Debt relief law a two-edged sword
Solani Rivele, a single mother of four, earns about R800 a week but owes 100 times that amount in loans. Millions like her rely on credit to feed their families.
Rivele has borrowed about R80,000 since losing her job as a security guard due to injury in 2016. Now she owes about R3,500 in monthly instalments, more than her monthly income.
“I can’t afford to pay because I’m a single parent, I’m the one who is providing food on the table,” the 44-year-old said in a shopping centre on the outskirts of her home in Alexandra.
“I can’t sleep.”
The situation of people like Rivele shows both the potential benefits — and unintended consequences — of a new law signed by President Cyril Ramaphosa in August, aimed at protecting vulnerable borrowers.
The National Credit Amendment (NCA) Act comes as some lenders make healthy profits on loans while many of the country’s poorest people spend huge chunks of their income on repayments.
It could see some South Africans have their debts suspended or wiped entirely, and force more responsible lending.
This could be good news for many who, like Rivele, are stuck in debt traps.
However, several big banks said the new rules, and the potential risks entailed for lenders, meant they had or would cut back on lending to those low-income customers who might qualify for relief in future.
“You are asking yourself, do you want to play in that particular market, or do you move away?” said Capitec CEO Gerrie Fourie.
This could cause serious difficulties for some families in a country where the unemployment rate is almost 30% amid sluggish economic growth, living costs are rising, and millions of people cannot make ends meet.
About a third of the population rely on loans for necessities like food, financial inclusion organisation FinMark Trust said.
African Bank, a smaller lender that targets low-income consumers, said it already had and would further reduce its lending to qualifying borrowers in response to the NCA.
Retail bank CEO of Absa, Arrie Rautenbach, said it would cut back on new lending to the riskiest borrowers among those who qualify for NCA relief, while Jacques Celliers, his counterpart at FNB, said it had already trimmed new lending to the group in anticipation of the law.
Capitec said in August it had, over the past two years, reduced the proportion of borrowers who would qualify for NCA relief in its lending book to less than 5%.
Fourie said the figure has previously stood at 12%-15%, with the reduction mostly driven by a deteriorating economy, but with the upcoming credit law also a factor.
Standard Bank and Nedbank said they were watching how the situation developed.
Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since MPs began looking at debt forgiveness in 2016.
It dropped from R3.64bn in the final quarter of 2015 to R2.27bn in the second quarter of 2019, data from the National Credit Regulator (NCR) shows.
Banking Association SA head Cas Coovadia said the law would either raise the cost of credit for some of the most vulnerable borrowers or stop banks lending to them.
This risks some being pushed back into the informal sector, dominated by a large network of illegal loan sharks known as mashonisas, Coovadia, bank executives and some debt counsellors say.
SA CEO of payday lender Wonga Brett van Aswegen said his company’s research showed mashonisas were already widely used, adding it would be “naive” to think consumers in need of cash would not go there.
Mashonisas commonly charge interest rates as high as 50% and sometimes use violence to get their money back, debt campaigners say.
The NCR, and Clark Gardner, CEO of consumer advice firm Summit Financial Partners, disputed that borrowers would be pushed into the hands of loan sharks and said it would not be a bad thing if they had less access to credit.
NCR company secretary Lesiba Mashapa said big lenders granted loan sizes he viewed as excessive.
The new law will see the credit regulator take over debt counselling for indebted consumers earning less than R7,500 a month — who are largely unable to afford private fees — and with unsecured loans of less than R50,000.
It will allow all or part of their debt to be suspended for up to 24 months and wiped entirely in some circumstances, for instance if they lose their job. — Reuters