Debt Relief and the DTI

Last month, the Department of Trade and Industry made recommendations for changes to the National Credit Act. These suggested alterations will allow the minister in charge to prescribe debt relief measures, reducing the weight on over-indebted households over time. A set of changes that will include debt forgiveness to certain consumers, this is seen as a step towards a consumer friendly credit market, by government. However, the plan is not without its shot falls, and it could come back around to bite us.

The government’s plan to implement this debt forgiveness scheme could pose a major threat not only to the financial sector, but more importantly to the debtors themselves. The proposed amendments would give the minister of trade and industry the power to apply debt relief measures to certain classes of debtors, for example those who find themselves retrenched while trying to pay off large debts. The department recommended that certain criteria be set, under which a retrenched consumer or victim of grant deduction, as well as those who fall prey to reckless lending, may qualify for debt relief from the government.

All this seems grand, right? How great would it be to have your debt wiped in times of hardship? While that may sound ideal in the short term, the long term impact is quite the opposite. Credit providers, ranging from banks to retail stores, already have legislation in place regarding prescribed debts – allowing old debt to be written off after three years – so to add a change like this on top could make the risk of lending much higher, and thus the chance of getting credit much lower.

Especially considering the junk status and recession we currently find ourselves in, shaking confidence in the South African economy is not an ideal move at the moment, but this is what these changes would do – loans of all types would have stricter conditions, making it that much more difficult for the low-income earners to secure credit…counterproductive to the NCR’s mission. Ultimately, it would be the banks that lose money if these changes are applied, when lenders become unable to service their loans. It would be the banks themselves who would have to cover the deficit, making lending a much less lucrative business. In order to make returns, the banks would in turn raise interest rates to recoup losses, which would then make normal loans, high risk. Unsecured loans in turn, would be seen as ultra-high risk as there is no collateral and an increased chance it could be written off.

With a worrying set of debt statistics in this country, with an indebted population owing around R1.63trn to lenders, we are home to some of the most indebted consumers in the world. In addition to this scary outstanding amount, the NCR and Statistics South Africa have found that more than half of all indebted consumers are three months behind on their payments. This, we find is more reason for increased education rather than changes to legislation. Debt review and loan consolidation remain responsible, effective ways to correct your debt efficiently. Showing you how to budget and plan, as well as divide your payments and communicate with creditors, these debt services build the future much more than government debt relief would.

Last month, the Department of Trade and Industry made recommendations for changes to the National Credit Act. These suggested alterations will allow the minister in charge to prescribe debt relief measures, reducing the weight on over-indebted households over time. A set of changes that will include debt forgiveness to certain consumers, this is seen as a step towards a consumer friendly credit market, by government. However, the plan is not without its shot falls, and it could come back around to bite us.

The government’s plan to implement this debt forgiveness scheme could pose a major threat not only to the financial sector, but more importantly to the debtors themselves. The proposed amendments would give the minister of trade and industry the power to apply debt relief measures to certain classes of debtors, for example those who find themselves retrenched while trying to pay off large debts. The department recommended that certain criteria be set, under which a retrenched consumer or victim of grant deduction, as well as those who fall prey to reckless lending, may qualify for debt relief from the government.

All this seems grand, right? How great would it be to have your debt wiped in times of hardship? While that may sound ideal in the short term, the long term impact is quite the opposite. Credit providers, ranging from banks to retail stores, already have legislation in place regarding prescribed debts – allowing old debt to be written off after three years – so to add a change like this on top could make the risk of lending much higher, and thus the chance of getting credit much lower.

Especially considering the junk status and recession we currently find ourselves in, shaking confidence in the South African economy is not an ideal move at the moment, but this is what these changes would do – loans of all types would have stricter conditions, making it that much more difficult for the low-income earners to secure credit…counterproductive to the NCR’s mission. Ultimately, it would be the banks that lose money if these changes are applied, when lenders become unable to service their loans. It would be the banks themselves who would have to cover the deficit, making lending a much less lucrative business. In order to make returns, the banks would in turn raise interest rates to recoup losses, which would then make normal loans, high risk. Unsecured loans in turn, would be seen as ultra-high risk as there is no collateral and an increased chance it could be written off.

With a worrying set of debt statistics in this country, with an indebted population owing around R1.63trn to lenders, we are home to some of the most indebted consumers in the world. In addition to this scary outstanding amount, the NCR and Statistics South Africa have found that more than half of all indebted consumers are three months behind on their payments. This, we find is more reason for increased education rather than changes to legislation. Debt review and loan consolidation remain responsible, effective ways to correct your debt efficiently. Showing you how to budget and plan, as well as divide your payments and communicate with creditors, these debt services build the future much more than government debt relief would.