'Moral havoc' risk to debt write-offs
SA's ballooning consumer debt crisis will not be addressed by government-sponsored debt write-offs, says Banking Association SA MD Cas Coovadia.
The National Credit Amendment Bill, which gives the National Credit Regulator the power to write off debts of up to R50,000, has been passed by parliament and is waiting only for President Cyril Ramaphosa's signature to become law.
But although 9.4-million people may benefit, it won't be for long, says Coovadia.
"Let's not run away from the fact that the demand for credit is not going to go down until we address broader socioeconomic issues," he says.
The so-called "debt forgiveness" law will make life harder for everyone except loan sharks.
"If we start sending out the sorts of messages that say that under certain circumstances debt will be expunged, then we're creating moral havoc in the sector," says Coovadia.
It will introduce more risk into the system.
The cost of credit will go up, making it more difficult for those who are managing their debt to continue to do so, "and credit will start to dry up for a sector of the population that is very susceptible to informal credit mechanisms".
The only sustainable solution to the country's crippling indebtedness is to tackle the underlying socioeconomic causes, he says.
The proposed law "won't cure indebtedness. If we don't get jobs going, the demand for credit will continue to increase."
The maximum level of debt that the National Credit Amendment Bill will allow the National Credit Regulator to write off
He says some sort of debt relief in the current circumstances is appropriate.
"Debt relief in principle is not the issue."
But in addition to exacerbating indebtedness, the intended law ignores efforts that the industry itself has been making.
"For a number of years we have been bringing the entire credit industry together to look at mechanisms to give relief. With some success."
So why has consumer debt ballooned into such a national crisis?
Insufficient regulatory support, says Coovadia.
"The mechanisms we put together had a sort of on-off support from the National Credit Regulator, and there was a time when the credit regulator would not support them."
As a result, debt counsellors and non-bank debt providers were reluctant to participate.
Only recently has the National Credit Regulator come out in support, he says.
If the credit regulator made it a condition of registration that these voluntary mechanisms be used to bring about debt relief, it would have a far more significant impact.
"Government comes at these things as if nothing is happening. What we should be doing is looking at current mechanisms that are in place, and what sort of support regulatory authorities can be giving to bring them up to scale. And do it in a way that creates relief and does not have a negative impact on the market and the economy."
But over-indebtedness is not going to disappear whatever voluntary mechanisms or debt forgiveness laws are in place, because it is a much broader, socioeconomic issue.
"The real question is, how do we pull together to manage the underlying causes that are creating this credit demand among low-income people. This is what we should be talking about."There are no quick fixes, and it is disingenuous for the government to pretend otherwise."If people are borrowing money to put food on the table and make ends meet, that is a broader socioeconomic issue, and unless it is addressed, demand for debt is not going to go away."Coovadia concedes that the industry itself is not blameless."Have there been some bad practices in lending? I'm sure there have. Has the credit industry extended credit where they should not have? I don't know. I certainly know there are laws in place through the National Credit Act that should be used to clamp down on reckless credit."The regulator has not been enforcing them, he says."We have a good National Credit Act in place. We negotiated long and hard for it. But the ability of the National Credit Regulator to implement it is questionable."We should move away from the situation in this country where we can't enforce laws that are in place, so we look for other pieces of legislation to try and cover that."By and large, says Coovadia, banks are conducting their credit business appropriately.If any bank is found to be behaving recklessly, the law must take its course."But there are a whole range of other credit providers out there, including micro-lenders, non-bank lenders, retail lenders, and I can't speak for them."Different banks have different products for different markets, but they haven't lowered their lending criteria.The debate has been about which products to develop to cater to different segments of the market."But it must be understood that where people cannot afford to repay, banks should not be lending to them."One of the problems the industry has with the bill is the power it gives to the minister of trade & industry to intervene to cap fees.What about the argument that banks' fees are excessive and need to be capped?"Banks will tell you that they price for risk. Does that mean there is a higher burden on those clients that are considered riskier, in other words poorer people? Absolutely," he says. But if the government "intervenes in that by capping fees then there are consequences".Such interventions create a situation where credit to certain sectors of the market could become "extremely difficult".Does he expect Ramaphosa to sign the bill before the elections on May 8?"I really don't know, but we would urge that this be looked at more carefully."Is it about the elections?"I hope not. We can't allow things like this to be used for pre-election political stuff because it will have consequences for low-income people who are struggling with debt. These are not things we should be playing around with as part of pre-election machinations."Does he see the bill as a populist measure?"It's certainly not an appropriate way of dealing with a very real problem," says Coovadia.