Hope for the hopeless
A new law could see millions of people’s debt in South Africa wiped out – but it’s controversial
She rises before the crack of dawn. Travelling long distances from her home in the suburb of Kraaifontein to her jobs in central Cape Town and other parts of the Mother City. Noloyiso Lombo (46) is a domestic worker, earning up to R4000 in a good month. “I work for a man two days a week and he pays me R2 000 a month.” Her second job is working for a cleaning agency where she’s employed for three to four days a week, depending on bookings.
“It’s difficult because I work on commission,“ she says. The single mom takes care of her 28-year—old daughter and two grandchildren, making sure they have a roof over their heads and are fed and clothed. That means there isn’t enough money to pay her debts.
She owes around R20 000, an amount that’s crept up over the past five years. Her debtors include clothing retailers and she still owes money on her daughter’s college fees.
“It’s stressing me out because I don‘t have enough to pay what I owe,” she says. And I can’t buy anything because if I do, my debtors are after me.” Noloyiso is one of the millions of South Africans who’ve increasingly tightened their belts yet still can‘t make ends meet. She can‘t survive without the debt she’s incurred — yet it’s stopping her from improving her life.
But soon Noloyiso’s worries might all be over. Thanks to a new law, low earners like her could see their debt wiped out. That‘s right — it’ll be as if it never existed. But, of course, it’s not as simple as saying you want it gone and so be it.
The National Credit Amendment Act 7 of 2019, recently ratified by President Cyril Ramaphosa, won’t apply to everyone or all debt.
The part of the act that refers to the debt being cancelled — praised by some but seen as reckless by others is aimed at households within a certain income category. It applies only to people earning no more than R7 500 a month before deductions.
There will be several other factors to consider before someone qualifies, and a lot must happen before the new law can be put into practice. Experts warn this step can make debt in South Africa more expensive in the long term and could end up harming the very people it‘s intended to help. But those who support it say it will make a huge difference in the lives of many poor South Africans who simply can’t get financially on track because of the huge burden of debt they have to carry.
These are consumers who have no other option but to incur debt to survive from day to day. We break down the details.
What is debt relief bill and who benefits from it?
The proposed measure to strike debt in South Africa is part of a series of amendments to the National Credit Act. The National Credit Amendment Act also called the Debt Relief Bill, is meant to help the poorest and most indebted South Africans. Its overarching purpose is to strengthen the credit act and prevent the exploitation of, especially lower-income households. But what’s made most consumers sit up and take notice is the prospect of having their debt written off.
The new law is specifically aimed at helping debt-ridden consumers who have unsecured debt such as credit and store cards or personal loans, of a maximum of R50 000. If you owe more than R50 000 you may not apply to the national credit regulator (NCR) for debt intervention. But after considering factors such as inflation, the relevant minister may adjust this total debt amount once a year.
The amendment won’t apply to those who are in debt counselling, sequestrated or in court-ordered debt administration. And it doesn’t include home and car loans.
No free passes
This won’t be a free-for-all — your debt won’t automatically be expunged if you qualify for it. Once the legislation is implemented, you’ll have to apply to the NCR for the process to start. The NCR will be in charge of administering these regulations and will assess each application and decide whether the situation is dire enough to warrant the debt being written off. You could say the NCR will act as a type of debt counsellor or debt manager — but without the fees, this usually comes with.
It might decide that the applicant is capable of getting themselves out of debt with the necessary guidance and debt restructuring. Details about implementation still have to be worked out but for the time being the process and timeframe look something like this:
- The NCR assesses whether the applicant is overburdened with debt and whether any of the credit agreements constitute reckless lending. The NCR then has several routes it could decide on. It could deny the application in its entirety, recommend voluntary debt restructuring, or investigate reckless lending agreements to see if the lenders are liable.
- If the NCR finds the applicant is unable to pay off their debt, it might suspend repayments for a year.
- The NCR will reassess the situation at the end of this period. If the applicant is then in a better position and able to pay off their debt within five years, the NCR can negotiate new repayment terms and interest rates on the applicant’s behalf.
- But if it’s found that the situation hasn’t improved, the NCR may suspend repayments for another year.
- Then, if the applicant is once again found to be unable to repay their debt, the debt might be expunged, either fully or in part.
So it will be a lengthy process and critics say the NCR doesn’t have the necessary resources to help the many debt-ridden consumers who’ll apply.
The situation right now
Under the new law, an estimated 9,5 million indebted South Africans could be eligible to have their debt expunged. But applications can be made only once a start date has been advertised in the Government Gazette.
Meanwhile, consumers should be wary of getting into more debt in South Africa, Sager warns. “Taking out more credit than you can afford isn’t a good idea and it could have long-term implications for your credit record.”
A no vote
So will the new laws be a godsend to society’s most vulnerable or put them at even more risk? It depends on who you ask. The banking sector hasn’t been positive about the changes. The amendment act in its current form “doesn’t achieve the intended objective of helping over-indebted consumers,” says Cas Coovadia, managing director of The Banking Association South Africa (Basa).
Banks have been voluntarily helping embattled consumers for years by providing billions of rands’ worth of relief in the form of interest rate cuts, he says. Debt intervention measures “shouldn’t introduce uncertainty and instability into the credit market, as this will have a further negative effect on consumers as well as the South African economy,” Coovadia says. The banking sector supports debt relief measures to over-indebted consumers whose income circumstances have been weakened beyond their control, he adds. But he believes the new amendment will disrupt the credit system, which is carefully calibrated to function in a certain way.
“By making provision for the arbitrary expunging of debt in South Africa, the act, in effect prevents banks from extending responsible credit, particularly to those in low-income households who often need it most.” Why? Because of the risk involved in lending to people who might not be able to pay and who might then eventually have their debt written off.
The act will make credit providers even more cautious of extending credit to people who, for example, earn less than R7 500 a month, Coovadia says. And if banks aren’t giving people loans and consumers still desperately need money, they‘ll find it elsewhere, critics argue. This might drive desperate consumers straight into the clutches of unscrupulous loan sharks — unregulated micro-lenders who charge impossible interest rates and extend loans to those who’ve run out of borrowing options.
“An unintended consequence of the new act could be that credit providers will have to review their lending criteria for the category of consumers involved, as they’ll be perceived as a higher risk,” says Neil Roets, CEO of debt counselling firm Debt Rescue. And if such consumers don’t meet the criteria, they’ll be left with little option but to turn to unregulated lenders — which will have a detrimental impact on their rights and their financial circumstances in the long term.” The Democratic Alliance (DA) is worried that the act will encourage South Africans to get into more debt. “The DA is concerned that this act will increase instead of decrease the appetite among low-income earners to incur more debt, with no intention of paying it back,” says Dean Macpherson, DA shadow minister for trade and industry. “The act in its current form fails to make adequate provision for dealing with illegal and unregistered rogue lenders who take advantage of consumers who have no recourse or protection from the state.” The National Clothing Retail Federation has also expressed concern over what the future holds for retailers.
Michael Lawrence, executive director, emphasises that many clients in the retail sector fall into the category the Debt Relief Bill applies to. As a result, many credit providers in the industry will be hesitant to extend credit.
Roets acknowledges that consumers, especially in the below R7 500 income bracket, can’t always afford the legal fees associated with debt counselling, despite these legal fees being quite reasonable, as debt counsellors. “Since 2007, debt counselling has proved to be a successful solution to assist consumers who are over-indebted,” he says. This might have been a better route to follow instead of writing-off the debt, Roets believes. “A much better solution would’ve been for the government to subsidise the legal fees for consumers within the defined criteria, enabling them to make use of debt counselling.”
Roets says SA’s consumer debt problem is largely a consequence of poor financial literacy. Most consumers receive little or no financial education at any stage of their life. “When people start earning an income, they’re often not equipped to handle the pitfalls that come with taking up credit,” Roets says.
“Overindebtedness in SA can be dramatically reduced if the government provides financial education at school level around topics such as the cost of credit, responsible use of credit, living expenses and good and bad debt.”
A yes vote
Trade federation Cosatu praised Ramaphosa for ratifying “one of the most pro-poor and pro-worker laws”, and reckons the banks are overreacting. “It will provide badly needed debt relief to millions of over-indebted and exploited workers and their families,” says Matthew Parks, Cosatu’s parliamentary coordinator. “It’s a helping hand to those who need it most.” But he urges South Africans not to take it as a license to shop. “It’s critical for consumers not to mistake it for a green light to engage in reckless borrowing or financial behaviour.”
– Richard van Rensburg & Shanaaz Prince