Regulations to tackle over-indebtedness

In the face of economic uncertainty, nonexistent growth and record unemployment, already over-indebted consumers are struggling to meet their debt commitments.

According to TransUnion’s Q4 2019 CCI report, which measures consumer credit health, 908,000 of the country’s 58-million active consumer accounts are in arrears by three months.

However, the situation could be worse, says Thomas Maydon, Head of Credit and Analytics at Principa Decisions.

“SA has robust legislation in place, such as the National Credit Act, which has ensured that the country’s over-indebtedness hasn’t reached unmanageable levels due to reckless lending. Without these regulations, the economy could be far worse off.”

In an effort to further reduce over-indebtedness, government recently introduced the National Credit Amendment Act, or ‘debt relief’ bill.

“The bill allows low-income earners to extract themselves from debt through debt restructuring if they earn a gross income of R7,500 or less per month, have unsecured debt of RS0,000 or are critically indebted;’ explains Benay Sager, chief operating officer of DebtBusters and partner for 1Life’s Truth About Money Initiative.

“Furthermore, all applicants will receive financial literacy training. It is important to note that these amendments do not automatically write off existing debt, and consumers will also not be able to apply for new credit while under debt intervention,” adds Carmen Williams, director of research and consulting for TransUnion South Africa.

While the bill is not yet in effect because its implementation requires regulations that have yet to be formalised, the industry is already responding to its pending introduction.

Reducing exposure

“Lenders already appear to be reducing their exposure to these consumers amid concerns they won’t be able to recover their money. These consumers are already finding it more difficult to access credit,” adds Sager.

While these “forgiveness” bills are well intentioned, Maydon believes they simply pour cold water on an overheating radiator that inevitably boils over again.

“Lenders understand the risks when lending to this market segment, which they price in with higher lending requirements. This simply makes credit more expensive across the board, which many will incur once they’re able to borrow again.”

Accordingly, time will tell if these proposed new regulations will have their intended impact on over-indebtedness.

Article originally published in Business Day.

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