1. Portfolio Committee on Trade and Industry
Debt Relief Measures to deal with
Over-indebtedness
15 November 2016

2. Table of Content
Introduction
Debt Relief Measures (not provided for in the NCA) (Question 1)
Debt Relief Criteria (Question 3)
Impact, Consequences and Challenges of legislating Debt Relief Measures and Debt Relief Criteria (Questions 2 and 4)
Proposed Solutions
Conclusion

3. Introduction
The Banking Association South Africa (BASA) understands and supports the Committee’s intention to assist over-indebted consumers and would like to thank the Committee for the opportunity to present and engage on this important matter. We believe that the approach adopted by the Committee to consult with stakeholders will allow for a balanced discussion and produce sustainable outcomes. We would, however, want to engage the Committee on the detail of implementing debt relief measures to ensure appropriate outcomes.
BASA does not support the principle of debt forgiveness. One of the banking system’s foundational principles is the need to efficiently and legally lend money to borrowers and to collect repayments from borrowers to settle the loans. Any failure to perform on this principle will have severe consequences for the industry and economy, will increase risk to depositors/savers, will impose a cost on society, and will limit credit providers’ ability to extend credit.
This presentation clarifies BASA’s view on the principle of debt relief, illustrates the extent of debt relief provided through existing voluntary debt relief measures, and talks to current and pending legislative reforms aimed at assisting indebted consumers.

4. Debt Relief Measures (not provided for in the NCA) (Question 1)
Debt Review Process (Debt Counsellors, Payment Distribution Agents).
Prescription of Debt (Stricter application given the NCAA).
Draft Credit Life Insurance Regulations (Introducing caps and minimum benefits).
Limitation of Fees and Interest Rates (Reduction in the Cost of Credit).
Affordability Assessment Regulations (Stricter lending criteria).
Debt Relief Measures
(not provided for in the NCA)
Debt Counselling Rules System (DCRS) which incorporates concession rules (above and beyond the NCA) for debt restructuring.
Payment Holidays/Moratoriums.
Restructuring/Rescheduling.
Debt Consolidation.
Bank Assisted Sales.
Bespoke Arrangements.
Settlement Campaigns.
In response to Question 1, the types of voluntary debt relief measures offered by the banks will be discussed in greater detail on the next two slides.
Allow for embedment, stabilisation, and supervision to establish the effect of the amendments prior to implementing further measures.

5. Debt Relief Measures (not provided for in the NCA) (Question 1) … continued
Description
Debt Counselling Rules System (DCRS)
When a Debt Counsellor uses DCRS, the system applies material concessions, that were agreed to by the Credit Industry, to assist over-indebted consumers in repaying their debt. The concessions go well above and beyond what is required in the NCA and consist of:
decreased interest rates (as far as zero);
the waiving of fees; and
the extension of the term of the credit agreement.
Payment Holidays/
Moratoriums
Providing the consumer with an opportunity to temporarily suspend payments due on an account in the event the consumer has been retrenched, is going on maternity leave, etc.
Restructuring/
Rescheduling
Providing the consumer with an opportunity to:
restructure (e.g. extension of payment term); or
reschedule (e.g. payment of arrears in instalments)
an account if the consumer missed one or more payments.
Debt Consolidation.
Providing the consumer with an opportunity to consolidate his/her credit products that are in arrears into a new consolidated credit product such as a loan. The consolidation is at a lower interest cost to the consumer, thereby reducing the net monthly debt servicing instalment.

6. Debt Relief Measures (not provided for in the NCA) (Question 1) … continued
Description
Bank Assisted Sales.
Providing the consumer with an opportunity to sell his/her assets (movable and immovable property) privately, prior to the execution of the asset. The sale is based on a willing buyer - willing seller model, thereby maximising returns and minimising losses.
Bespoke Arrangements.
Providing the consumer with an opportunity to enter into a voluntary payment arrangement (as negotiated between the bank and the consumer), based on the consumer’s individual circumstances.
Settlement Campaigns.
Providing the consumer with an opportunity to settle his/her account/s at a discount (as offered by the bank), based on the consumer’s individual circumstances.
The underlying principle of the voluntary debt relief measures offered by the banks is that the consumer is able to repay the debt or will be able to repay the debt in the near future, when his/her circumstances change.
The debt relief measures enable consumers to be fully rehabilitated without incurring expensive legal costs, ultimately allowing them to re-enter the credit market.

7. Debt Relief Measures (Question 1) … continued
The effectiveness of the debt relief provided by debt review, as it relates to the number of accounts in default, is best illustrated as follows:

8. Debt Relief Measures (Question 1) … continued
The effectiveness of the debt relief provided by debt review, as it relates to the number of clearance certificates accepted, is best illustrated as follows:

9. Debt Relief Criteria (Question 3)
A consumer’s personal circumstances will determine which of the available debt relief measures is best suited to assist and address the needs of the consumer.
By way example:
Simon and Thabo both worked for Platina mine, which faced a situation where the workers went on a prolonged strike that resulted in a loss of income for the mine and subsequently the retrenchment of several workers.
Simon, a single father with two children, was one of the workers retrenched. Simon was concerned that he would not be able to repay his personal loan and contacted his bank.
The bank suggested to Simon that a claim be submitted against his credit insurance policy (provided for in the NCA) as a measure of debt relief. The policy provided for full settlement of the outstanding amount in the event of a retrenchment.
Thabo, a married father with two children, and Simon’s colleague, was also retrenched. Thabo and his wife, who works and earns an income, were concerned that they would not be able to repay their personal loan after having deducted their monthly household expenses from his wife’s salary, and contacted their bank.
The bank suggested to Thabo and his wife that their personal loan be restructured (not provided for in the NCA), thereby extending the term of repayment and reducing the net monthly debt servicing instalment.

10. Debt Relief Criteria (Question 3) … continued
In response to Question 3, BASA is of the view that uniform criteria, consisting of:
a target group of debtors who will be eligible for debt relief;
a period in respect of which the debt relief measures will apply; and
the manner of debt relief measures that must be applied
for debt relief can’t be set, and will have severe consequences (which will be discussed in greater detail on the next four slides) as:
no two consumers’ personal circumstances are exactly the same as was illustrated under the example of Simon and Thabo whose economic circumstances were the same (worked for and retrenched by the same company), but personal circumstances were different; and
different Credit Providers offer different products and operate within different customer segments, which means that the markets in which they operate are not identical, hence customised debt relief measures will be more effective.
To summarise, flexibility and non-prescriptiveness in respect of the types and application of debt relief measures and debt relief criteria plays a significant role in ensuring that a suitable debt relief measure is offered that is appropriate to the consumer’s needs and personal circumstances.

11. Impact, Consequences and Challenges of legislating Debt Relief Measures and Criteria (Questions 2 and 4)
The impact, consequences and challenges of implementing debt relief measures and debt relief criteria through legislative reforms can be broken down into the following areas:
Economy:
The banking system has, as one of its foundations, an undertaking by borrowers to repay the loans that they obtain from banks. Any compromise to this principle will have severe consequences for the industry and, given the role of the banking sector in the economy, for the economy, e.g. job losses.
Given the current economic environment, Moody’s have forecasted that banks will report higher non-performing loans. Coupled together with low growth projections, it has been concluded that SA banks will over the short to medium term period, experience challenges in maintaining a strong financial performance. during this period. Any further pressure introduced by the proposed introduction of legislated debt relief measures and criteria will add to the negative business environment, with consequences for inclusive growth.

12. Impact, Consequences and Challenges of legislating Debt Relief Measures and Criteria (Questions 2 and 4)
Economy (continued):
A crucial component of an effective banking system is financial stability.
In order to maintain financial stability, banks need to demonstrate that they are able to recover monies lent to consumers, thereby ensuring depositor and investor confidence.
Any restriction on banks’ ability to recover monies lent will result in a loss of revenue and an erosion of return on capital for investors.
Investors (which includes institutional investors such as Pension Funds) will seek to invest funds in industries and/or countries where the returns on investments are higher, there is protection of investor capital and where there is less earnings volatility.
There is a risk of banks incurring a ratings downgrade as a consequence of any reduction/volatility to earnings, and foreign outflows are likely to increase even further if debt relief measures and criteria are legislated.
Consumers and Credit Providers:
Responsible lending and responsible borrowing go hand in hand and form the core of a sustainable credit market. Debt forgiveness will accelerate irresponsible borrowing.
Applying standardised debt relief or forgiveness measures and debt criteria to targeted populations could be seen to be discriminatory and unconstitutional to consumers who indeed repay their debt willingly.

13. Impact, Consequences and Challenges of legislating Debt Relief Measures and Criteria (Questions 2 and 4)
Consumers and Credit Providers (continued):
Consumers who previously repaid their debts could become dis-incentivised to do so in the future as standardised debt relief measures and criteria reward negative repayment behaviour (moral hazard – farmers in India are unable to borrow money).
There exists a presumption in law against the forfeiture of rights and a statutory provision which gives rise to any such forfeiture must be restrictively interpreted. Standardised debt relief measures and criteria affects a credit providers rights to enforce its credit agreement and therefore constitutes a forfeiture of rights. Therefore a credit provider would be prevented from receiving or collecting monies that are due and owing to it that stem from a legally binding contract. (Milman NO v Twiggs and Another).
In Sebola and Another v Standard Bank of South Africa Ltd and Another, the Constitutional Court held that the NCA requires a balancing of the respective rights and responsibilities of credit providers and consumers. The Constitutional Court held that “The statute sets out the means by which these purposes must be achieved, and it must be interpreted so as to give effect to them. The main objective is to protect consumers. But in doing so, the Act aims to secure a credit market that is “competitive, sustainable, responsible [and] efficient”. And the means by which it seeks to do this embrace “balancing the respective rights and responsibilities of credit providers and consumers”. These provisions signal strongly that the legislation must be interpreted without disregarding or minimising the interests of credit providers”.

14. Impact, Consequences and Challenges of legislating Debt Relief Measures and Criteria (Questions 2 and 4)
Cost of Credit/Access to Credit:
Legislated debt relief measures and criteria will make it impossible for credit providers to adequately price for the risk of consumers. A confluence of pricing, regardless of individual consumer risk will arise at a portfolio level in order to offset the inability to price for the risk. This will mean that consumers who have a good repayment history will no longer be rewarded for such behaviour when they apply for further credit.
Access to credit will decrease due to potential de-risking and the cost of credit will increase as a consequence of a culmination of factors brought about by the economy and the recent amendments to the NCA.
To summarise, it is not practical to further legislate debt relief measures as consumers in distress are dealt with on a case-by-case basis taking their unique circumstances into account. Legislative reforms to introduce additional debt relief measures will have severe consequences for the industry, economy (job losses, etc.), will increase risk to depositors/savers, will impose a cost on society, and will limit credit providers’ ability to extend credit.

15. Proposed Solutions
Increasing the uptake and utilisation of the Debt Counselling Rules System (DCRS):
transfer of ownership to the NCR;
management of DCRS by an independent third party supplier;
amendment of the conditions of registration by the NCR to enforce and increase the utilisation of DCRS by Credit Providers, Debt Counsellors and Payment Distribution Agents; and
DCRS allows for the application of material concessions that were agreed to by the Credit Industry which go well above and beyond what is required in terms of the NCA.
Voluntary Debt Mediation Service (VDMS):
The Banks and other Credit Providers embarked upon a pilot VDMS with the view of ultimately developing a final debt rehabilitation solution that would be complementary to the statutory debt review approach. VDMS was conceptualised, but, for various reasons, was not launched, it is suggested that the VDMS proof of concept be revived.
The concept of a voluntary solution, based on consensual agreement of debt restructuring proposals using the existing concession rules (under DCRS) benefits consumers in that the lengthy and expensive legal and court processes are not required, thereby saving the over-indebted consumer legal and other costs.

16. Proposed Solutions … continued
Portfolio Committee to track, monitor and receive feedback on the implementation of legislative amendments which have recently been enacted or is in the pipeline to be enacted, and which support and/or enable debt relief, e.g.:
Courts of Law Amendment Bill (affordability of Emolument Attachment Orders).
Debt Collectors Amendment Bill (review of the collection costs charged by Debt Collectors and Attorneys).
Social Assistance Act Regulations (improving the protection afforded to social grant recipients in respect of social grant deductions).
National Credit Act, Limitations of Fees and Interest Rates Regulations (decreased the cost of credit).
High Court and Magistrates’ Court Rules in respect of Sales in Execution (setting of reserve price).
Portfolio Committee to review and enable engagements with other government departments in respect of legislative reforms which were suggested but stagnated, and which support and/or enable debt relief, to revive these initiatives, e.g.:
Insolvency Bill 2000 (various proposed amendments to the insolvency law landscape in South Africa, dealing with NINA [no income, no assets] and NINA [no income, no job] debtors).
Magistrates’ Court Act (suggested changes to the administration order process).

17. Questions
Thank You