Here is why Government’s debt forgiveness plan is a bad idea

Rather than helping consumers, the debt forgiveness programme being mooted by government will plunge consumers deeper into debt in the long term, according to a leading economist.
The National Credit Regulator (NCR) briefed Parliament’s Standing Committee on Trade and Industry on Tuesday morning about the state of South Africa’s credit market and its financial performance, among other matters.

NCR CEO Nomsa Motshegare said that there were 10-million over indebted consumers in the country and suggested that some form of debt forgiveness should be considered.

The ANC’s Adrian Williams also suggested that the regulator consider a kind of “debt forgiveness programme”, which would reprieve lower income groups. “This shouldn’t be for the rich who have just been spending recklessly.”

Magnus Heystek of Brenthurst Wealth Management said should the government decide to implement the plan currently under consideration it would be a disaster for the economy and for consumers.

“If lenders are compelled by legislation to write off even minimal amounts of debt, it would shake confidence in the South African economy to the core.”

Heystek said it was patently obvious that this was an ANC election ploy trying to buy votes from the more than 50% of South Africans who were deeply indebted.

“Should the government decide to go ahead with this idea which is currently in the planning stage, it will ultimately be the banks who will lose out when lenders are unable to service their loans. The only way that the banks will be able to recoup their losses will be by charging higher interest rates for what will be perceived as high-risk loans,” Heystek said.

He said it would also make it more difficult for consumers to get loans because unsecured debt will be viewed as ultra-high risk if there was the possibility that it could be written off.

Neil Roets, CEO of Debt Rescue, said if the measure currently being investigated by the National Credit Regulator (NCR), came to pass it would bring welcome short term relief to deeply indebted consumers but that the longer term consequence could be extremely negative.

“Lenders which included both banks and the retail sector already have to cope with prescription legislation which means if a consumer has not paid back any instalments on the outstanding amount for a period of three years it is said to have expired.”

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