There may be major negative unintended consequences to credit amnesty
The near-certain decision by government to introduce a second “credit amnesty” after the spectacular failure of the first one in 2006-2007, will only provide temporary relief to deeply indebted consumers and drive many into even more profound indebtedness requiring debt counselling.
Although the envisaged amnesty may remove millions of blacklisted people from credit bureau databases, it will in real terms have a negative impact because it will encourage consumers, who are already drowning in debt, to borrow more.
Because there had been inadequate information made available to especially poor and semi-literate consumers with the previous amnesty, many thought that their debts had been wiped out and even those who realised this was not the case then used the opportunity to pile up more debt because they were no longer black-listed.
An unexpected consequence of the amnesty may be that credit may be more difficult to come by for consumers with clean credit records and they may be charged higher interest rates.
We are seeing double-digit growth in the number of distressed creditors knocking on our door for help. If this legislation is passed without serious consideration about its consequences, the effects are going to be dire.
Mark Seymour, chairperson of the Credit Providers’ Association, warned that removing blacklisted creditors from databases would make credit providers more cautious when lending money, particularly to lower-income groups, because, without complete records, they would find it difficult to assess credit worthiness.
He said the increased risk might also be passed on to other consumers in the form of more expensive credit.
The Department of Trade and Industry seems determined to proceed with the scheme. This was made clear in their presentation to parliament.
Research conducted for the regulator and the department shows that, although information is removed from databases, it is still being used illegally by some credit providers and legislation is needed to curb this.
The department of trade and industry (DTI) and the credit regulator are expected to submit a report to Parliament’s trade and industry portfolio committee next month on how best to implement it. The report will form part of public hearings.
It was “part of the human condition” for consumers to pile up as much debt as possible and not worry about the consequences.
There is a lack of understanding among most consumers that if you enter into a credit agreement, at some stage or other that debt has to be repaid.
Debt counselling, which was made a reality by the National Credit Act has brought relief to many desperate consumers by giving them some breathing space by prolonging the repayment period. The bottom line, however, remains that at some stage all outstanding debts have to be repaid.
The sad reality is that for a sizeable proportion – perhaps as high as 70% or 80% an amnesty will just plunge them deeper into debt unless there is proper education.
According to the National Credit Regulator, the purpose of the amnesty would be to provide a new credit opportunity, reduce the cost of credit repair and help consumers to pay less for their credit.
The amnesty is a foregone conclusion; how it is to be implemented is what must be considered. At a meeting last month of Parliament’s trade and industry portfolio committee , committee chairperson Dumisani Gumede told MPs that it would have to “approve a suitable amnesty project”.
Trevor Bailey, the chairperson of the regulator’s board, told Parliament in February that research had shown that a credit amnesty for those with debt less than R10?000 would benefit 86% of those earning up to R15?000 a month.
Neil Roets is the CEO of national debt counselling firm, Debt Rescue