Simnikiwe Hlatshaneni
Premium Journalist
2 minute read
17 Aug 2019
6:05 am

‘Debt relief’ Bill poses more risks than gains – expert

Simnikiwe Hlatshaneni

It could make getting loans harder for those who qualify, and also risks the ire of international credit ratings agencies as uncertainty would increase.

Picture: iStock

The newly signed “debt relief” Bill could stimulate the economy in the short term, but cause a massive debt crunch in the long term, according to an expert.

President Cyril Ramaphosa signed into law the controversial National Credit Amendment Bill, which essentially would freeze the debt of qualifying low-income debtors – partially or fully – for up to 24 months.

The Bill was signed despite warnings from industry players in the financial sector that debt relief would see banks making it more difficult for low-income workers to access credit.

Economist Peter Baur said the Bill was enacting the freezing of assets for the lenders and posed a major risk to those assets and to those who temporarily benefitted from debt relief.

The Bill provided for the possibility of the debt being completely wiped out, should the debtor’s financial situation worsen or not improve after the relief period.

“If, for instance, a bank has a R100 million owed to them, that debt is seen as an asset – and if the government says people can stop paying their debt for up to two years, that asset will be seen as a bad asset.

“And after that two years, there is no guarantee one’s work environment will have changed. You might be unemployed.”

The criteria for this relief included an unsecured debt of more than R50,000 and where a person earned R7,500 or less per month.

Depending on whether government underwrote this debt, which would protect the market, this Bill could also see the cost of loans increasing, Baur said.

Because those who benefitted from the Bill would essentially have a higher income as a result of the debt relief, this would lead to more buying power, stimulating the economy, which Baur described as a short-term crowding-out effect.

He warned, however, that it came with long-term uncertainty.

It also posed the risk of international credit ratings agencies recognising an increase in uncertainty because the majority of the labour force in South Africa met the income criterion of no more than R7,500 a month.

For more news your way, download The Citizen’s app for iOS and Android.