Credit Abuse, Debt Relief & Debt Forgiveness

Millions of South Africans cannot live without credit and are falling further behind on their debt repayments, resulting in over-indebtedness. Numbers from the National Credit Regulator show that out of the 23 million credit-active consumers in the country, over 42% are considered impaired. This means that they have been in arrears for three or four months or have judgments against them.

According to experts, there are several reasons why consumers become indebted – these include reckless lending by credit providers, a lack of knowledge on the part of consumers and perhaps a lack of responsibility. Other factors include a faltering economy, unsecured lending, the collection of prescribed debt, high inflation rate, the selling of credit insurance at high prices, and the rising cost of fuel, food, electricity, water, rates and other basic costs.

In South Africa, over-indebted individuals currently have three debt relief options: sequestration under the Insolvency Act, administration under the Magistrates Court Act and debt review under the National Credit Act. All three options have shortcomings. As a result, Parliament held a series of meetings with various role players to discuss how to help people caught in a debt trap.

MPs were particularly concerned about people who had NINA (no income, no asset) loans. People incurred credit when working but if they lost their job, the loan interest continued and the debt grew and it became impossible to dig themselves out of the hole. MPs called for enforcement in the sector to be beefed up as loan companies persisted with reckless lending because they knew they could get away with it and that the penalties were inconsequential. In their view, reckless lenders should take some responsibility by writing off part of the debt. If a lender had to write off the debt it recklessly lent, then this would curb this practice substantially.

MPs noted that regulators needed powers to tackle the illegal loan sharks as well. While there were many irregularities happening in the regulated legal space, they were probably dwarfed by the size of the abuses in the illegal space. The NCR’s hands were tied because it had to rely on SAPS. The legislators called for the NCR to have real teeth with powers to investigate, search, seize, raid and shut down illegal operations. It was suggested that a solution was the completion of an integrated social security system in South Africa that could intervene. People would not go for consumer credit loans for small issues that could be covered under the integrated social security system.

In their remarks, National Treasury and the South African Reserve Bank said that a lot of education was needed and a less fragmented approach should be followed by the regulators if they wanted to be effective. They cautioned against debt forgiveness as it could backfire. A credit amnesty and the expunging of information from credit bureaus as this would make lending more risky and could result in increasing the cost of loans and tighter lending conditions that impacted on the very people that they intended to benefit. Treasury believed that many of the people who had received a credit amnesty before were back in debt again.

As part of the measures to address this, the Department of Trade and Industry highlighted that new legislation is on the cards to crack down on dodgy lending practices, including the selling of credit life insurance at inflated rates, granting of credit against social grants, collection of prescribed debt and high interest charged by attorneys for debt collection.