Debt forgiveness Programme: briefing by National Credit Regulator

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Trade and Industry

03 May 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee met with the National Credit Regulator (NCR) to be briefed on the debt forgiveness programmes. The presentation provided insight on the feasibility of a debt forgiveness programme in South African based on the level of over-indebtedness of consumers and provided research based on a desktop review of a range of debt relief measures and forgiveness programmes globally and the impact of these programmes before concluding with recommendations.

The Committee supported the proposals and recommendations in the presentation in principle – Members expressed that further research needed to be conducted on the impact of some of the proposals and consultation was required with the relevant stakeholders affected by the recommendations – it was important not have recommendations which could not be realised. Some Members felt that the private sectors and reckless lenders should take some responsibility for writing off debt and that this would substantially contribute to curbing reckless lending. Discussion was also held on the issue of African Bank and applications to have the debt written off – the Committee relayed that the greatest impact currently would come from taking the African Bank bad book to the Credit Tribunal to have it determined as reckless. In this regard there was also a suggestion that the Committee met again with the Reserve Bank.

Members cautioned against the creation of perverse incentives with debt forgiveness such as not finding work or electing to take retrenchment packages. Some of the proposals would have to be tightened to prevent such situations. This was similarly with the student debt forgiveness programme and the possibility that it be a graduate programme with the priority of cutting unemployment. The Committee also highlighted the issue of extending the powers of the NCR would be looked at – through a suggested two-phased approach, the Committee could look at what could be done through the regulations and then amendment of the principal Act. There was also a need to further discuss the administration of the proposal relating to e-tolls.

The Committee then tuned to internal business by perusing the programme of the Committee for the remainder of the term before the House rose at the end of May. Key issues on the programme including meeting with the Standing Committee on Finance on illicit flows and base erosion, the colloquium on localisation, meeting with the National Regulator for Compulsory Specifications, meeting again with the NCR to follow up on engagement with key stakeholders stemming from today's meeting and deciding the desirability of the Remote Gambling Bill. 

Meeting report

Debt Forgiveness Programme

Ms Nomsa Motshegare, CEO, National Credit Regulator, began by outlining the objectives of the presentation which included investigating the feasibility of a debt forgiveness programme in South African based on the level of over-indebtedness of consumers, looking at desktop research based on a review of a range of debt relief measures globally, the impact of these programmes and recommendations.

Looking at debt relief measures in SA, Ms Motshegare noted sequestration (Insolvency Act) and the debtor’s assets being insufficient to satisfy the claims of creditors. Mention was also made of debt administration under the Magistrates Court Act and debt review in terms of the National Credit Act whose main aim included addressing and preventing over-indebtedness, providing mechanisms for resolving over-indebtedness and involved restructuring of a debt.

Turning to debt forgiveness programmes in terms of international case studies,  the first example was Croatia's A “Fresh Start” scheme (2015) which aimed to provide a debt discharge to the poorest individuals with the objective of providing stimulus to employment and economic growth. Municipalities, utility and telecoms providers, tax authorities and banks were required to clear some of the debt and absorb the losses themselves. Those eligible must have debt of < R76 000, a monthly income of < R2 770, no property and no savings. The Scheme was applicable to 60 000 citizens (2% of the adult population), at an approximate cost of R467 million. The impact of the scheme was too soon to assess – it could have an effect on economic growth with the requirement that banks and other private sector institutions write off debt which might lead to the imposition of higher interest rates/fees to other consumers and increased reluctance by credit providers to lend to worthy low income consumers in the future.

India had a Debt Waiver and Debt Relief Scheme to Small and Marginal Farmers (2008) which targeted over-indebted farmers in rural areas (justified in part by suicides). Over-indebtedness was caused by unpredictable rainfall and high interest rates. This was one of the largest debt relief schemes in history and affected 36-40million farmers covering an outstanding debt of R156 billion. Criteria to be eligible for the programme included having a loan issued before December 2007 and still due as of February 2008. Borrowers who pledged < 2 hectares of land as collateral received unconditional 100% debt relief while borrowers who pledged > 2 hectares received     25% conditional debt relief subject to repayment of the outstanding balance. The government recapitalized the loans written off for the full amount. In terms of impact, the World Bank published a study on the effect of the debt forgiveness scheme - borrowers in areas with a high-number of debt relief cases started defaulting in large numbers and banks reallocated their credit away from these districts.

Ms Motshegare then outlined the case of USA: The Obama Student Loan Forgiveness Scheme (2010) assisted student borrowers to manage repayments so that loan debt was not a deterrent for pursuing higher education. Students with study debt obligations were targeted along with borrowers who were permanently disabled while private loan borrowers did not benefit. The Scheme applied to federal loans, loan consolidations, revised payment plans, loan and interest forgiveness and for students who paid diligently (according to agreed payment plan) with the balance at end of the loan period (typically 20-25 years) written off by State. Additional vocational-based student debt relief benefits were made available to former students engaged in certain professions, for example, public Service employees if in the public service for at least 10 years and made 120 payments - the balance of the student debt would then be discharged. The loan program offered five different repayment plans:

  • Standard Repayment: Fixed amounts were paid each month for the life of the loan
  • Graduated Repayment: Amounts <Standard repayment plan were made, but gradually increased every two years;
  • Income contingent (ICR): Payments were based on borrower’s income, family size, loan balance, and interest rate; The borrower was required to pay 15% of their discretionary income to their federal student loan
  • Income Based (IBR): Payment was strictly based on borrower’s income and family size. Consideration on loan balance and interest were excluded in calculating the monthly payments.
  • Pay as you Earn (PAYE): This was usually the lowest monthly plan and was based on the  borrowers income. It used 10% of discretionary income (IBR was 15%) as a payment.

Ms Motshegare then turned to look at mechanisms for debt relief in terms of international case studies - New Zealand, England and Wales had the No Income, No Assets Debt Relief (NINA debtors). According to the World Bank, it was better to avoid discrimination by providing the same relief to all debtors when dealing with NINA debtors. The NINA process was targeted at the debtor whose over-indebtedness had resulted from changes in circumstances rather than unnecessary borrowing. New Zealand was reported to have been the first jurisdiction to have specifically provided for the NINA debtor. The bankruptcy process was inappropriate to NINA debtors.  Common characteristics included:

  • Debt relief if liabilities were < certain threshold;
  • Monthly income and disposable income was <certain threshold;
  • Debtor had not previously been admitted to the NINA process (New Zealand) or had not been admitted in the last 6 years (England and Wales).

Debt Relief orders were also subject to certain restrictions with regard to individual behavior – if the debtor failed to notify the relevant authorities of changes in circumstances that would allow the debtor to repay towards the debt. If the debtor adhered to all requirements of the NINA process, debts were discharged -

In New Zealand, this happened after 12 months of the inception of the process.

Recommendations for debt relief under the NCA included:

  • Prescribed Debts
  • Social grant beneficiaries
  • Loans to students under the National Student Financial Administration Scheme (NSFAS) scheme
  • Garnishees
  • Mis-selling of insurance
  • Reckless lending

Another proposal was to extend the powers of the NCR - other regulators in SA had been grant such powers resulting in effective and efficient cost effective regulation of their respective jurisdictions. For example, the Reserve Bank Act: section 10A(9) empowered the Governor to impose fines on the banks, the Tax Administration Act: section 210 empowered SARS to impose penalties for contraventions of its legislation and the  Financial Services Board (FSB) Act: section 10A allowed the FSB to establish an Enforcement Committee which had the powers to impose penalties/fines. Once the NCR had determined whether the entity had contravened the NCA, instead of referring such case to the NCT, it must instead be allowed to impose the necessary sanctions. The sanctions imposed by the NCR may be appealable to the NCT and High Court.

In imposing sanctions the following considerations must apply:     

  • Nature, duration, gravity and extent of the contravention
  • Any loss suffered as a result of the contravention
  • Behavior of the entity
  • Degree of cooperation
  • Previous fines or sanctions imposed
  • Profit derived from the contravention

Recommendations for debt forgiveness programmes included:

  • Program for NINA debtors
  • Graduate debt forgiveness program
  • African Bank Bad Book
  • Retrenched Steel and Mine Workers
  • Moratorium on Gauteng E-tolls

The proposal was to conduct further research especially on the NINA debtors program and engage with the relevant key stakeholders in all above programmes.

Discussions

Mr A Williams (ANC) thought the recommendations looked nice and fantastic but massive engagement was definitely needed with the relevant stakeholders to see the feasibility of the recommendations and he hoped this would take place. Reckless lenders should also take some responsibility for writing off some of that debt – he thought reckless lending could be reduced if these lenders were made accountable in terms of debt forgiveness along with government. If there was an environment where a reckless lender might have to write off the debt they recklessly lent, then reckless lending could be curbed quite substantially. It was important to look into this in terms of how to make the private sector also pay for some of the debt they created in a reckless manner particularly when it came to the NINA-process – he thought a lot of poor people were accessing debt quite easily and this needed to be curbed and making the private sector partially reasonable would be the way forward in this regard.

An official from the NCR agreed with the point around the private sector taking some responsibility but noted that the issue was with the powers of the NCR – it had lost a very big case against Capitec Bank and before it could investigate, the NCR must have reasonable suspicion that there was wrongdoing. The functions of the Regulator would not be discharged if this kind of suspicion was required. An example was the Lewis case – pensioners did not know they should not be paying for retrenchment cover and as a result, complaints were not lodged with the NCR. The job of the Regulator was to proactively approach companies and look at their books in terms of where the problems were. If the powers of the NCR were extended as proposed it would be able to investigate proactively without complaints and impose penalties on lenders. It currently took a long time for referrals to be heard before penalties were imposed, sometimes up to a year. This was too long to wait.

Mr G Hill-Lewis (DA) asked if it was correct to say that if a debt agreement was declared reckless, the debt was forgiven.

An official from the NCR explained that the debt could be written off on structure so the tribunal had two options.

Mr Hill-Lewis got the sense that the huge majority of the African Bank bad book would be reckless credit – there might be some that was not reckless credit and still went bad but the huge majority would be reckless credit almost by definition. All of those people should then have their credit agreements referred and there should be an application to have that debt written off – this would be an enormous step forward. He agreed with the proposal to expand the powers of the Regulator to ease reliance on the tribunal. He was concerned that some of the NINA-programmes created perverse incentives whereby people who had changes in circumstances were either incentivised not to report them or, worse, incentivised not to change their circumstances. For example there would be people, because they had a great deal of debt, and the only way that debt could be forgiven was for them to be unemployed with the incentive being for them to actually not go out and look for work – this should be cautioned against. The easiest work to do currently with the most impact was to work on the African Bank bad book as it involved millions of consumers, most with reckless credit. When the Committee met with the Reserve Bank, he had asked if the Bank went through each one of those credit agreements to determine whether it was reckless or not – the Bank indicated it had but had never been able to prove this.  Although he took them on their word and the agreements had been reviewed, why had they not been declared reckless credit?

Ms Motshegare agreed that if the powers of the NCR were extended it would make a huge difference to millions of consumers in terms of debt relief and the recommendations made.

Ms P Mantashe (ANC) heard what the NCR was saying and agreed with the proposals but questioned the student loan forgiveness programme – looking at the amount of money paid over to NSFAS currently, where would the money for the forgiveness programme come from? It was important not to make recommendations which would never be recognised and raised the hopes of communities out there.

The Chairperson added that one might look at rewording the student loan forgiveness programme to graduate programme – the student loan forgiveness programme would need to be a broader issue. A student who had graduated was ready for the job market but because debt was not paid off, the degree might not be obtained. She was not saying there were no challenges along the way for that student but there was the priority to cut unemployment while having skilled students obtaining their degrees. “Student loan” perhaps might be too broad and it was best to focus on “graduate”.  

Ms Motshegare agreed with the point around graduates. The NCR would have to engage with NSFAS and the Department of Higher Education as it was something the Regulator could not do alone. Consultation and engagement with these key stakeholders would be necessary.

Mr Williams thought the recommendation regarding retrenched steel and mine workers should be limited to forced and not voluntary retrenchment because workers could get into massive debt and then ask for the retrenchment package. It was important to also look at other workers retrenched. The specific criteria to get this forgiveness must be very narrow for those workers who were really poor and could really not afford to pay back that money. It was important to prevent incentives not to get work and pay back debt – research further than a desktop study should be done to look into these implications. A worse situation should not be created where debt was written off and others then refused to pay. 

Mr MacDonald Netshitenzhe, Chief Director of Policy and Legislation, Department of Trade and Industry, on the issue of “writing off” noted that it was specific terminology for the institution writing the debt off for specific purposes. It did not mean the creditor could not institute action against the debtor.

Mr Hill Lewis, on the issue of reasonable suspicion, did not know if the court found what reasonable suspicion was. In the case of African Bank, reckless lending was found in more than one of their branches prior to the collapse. In his opinion this was more than enough reasonable suspicion to check the Bank's whole loan book especially the bad book. He did not read the judgement so did not know what the court found on reasonable suspicion but it was quite easy to show reasonable suspicion along with one or two complaints.

Mr Williams supported the recommendation of expanding the powers of the NCR.

Mr Netshitenzhe said the DTI would have to take the lead with amendments.

The Chairperson imagined that there might be the need for a two-phased approach – what could be done without amendments to the principal legislation and that which required amendment per se. This was her proposal to the Committee. The Minister had the power to regulate within the principal Act and it may be that some of these matters could be looked at in the regulations - an example was the graduate loan issue and debt with respect to retrenched workers from the mine and steel industry. She read or heard mention of the fact that the Unemployment Insurance Fund (UIF) had a significant amount of funding so it might not be a major challenge if the proposal were to go through in engagement with labour and the National Skills Fund in this regard. Debt was the mandate of the DTI but given that the African Bank issue fell under Treasury, there had to be a way in which the matter was engaged especially because this was a major amount.  Did the Committee, on principle, support the graduate forgiveness proposal?

Ms Mantashe supported the proposal as amended.

Mr Hill-Lewis said NSFAS already worked by turning course debt in which the pass was more than 60% into a scholarship and this was a positive incentive for students to work hard. He was hesitant about writing off the entire fee as NSFAS must still function and make money in such a way that it supported other students operating like a bank would but in a way that provided cheap finance to students via soft loans.

Mr Williams noted that some rigorous engagement was needed with the stakeholders on issues relating to the proposals – the Committee should support those proposals with the NCR going to the relevant stakeholders and then returning to the Committee on the outcome of the engagements.

The Chairperson outlined that there were issues to discuss around the administration of the proposal relating to e-tolls – there were already incentives within the e-toll programme.  In discussing this with the relevant authorities, this should be looked at. On the other hand, one would not want to encourage others to default in terms of inverse incentives. Noting that there was very little time, all these factors should be taken into consideration – sometimes when there was very little time, it was amazing how much can be done. It was important for the Committee to look into the issue of powers in order to investigate and what other powers the NCR might require while acknowledging that the Committee would not take a decision before it rose at the end of May but there would be a plan to move forward on the matters.

Mr Lionel October, DG, DTI, thanked the Committee for guidance on the matter noting that the Department would be working expeditiously on them along with the relevant stakeholders and those who would be affected by the writing off of the debt. Concerns and issues raised in engagement will be fed back to the Committee. With African Bank, especially private credit holders, there were rights to credit so debt could not be written off arbitrarily – write off mist be properly apportioned.

Mr Hill-Lewis noted that when the Reserve Bank was before the Committee he had specifically asked it about the African Bank bad book but no application had been made to the tribunal to have that bad book declared as reckless credit – this made him question and doubt whether the Reserve Bank was doing what it told the Committee. To make a reasonably big impact in short time would be to start with this bad book, take to the Tribunal and have to declared as reckless – doing this through the tribunal would be proper procedure and not arbitrary.

The Chairperson agreed as commitments were made – the Committee Secretary would look at the minutes of this meeting with the Reserve Bank to see exactly what occurred at that time. This could be fit in sometime next week and she would discuss with MANCO the feasibility of getting the Reserve Bank back as soon as possible in terms of the ring fence regard.

Committee Business

The Chairperson took Members through the revised Committee programme. Many Members had raised the issue of Transnet localisation and she reminded the Committee that there would be a colloquium on this matter – the colloquium involved not only Transnet but as many of the relevant stakeholders as possible.  Issues relating to localisation should be referred to the Committee to be taken up during the colloquium which would only take place when the Committee returned in August. Before the Committee rose, the terms of reference for the colloquium would be prepared. The NCOP, as fair as possible, would join the Committee in the matter and perhaps chairs of the economic development committees in the provinces would also be invited so that DTI could address all stakeholders in one forum.

The other matter off and on the radar of the Committee was the National Regulator for Compulsory Specifications (NRCS) – when the Committee visited the port earlier in the year it appeared as if systems were in place but the reality was that complaints continued to be raised. The Committee needed to address these complaints – the DTI would be approached formally on this and then it would be decided whether or not the matter could be fit into the Committee programme because there was very little time left before the House rose.

The Committee would also be joining a meeting of the Standing Committee on Finance on the issue of illicit flows, base erosion etc. On 13 May, the Committee would be meeting with the National Consumer Regulator and again with the NCR on engagement with stakeholders stemming from today's meeting. There would hopefully be about 10 days from now for the NCR to engage before returning to the Committee. The Committee was advised that it could use a constituency day and this day would still have to be decided on. The Committee would have to get to a point with the NCR where there was a firm position before moving ahead with amendment of the principal legislation. The Committee would also have to consider the desirability of the Remote Gambling Bill before it rose per se.

Mr October supported the decision to hold the colloquium on localisation – major stakeholder on the issue, especially the manufacturing circle, should be invited along with the larger State Owned Enterprises (SOEs) and government departments who were big procurers. On the NRCS, disciplinary action was being taken currently against managers where there were allegations of corruption and other matters. In such cases, it labour regulations were very strict in that people had recourse if they felt unfair action was being taken.  DTI had a clear zero tolerance policy on corruption and if there was any evidence on it, action was taken.

The meeting was adjourned. 

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