NOMPU SIZIBA: What does the so-call debt-relief bill that was put into law by President Cyril Ramaphosa last week mean? What does it mean for the banking sector? Earlier my colleague, Ryk van Niekerk, spoke with Cas Coovadia, the managing director of the Banking Association of South Africa.
RYK VAN NIEKERK: President Cyril Ramaphosa signed the National Credit Amendment Bill into law last week. This law allows for the writing-off of certain consumers’ debt, and it will result in losses for banks, retailers and other credit providers. Several bodies have reacted quite negatively to the news, stating that it would put more pressure on the financial system in the country, and would make it tougher for consumers to get new loans. Some analysts even said it may lead to a downgrade of our banks’ credit ratings.
On the line is Cas Coovadia, the MD of the Banking Association of South Africa. Cas, welcome to the show. The law has been in the pipeline for a while, but it seems as if many affected parties, such as the banks, were surprised when the news broke that the president had signed the bill. Were you surprised?
CAS COOVADIA: The bill has been in the making for quite some time, and we had quite a lot of interaction with the dti (Department of Trade and Industry) portfolio committee before the elections on the bill. But there were still issues in the bill that we felt were problematic and, when the bill was sent to the president for signing, we petitioned the president with all the information on why we thought it’s problematic, and that we felt we could actually work together to address some of the concerns which would be better, not just for lenders, but the borrowers as well. And we didn’t get any feedback on our petition, so from that point we were a bit surprised the bill was signed.
But it is signed now. It’s gazetted, but there is no implementation date yet, and maybe what we will now do is interact with who we need to, to actually look at what they are thinking about implementation, and so see if we can address some of the issues.
RYK VAN NIEKERK: It seems like your input was not considered. What are your main concerns against this bill?
CAS COOVADIA: There are a number of issues. The one is that expunging debt – and our estimation is that there would be about 9.4 million people, current borrowers, who have unsecured debt of less than R50 000. Any number of those could be susceptible to being arraigned, and that debt could be expunged. But, having said that, the problem is that the minister then adjusts the gross monthly income and reasons that its people are earning below R7 500, and adjusts the total unsecured debt threshold.
So, it creates a whole lot of uncertainty. It’s not a number of people that are limited, and that is it. The thing is open-ended to a great extent. For four years after the implementation of the act, people getting into over-indebted situations could have their debts expunged. And all of this creates uncertainty that brings risk into the market and makes it very difficult, if not impossible, for banks to actually lend to that sector of the market. And, if they do lend, they’d have to provide for that risk and the cost of lending would go up. Now, surely that’s not the intention of the bill.
The other issue we have is that we’ve been interacting with the National Credit Regulator for quite some time, on an industry-wide – and when I say industry-wide it’s the entire credit industry, including non-bank lenders and others – on that restructuring mechanism that we have put into practice. And if we’ve got total support for that from the regulator, we believe we can bring that up to scale. It goes well beyond the National Credit Act as far as that restructuring relief is concerned.
And then individual banks have their own debt-restructuring mechanism which has resulted in significant restructuring of that. So we believe that to actually use legislation to intervene in the market in this way, when market mechanisms are actually working to do what the bill intends to do, or what the act now intends to do, is problematic. And so those are some of the issues we have, and particularly at a time when we should be sending messages that actually increase confidence among market investors and rating agencies and others. Here we are sending messages that we are intervening in the market to raise rates, and we just think that is inappropriate.
RYK VAN NIEKERK: You said 9.4 million consumers may qualify for debt reduction. How much money are we talking about?
CAS COOVADIA: At a reasonable estimate we are looking at about R20 billion.
RYK VAN NIEKERK: That doesn’t seem that significant in the greater scheme of things. How much of that debt would these consumers have been able to repay if the new law wasn’t signed?
CAS COOVADIA: I don’t have a figure for how much they’d be able to repay, because that depends on their circumstances, and so on. But the bottom line is that if a consumer gets into trouble, and is unable to repay his or her debt, and approaches his or her bank, banks have restructuring things in place. You know, you may say R20 billion in the broader scheme of things is not significant. Well, the issue is that we have a current situation where we have no economic growth, we have significant unemployment, we have people borrowing just to put food on the table. We don’t want to encourage that sort of situation from getting out of hand, whether it’s R20 billion or R40 billion. The things is that if you begin to send out messages that you can borrow money and, if you are not managing your finances properly, you can have your loan expunged. That actually begins to create serious problems in the credit market, and I don’t think that’s appropriate under any circumstances, but particularly in the current circumstances we believe that that is not the way to go.
RYK VAN NIEKERK: Most definitely. That is an excellent point. But what do you think the consequences will be? Do you think there will legal action to try and maybe test the constitutionality of this bill?
CAS COOVADIA: Well, we are meeting with some of the technical people in the banks during the course of this week, to look at our options. We are not using litigation in instances like these, but we look at our options, see what the possibilities of still engaging government are, given that the implementation date has not been gazetted yet. But we will be meeting our members during the course of this week to look at various options.
RYK VAN NIEKERK: Have you been able to engage with the Minister of Finance, or even the president following the signing of the bill?
CAS COOVADIA: No, we haven’t been able to engage with the president yet. This is a Trade and Industry bill, not a finance bill. It was a committee bill. It wasn’t introduced by the Department of Trade and Industry, it was introduced by the dti portfolio committee in the previous administration. And we’ve been interacting with the dti portfolio committee, because it’s been a committee bill. We will obviously talk to the new Minister of Trade and Industry, but I think we just need to point out that it was a committee bill and not a departmental bill.
RYK VAN NIEKERK: Cas, thank you so much for your time.