SA’s new debt-relief law will ratchet up the cost of credit, strangling consumer spending with a devastating effect on an ailing economy, a banking lobby group said.
The comments by the Banking Association SA (Basa) on Friday came a day after President Cyril Ramaphosa signed into law a bill that gives the National Credit Regulator (NCR) powers to write off unsecured loans — which do not need collateral — worth R50,000 for consumers found to be critically indebted and earning no more than R7,500 a month.
Consumer spending is the biggest engine propelling the SA economy, accounting for about 60% of GDP.
But South Africans have been spending warily in recent years as they grapple with dangerously high personal debt levels. SA’s household debt is at about 73% of disposable income, according to the SA Reserve Bank.
Cas Coovadia, the Basa MD, said that the new law is likely to have a devastating effect on the economy at a time when SA should be pulling out all the stops to avoid a ratings downgrade and attract investment.
"This means the cost of credit will go up, meaning that there will be less money for productive use in the economy. This will negatively impact economic growth," Coovadia said.
Ramaphosa’s reformist credentials have been under sharper scrutiny in recent months as his plan to push through policy changes to drive economic growth struggle to gain traction amid infighting within the ANC and financial crises at state entities such as Eskom.
The banking industry had petitioned the president not to sign the bill in its current form on the grounds that it would result in a restriction of credit to low-income earners and that it is an unconstitutional deprivation of property.
Coovadia said that Basa will wait for the finer details — including implementation timelines of the law — to be gazetted before deciding on what further action to take.
Shares in financial services companies fell on Friday, with traders citing the signing into law of the bill, which the Treasury estimates could result in the debt write-off of between R13.2bn and R20bn.
Capitec, which owes its successful entry into the fiercely competitive banking industry to unsecured debt, was the biggest decliner on the banking index, falling more than 2.5%.
"Most of their client base sits in the zero to R10,000 monthly income group — more than 80% of their clients, said Nolwandle Mthombeni, portfolio manager at Mergence Investment Managers, referring to Capitec.
Investors also dumped retailers with TFG, the owner of Markham and Foschini chains, dropping more than 3%, while Truworths, which also reported a slump in profit, skidded more than 7%. Both retailers rely heavily on in-store credit cards.
Coovadia said the law sent a message to investors. "Individual banks have their own schemes of restructuring debt, which are working well. [This law] makes a significant intervention in the market, which will not send the right message to investors and ratings agencies. It will not inspire confidence," he said.
Clark Gardner, CEO of consumer watchdog Summit Financial Partners, said the debt intervention aspect of the new law would not have any significant effect on credit providers, collectors or consumers.
"It seems this is another piece of legislation that will be incredibly difficult to implement and we doubt whether even R100m of applicable capital outstanding will be written off in the first year or two. The primary reason is that the application process requires a consumer to apply to the NCR or the government official they appoint," Gardner said.
He said this segment of the market would need to be informed of debt intervention benefits, the application process and provided with the digital means to apply accordingly.
"The NCR has one office in Midrand [Gauteng] and consumers in this segment don’t have access to computers, broadband or application form experience. The NCR has neither the capability nor culture of delivery required to address these applications in a reasonable period of time."
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