-going basis. The total number of consumers impacted was just over 1.5 million people. This proposal would result in a small increase in credit providers' risk portfolios, and might result in the closure of smaller credit providers and a decrease in the supply of credit.

The NCR told the Committee that the primary aim of the credit amnesty was to reduce credit impairment. Of the 20 million active credit consumers in South Africa, 47% were considered to be impaired in the sense that they had accounts which were three months and more in arrears, had judgments and adverse listings. Some of the consumers had to undergo debt counselling.  Debt counsellors were individuals registered with the NCR to assist consumers who were over-indebted. The presentation outlined the status of the debt counselling process and the purpose of the Act, with the focus of debt counselling as a mechanism for dealing with over-indebtedness. The presentation also focused on the registration of debt counsellors, debt counselling statistics, the support and promotion of debt counselling, challenges and proposed solutions.

The Portfolio Committee was told that since the inception of the debt counselling programme, until June 2013, 422 624 consumers had applied for debt counseling, with 82 964 consumers applying during the 2012/13 financial year.  Since inception, R10.6bn had been distributed to credit providers. In order to support and promote debt counselling, 573 monitoring exercises had been conducted in 2012/13.  The objective was to monitor compliance with the National Credit Act and conditions of registration, with NCR guidelines providing guidance and support. Six provincial debt counselling workshops had been conducted in Limpopo, Free State, Eastern Cape, North West, Gauteng and KwaZulu-Natal.

The NCR explained that the challenges faced in debt counselling included the lengthy court processes and lack of uniformity in the views of magistrates; terminations by credit providers despite court orders being in place; expensive legal fees; and poor cooperation between credit providers and debt counsellors.

During discussion, the Committee asked for a racial breakdown of the total figure of credit-impaired consumers and statistics on consumers who had been rehabilitated. Members expressed concern about the prevalence of credit for consumption purposes, instead of for investment which was helpful to the growth of the South Africa economy.

The Committee asked about the profiles of the credit providers, the monitoring of credit providers and the unethical behavior of some credit providers, debt counsellors and credit bureaux. The need for a focus on restorative justice was also emphasized, and Members expressed their concern about the sophisticated discrimination which resulted from the use of credit records as a barrier to the employment of citizens.  A Member asked how debt counsellors were being monitored since the introduction of the new Companies Act, and if there was a code of conduct for debt counsellors.

The Committee Chairperson told the DTI and the NCR that she was alarmed because the situation had worsened since 2009, when the Committee had had the opportunity to address debt counsellors.  At the time, the debt counsellors were 95% white and the situation had not improved all that much.  It was also alarming that the decision to review the situation had not been properly implemented. It did not appear as though the debt impairment database had been cleaned up. The Committee had raised the issue two years ago, one year later and even in the current financial year. She asked how well these databases had been cleaned up and how far the monitoring of the process was. There had to be a clear understanding that access to development and investment credit was very important, but there had to be a clear study of the causes of impairment due to consumption debt.  It was sad that shops continued to entice consumers with credit, even when these consumers were already struggling under debt burdens.  These were dangerous practices which were flirting with, and skirting around, the law.
 

Meeting report

Introduction
The Chairperson welcomed the Committee Members, officials from the Department of Trade and Industry (DTI) and the National Credit Regulator (NCR). She thanked the media for their effective coverage on women and women achievers on Women's Day, and said that the media played a critical role in the creation of awareness in terms of women empowerment and uplifting. There were many ways to profile the work of women, and it was important for the media to continue doing the work they were doing.

The Chairperson received an apology from Mr G Hill-Lewis (DA), and also noted the standing apology from Mr M Oriani-Ambosini (IFP), who had been sick for a while now. She had not received any other apologies but was aware of the fact that many Members were having problems with their flights due to bad weather conditions.

Adoption of Agenda
The Chairperson presented the draft agenda of the meeting to the Members for consideration and adoption.  Mr G McIntosch (COPE) moved for the adoption of the agenda. This motion was seconded by Mr X Mabasa (ANC).

After a round of introduction, the chairperson asked the DTI to proceed with the presentation.

DTI Presentation on Credit Amnesty Project
Mr MacDonald Netshitenzhe, Chief Director: Policy and Legislation at the DTI, said the presentation comprised an outline of the purpose, background and context of credit amnesty; the primary aims of credit amnesty; the methodology; NCR impact assessment; perceived least, medium and high risk proposal; key recommendations and how the credit amnesty could be a success. It would also outline the timelines, implementation, monitoring and evaluation of the project.

The Select Committee on Trade and International Relations had asked the DTI to look at the problem of credit impairment in relation to the previous Credit Amnesty that had been resorted to in 2007/2008.  In this regard, the DTI had cursorily determined whether or not the previous Credit Amnesty was effective or had achieved its intended purpose. Without prejudging the above determination, the DTI had requested the NCR to determine empirically issues that may alleviate credit impairment, and consultation with relevant stakeholders in the industry had been held. An interim finding had been presented to the Select Committee and it was agreed that by February 2013 the study should have been finalised. The study had been completed by February/March 2013 and the DTI had considered the Report in March 2013.

Speaking on the context of credit amnesty, Mr Netshitenzhe explained that credit was a key enabling mechanism for investment and development, and a failure to facilitate widespread access to credit often resulted in a significant opportunity cost to entrepreneurs and the wider economy. Credit spurred consumer spending, which was a key driver of economic growth, while inaccessible or expensive credit hindered growth.

The Committee was presented with the following primary aims of the credit amnesty project:

• Reducing credit impairment by addressing its causes;
• Removing barriers to credit and assisting those consumers who can afford credit to access credit;
• Embarking on “restorative justice”;
• Achieving the goals of the National Credit Act (NCA);
• Assisting consumers impacted by economic recession;
• Redressing failure of credit providers to consider broader economic factors;
• Removing barriers to employment;
• Reducing over pricing;
• Stimulating economic growth; and
• Broadening access to credit providers.

In an impact assessment, the NCR had appointed an independent firm of actuaries and analysts to conduct an impact assessment of the likely impact of various data removal scenarios, including the number of consumers impacted, the degree to which consumers would be impacted, credit acceptances, and risks to credit providers' portfolios.

After the impact assessment, the following options were arrived at:

Option One – Perceived least risk proposal
This included the removal of adverse information listings having a value equal to or less than R10 000, irrespective of non-payment, the removal of all paid up adverse information listings on an on-going basis and the removal of all paid up judgments on an on-going basis. The number of consumers impacted was approximately 1.5 million people. The DTI recommended this proposal to the Select Committee as it was the proposal that would have the least adverse impact on credit providers' risk portfolios.

Option Two – Perceived medium risk proposal
This option involved the removal of all adverse information listings irrespective of value and irrespective of non-payment. It also included the removal of all paid up adverse information listings and all paid up judgments on an on-going basis. The total number of consumers impacted was just over 1.5 million people. This proposal would result in a small increase in credit providers' risk portfolios, and might result in the closure of smaller credit providers and a decrease in the supply of credit. The Select Committee had opted for this proposal.

Option Three - Perceived highest risk proposal
This option involved the removal of all adverse information and judgment listings, irrespective of value and irrespective of non-payment. It also included the removal of all paid-up adverse information listings on an on-going basis and the removal of all paid up judgments on an on-going basis. The total number of consumers impacted by this option was approximately 2.1 million people. This proposal would result in an increase in credit providers' risk portfolios and might result in the closure of smaller credit providers and a decrease in the supply of credit. This proposal was rejected by both the DTI and the Select Committee.

Recommendations
The DTI made the following recommendations:
• To proceed with a responsible amnesty by removing some credit information;
• Paid up judgments and adverse information listings should be removed on an on-going basis following payment of the underlying debt, as was done in Brazil;
• Credit providers should be required to conduct more comprehensive affordability assessments;
• Credit providers should be required to use discretionary income guidelines;
• Credit providers should be required to prove that consumers had the discretionary income they claimed to have;
• The NCR should continue to audit credit providers' affordability assessments on an on-going basis;
• The NCR should prosecute all cases of reckless lending;
• Listing rules were required to ensure consumers are properly notified and given sufficient time to remedy default;
• Credit literacy programs should include NCR materials both in credit retail outlets and elsewhere throughout the credit lifecycle;
• Abuses such as collecting prescribed debt, inappropriate garnishee orders and exorbitant credit life insurance, should be prevented.

Mr Netshitenzhe said that in order to have a successful credit amnesty, considered legislative amendments should deal with the on-going removal of adverse information and the NCA should be aligned with legislation that dealt with debt collection and garnishee orders. As to what form the credit amnesty should take, the Minister should be empowered to issue Regulations in order to bring it into effect . In terms of timelines, a Notice and Procedure to be followed should be drafted on Credit Amnesty for issuance by the Minister, and the public should be consulted for 30 days. This process of consultation indicated that an issuance of the Notice could start in June 2013 and be finalised by September 2013, but the September deadline could be pushed forward by one month. With regard to implementation, the implementation of the Notice could be effected on 1 October 2013, and monitoring should commence immediately.   Evaluation should be completed by 31 March 2014, and the results (if any) should be implemented by April 2014.

The Chairperson said that the Committee was going to receive the presentation from the NCR so that deliberations could be done on both presentations.

National Credit Regulator on debt counselling
The Chief Executive Officer of the NCR, Ms Nomsa Motshegare, said that the primary aim of credit amnesty was to reduce credit impairment. Of the 20 million active credit consumers in South Africa, 47% were considered to be impaired in the sense that they had accounts which were three months and more in arrears, had judgments and adverse listings. Some of the consumers had to undergo debt counselling. Debt counsellors were individuals registered with the NCR to assist consumers who were over-indebted. The presentation was intended to outline the status of the debt counselling process.

The presentation was done by the Chief Operations Officer of the NCR, Mr Obed Tongoane.  After stating the purpose of the National Credit Act, he told the Committee that the NCR was required to register credit providers, credit bureaux, and debt counsellors. The main role of a debt counsellor was to assist over-indebted consumers. He provided the criteria for registration of debt counselors.  In July 2013, South Africa had a total of 2 013 debt counsellors.  The Committee was given with a breakdown of  debt counsellors in terms of provincial and geographical location, professions, race and gender.

Debt counselling statistics 
Since the inception of the debt counselling programme until June 2013, 422 624 consumers had applied for debt counselling. During the 2012/13 financial year, 82 964 consumers had applied for debt counseling, and since inception, R10.6bn had been distributed to credit providers.

In terms of support and promotion of debt counselling, 573 monitoring exercises had been conducted in 2012/13 and the objective was to monitor compliance with the National Credit Act and the condition of registration, with NCR guidelines to provide guidance and support. Six provincial debt counselling workshops had been conducted in Limpopo, Free State, Eastern Cape, North West, Gauteng and KwaZulu-Natal, and meetings had been held with law societies to assist where possible with free legal services. Workshops for magistrates were on-going and circulars and public notices were issued on a regular basis to provide guidance and advice to the industry and consumers. Debt counselling awareness campaigns which targeted government employees were held with Mpumalanga’s Department of Education, KwaZulu-Natal’s Department of Finance, and North West’s Department of Economic and Development Affairs.   Roll outs to other government departments were underway.

Challenges
The challenges faced in debt counselling included the lengthy court processes and alack of uniformity in the views of magistrates, terminations by credit providers despite court orders being in place, expensive legal fees, and poor cooperation between credit providers and debt counsellors.

The proposed solutions and actions taken by the NCR included the workshops with magistrates; the current Bill amending the National Credit Act; engagements with Law Societies to assist where possible; and stakeholder engagements and possible conditions of registration compelling cooperation.

Discussion
The Chairperson asked the NCR to provide to the Committee with a racial breakdown of the debt-impaired consumers so that they could know who exactly was in what situation, and what could be causing the over indebtedness.

Mr W Thring (ACDP) asked for statistics and a progress report on people who had been rehabilitated.

The Chairperson said that prior to the National Credit Act Amendment Bill there had been a need to follow up on all of the credit issues in the previous two years. Once this follow up was done and when the Committee was moving in terms of a tabled amendment Bill, the Committee was going to be on track with the latest information. It was not a question of making a decision today, but it rather of getting the information.

Ms S van der Merwe (ANC) commented that debt counselling was a good and productive way of assisting people out of a difficult situation, but in terms of a credit amnesty, more could be done. There were two kinds of debt -- one was getting credit for consumer issues, while the other credit was for investment. The problem was that people got into debt for consumption and consumables, and this was where the danger lay.  Credit for economic activity and investment was good, but credit for consumption had to be taken with a pinch of salt.  Credit amnesty had to do with impairment, but the problem was that the focus should be on preventing debt. On the proposal for the first option of the impact assessment of the DTI, she asked who the credit providers were. Was it banks or smaller institutions, and what were their profiles? The issue had to be about reducing consumer indebtedness.

Mr Thring asked if there was a monitoring index which warned about the levels of over-indebtedness in South Africa. If not, why?  If yes, what were the current indications of the index?  How was restorative justice being dealt with, particularly with the involvement of the big players like banks? There were situations where banks acknowledged errors but refused to compensate the individuals who had been wronged. How were these situations dealt with?

Mr X Mabasa (ANC) remarked that after several interactions with consumers, he had noticed that the credit bureaux did not care about removing people from their lists and were happy to keep people on the register. Even when people tried to be removed, they were not helped. Credit providers and the credit bureaux were letting the system down. Another issue was that the service providers and their advertisements were “just too much”, and were not always portraying the real image. The adverts were too commercialised and the financial implications were often neglected or hidden. The nature and content of the adverts had to be scrutinized. The prevalence of loan sharks had to be reduced. Was there any noticeable reduction in their activities?  In outreach campaigns, rural areas were always forgotten, yet they were most vulnerable. What was the strategy on informing the rural communities?

Mr Z Wayile (ANC) said that moving from the basis of the Constitution, the Bill of Rights placed emphasis on human dignity. To a great extent, the credit bureaux and credit providers had been violating these fundamental rights. He gave an example of a rural woman who had been thrown out of her house for defaulting on a bond. While this woman worked, she paid every instalment, but with recent health problems, she not only lost her job but also lost her house. What could be said about such situations?

On the aims of the credit amnesty and the removal of barriers to employment, it was bad that many people were being barred from getting employment because of their credit status. This was a sophisticated form of discrimination. How was this issue going to be handled?

On credit literacy programmes and garnishee orders, he had noticed that there was collusion between employers and credit providers which were negatively affecting employees. What was being done about these unethical behaviors? What research had been done on the effect of these issues on productivity? How was effective consultation ensured?  Did the NCR have the institutional capacity and mechanisms to enforce the law?

Mr G McIntosch (COPE) said that there was the need for a healthy credit industry in the country. There were many people who were losing confidence in the banks. He was aware that the DTI was working on the matter, but it was important for people to be educated. There had to be emphasis on credit education. More research could be done on the matter by looking at some international best practices.

Mr B Radebe (ANC) asked how debt counsellors had been monitored since the new Companies Act. He told the story of an experience which he had heard, where a debt counsellor had rejected a person because the person was over-indebted. How were these debt counsellors monitored? Was there a code of conduct for the debt counsellors?

The Chairperson asked for a breakdown of the debt impairment of consumers per province.  She had noticed that, because of its population, Limpopo was doing very well. She was alarmed because the situation had worsened since 2009, when the Committee had had the opportunity to address debt counsellors. At the time, the debt counsellors were 95% white and the situation had not improved all that much.  It was alarming that the decision to review the situation had not been properly implemented.
It did not appear as though the debt impairment database had been cleaned up. The Committee had raised the issue two years ago, then one year later, and even in the current financial year. How well were these databases being cleaned up, and how far was the monitoring of the process. What kind of databases were being kept? It was not acceptable that a problematic database could be used in making decisions.

On the uniformity of positions by magistrates, the workshops were good but the Act provided for a broad range of flexibility from the magistrates. This could lead to injustices and the matter had to be resolved.
There had to be a clear understanding that access to development and investment credit was very important, but there had to be a clear study of the causes of impairment due to consumption debt. It was sad that shops continued to entice consumers with credit even when these consumers were already struggling with debt burdens. These were dangerous practices, which were flirting with,and skirting around, the law.

Mr Netshitenzhe responded that the questions were very critical, and many of them were going to be answered by the NCR, as they were the foot soldiers on the ground.

On the difference between consumer credit and investment credit, and the relation with credit impairment, there was a great need for education. Consumer education was very important. The DTI was interested in education, because people could pay their debts and yet still fall back into debt.  Education was going to play a big role in this regard.

In relation to who the credit providers were, the NCR registered the credit providers and were in the best position to answer the question. The banks fell into this category.

On the monitoring index, the DTI was working on the policy and legislation for revamping the monitoring aspects of the system. The NCR was also involved in this regard.

As regards the luring of consumers and adverts causing further debt, this concern came back to the issue of consumer education. There was a Consumer Act which was very educative, and the DTI had identified that many laws had been introduced and agencies were expected to implement their provisions. This was a weakness, and the DTI was capacitating itself to implement so it would not have to rely only on agencies for implementation. The DTI had advertised positions which were going to be filled in a bid to capacitate itself in terms of promoting education and awareness, and to implement its policies and regulations.

On restorative justice, it was worrying that people entered into agreements and were penalised unfairly. The courts were an avenue to deal with the issue, and the DTI had a responsibility to ensure that people were relieved of the pain they had been unfairly put through.

It was sad to hear that some debt counsellors dumped their own clients. In the current amendments, it was important for the NCR to be able to withdraw the registration of such counsellors. There had to be remedies for such problems. Suing them could also be an option, but it was clear that something definitely had to be done.

On garnishee orders, it was important for government to work as a whole, as some of the issues were within the competence of other government departments. For instance, the garnishee orders were under the competence of the Department of Justice (DOJ). The Department of Justice was revising their legislation and the Minister of Trade and Industry had written to the Minister of Justice asking him to put the issue of garnishee orders within the relevant legislation. It was important to follow up with the DOJ, as the status of this matter had not yet been communicated.

Ms Motshegare told the Committee that in terms of the monitoring index, the NCR had a credit bureau monitor that was used to monitor the levels of indebtedness of borrowers and consumers in the country. That was why earlier on she had made mention of the fact that South Africa had 20 million credit active consumers. This was the information that was fed to the NCR on a quarterly basis by registered credit bureaux. The NCR had 12 registered credit bureaux. The information obtained from these credit bureaux was collected, analysed, aggregated and published on a quarterly basis. As at March 2013, 47% of the credit active consumers were credit impaired. A consumer was considered to be impaired when they had a credit agreement which was over three months in arrears. If a consumer had six credit agreements and even only one was three months in arrears, such a consumer was considered to be impaired. It was a very conservative figure. The credit monitor included credit, cell phone accounts, and a few other factors. It was not just credit.  The NCR was working on refining the information so that it would refer only to credit.

On the strategy for rural areas, the NCR had joined the DTI in their outreach initiatives as the NCR was having challenges in reaching out to communities in rural areas. The NCR was actively going on road shows with the DTI to try and educate consumers on credit matters.

The NCR had been collaborating with the South African Police Services (SAPS) and the South African Social Security Agency (SASSA), and through this initiative several loan sharks and illegal credit providers had been arrested. The NCR had referred some of these matters to the National Consumer Tribunal and criminal cases had been opened. The NCR had been to KwaZulu-Natal, Limpopo, Northern Cape, and the Western Cape. In addition to pension payout points, the NCR had been to mining towns and farms.

The Company Secretary of the NCR, Mr Lesiba Mashapa told the Committee that in terms of restorative justice, the primary purpose of the credit amnesty was restorative justice. The DTI and the NCR wanted to make the current credit amnesty different from the 2008 credit amnesty, in that the 2008 amnesty only proposed a removal of adverse listings without proposing additional measures to address the underlying causes of credit impairments and consumer over-indebtedness. With the current amnesty, the objective was not only to reduce impairments over a long period of time, but also to propose additional measures which would address the problem. There were many causes of consumer indebtedness which ended up in the impairment of their credit records, and many of these factors were often beyond the control of the consumer. There had been an economic recession in 2008/2009, and before the implementation of the National Credit Act there had been a massive amount of reckless lending, as credit providers had anticipated that the lending criteria would become tightened with the new Act. The effect of inflation on discretionary income also had to be considered.

The aim of the amnesty was not to promote reckless borrowing, but once a consumer’s record was removed, they should be able to access credit if they could afford it. It was also hoped that this would reduce the cost of credit.

The Select Committee on Trade and International Relations had voted on the option of removing all adverse credit records, irrespective of their value, as a “once off.”  There was a current problem with civil judgments, particularly with the listing of judgments on credit records for a period of five years -- for a consumer to have such a judgment removed, they had to apply to a court to rescind such a judgment and quite often they had to employ an attorney and legal fees and procedures were costly.  With the current amnesty, the proposal was to effect amendments to the regulations so that when a consumer paid off a judgment debt, all that had to be done by the consumer was to obtain proof of payment from the creditor, submit it to the credit bureau and such a judgment would be removed. Additional legal costs were thus not going to be incurred and the consumer did not have to wait for five years. This also applied for adverse listings.  If the underlying accounts were paid, the consumer did not have to wait for one or two years for the listing to be removed. It was going to be removed as soon as proof of payment was submitted to the credit bureau.

The Chairperson said that all the questions of the Members and the responses given were very important. There could be one or two areas which had been overlooked, but the Committee was going to submit any outstanding questions to the DTI and the NCR in writing, for written responses. It had to be made clear that there had been a process of improvement over the last three years, but the concern of the Committee was that certain areas remained which required interrogation, especially now that there was consideration of the status of the credit amnesty project. The Committee had to be as informed as possible. She apologised to the Members that there was not going to be a second round of questions, but all outstanding questions could be submitted to the DTI and NCR in writing.

Workshop
The Chairperson announced that the Committee had received a letter from the Portfolio Committee on International Relations and Cooperation, inviting Members to a workshop under the theme of “A dialogue on South Africa–Cuba relations: Successes and Challenges towards the implementation of processes aimed at kick-starting economic processes in Cuba”.  The event was going to start at 11h30 on the 13 August 2013 at the Good Hope Chamber in Parliament. 

The Committee Secretary, Mr Andre Hermans, informed the Committee that changes had been made to the Committee programme relating to a request by the Minister of Trade and Industry to respond to the loan made available by the National Empowerment Fund (NEF).  The Minister would be available on 23 August 2013. The Minister was also going to comment on the Committee’s workshop on trade agreements. The Committee would also use the opportunity to complete the SADC Protocol Agreement, which was before the Committee.

The meeting was adjourned.  
 

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