What are we to expect from the Amendments to the National Credit Act 34 of 2005, will this negatively impact the banking industry and how will government look to implement the Amendments?
With the President having signed the National Credit Amendment Act 7 of 2019 ("the Amendment") on 13 August 2019 and with it currently projected to be fully effective by January 2021. What are we to expect from the Amendments to the National Credit Act 34 of 2005("NCA"), will this negatively impact the banking industry and how will government look to implement the Amendments?
The National Credit Act came into effect to promote a fair and non-discriminatory marketplace for access to consumer credit. It therefore seeks to regulate consumer credit and improve standard of consumer information to promote black economic empowerment and ownership within the consumer credit industry. The Act also intends to prohibit reckless credit granting and provide for debt re-organisation in the event of over-indebtedness.
One of the key amendments to the Act, which seems to be causing a stir in the media, is the inclusion of Section 86A, which allows for certain over-indebted individuals to apply for debt intervention/relief.
Section 86A(1) holds that:
"A debt intervention applicant may apply to the National Credit Regulator in the prescribed manner and form to have the debt intervention applicant declared over-indebted, if that debt intervention applicant has a total unsecured debt owing to credit providers of no more than R50,000, or such an amount as may be prescribed by the Minister".
In promoting and advancing the social and economic welfare of all South Africans, it was highly significant for the Act to address low income workers that were on debt review. The changes are intended to address the inability for poor consumers to access formal debt-relief processes.
In effect, the Amendments would only be applicable to natural persons, specifically consumers under unsecured credit agreements or have entered into short term credit transactions/credit facilities and provided that the total of the principal debts under these agreements is not more than R50 000. Further, when the applicant applies to the National Credit Regulator for debt relief, what is to be shown in receiving such relief is that the person is actually over-indebted or not subject to an administration order and that during the 6 months preceding the application the person received an average income of no more than R7 500 per month.
According to Treasury, it estimates that more than 9 million consumers potentially qualify for such intervention/relief, with between R13.5 Billion and R20.7 Billion worth of debt possibly being written off in this respect.
Concerns have been raised by the Banking Association of South Africa ("BASA") prior to the Bill being signed by the President about what type of debt re-structuring mechanisms would be introduced industry-wide, as the current mechanisms vary amongst the banks. BASA further illustrated that with individuals getting themselves into over indebted situations having such debt expunged, there would be greater risk and uncertainty as banks would have to provide for that risk of debts being expunged, thus the cost of lending would increase. BASA has suggested that credit granted to people under these amendments could decline as much as 57%.
The portfolio committee from the Department of Trade and Industry has recently published its implementation plan for the Amendments. In making regulations, inter alia, it has prescribed that the Minister may only adjust the qualifying amounts for debt relief once per year and thereafter every 24 months. In the next few months budget will be allocated to ICT and once-off set up costs, these requests will be made to Treasury. A further industry funded levy has been proposed as an additional option to fund the debt intervention measure. The Department projects that once the amendments have been promulgated in January 2021 it shall be phased out between 15 to 24 months.
In congruence with the portfolio committee the National Credit Regulator and the National Credit Tribunal have further published a detailed report on how the amendments will be implemented.
It is yet to be seen what the effects of the Amendments will have on the credit market. However, there is growing sentiment that marginalised consumers should be afforded an opportunity to uplift their economic circumstances, where there is the inability to repay a debt. Capitec Bank currently has the highest exposure to the targeted income group and has released a statement in preparation for the introduction of the law, holding that it now represents less than 5% of its lending book, reducing exposure to affected loans and noted that conservative provisioning relative to write-off experience should temper the outcome. It further stated that as unsecured loans account for just 8% of total unsecured advances by banks and only 1% of total bank advances, the law is likely to have a muted impact on South African economic growth.
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