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The Credit Ombud has welcomed the announcement by National Treasury and the Banking Association of South Africa (BASA) that debt counselling provisions in the National Credit Act will be reviewed.

“We welcome this proactive behaviour to prevent more consumers from falling into a debt spiral,” says Credit Ombud, Manie van Schalkwyk. “Currently, the debt counselling process has a number of weaknesses that need to be addressed.”

Household debt to disposable income ratios remain high at 76, 3% in the second quarter of 2012, with just 53% of retail borrowers in good standing on their accounts.   

The National Treasury, BASA and the National Credit Regulator (NCR) will discuss how the current system of debt counselling can be improved to remove perverse incentives and eliminate abuses. They said consideration should be given to a system of voluntary counselling and steps to reduce abuses in debt consolidation.

“A voluntary debt counselling process in which credit providers play a central role could provide redress more quickly and cheaply than legal remedies through court proceedings,” says Van Schalkwyk.  “A voluntary process could be more affordable and accessible for over-indebted consumers because credit providers would bear the costs and share them at an industry level.”

Approximately 160,000 consumers have applied for debt counselling, with an average of 7,500 new applications being received per month. Only 10% of the new applications are resolved through the courts.

Van Schalkwyk adds that National Treasury and BASA had recognised that amnesty measures for credit records would have perverse outcomes, because they did not lift the debt burdens of those who are affected.  

“We need a more integrated and holistic approach to tackling the high level of over-indebtedness in the country,” says Van Schalkwyk.  “Benefits of voluntary self-regulation include flexibility, cost-effectiveness as well as buy-in from credit providers. These are practical solutions to a very real problem.”

A task team investigation into improving the debt counselling process found that a lack of capacity and delays in the magistrate's courts, including uncertainty on the interpretation of the relevant sections of the National Credit Act (NCA) contributed to low levels of debt counselling applications being finalised.  It also found inefficiency and non-compliance by debt counsellors who accepted applications which did not qualify for debt counselling.

Van Schalkwyk also says the announcement that BASA, the NCR and the National Treasury will formulate a standard to measure affordability, which could then be incorporated into regulations as minimum standards, would help to reduce reckless lending and create more certainty, consistency and standardisation with regards to lending in the industry.  

Another key development was BASA and National Treasury’s engagement with the Department of Justice on the abuse of garnishee orders and the suggestion that their use be restricted to maintenance orders.

According to Summit Financial Services, by September 2012 10-15% of the total workforce of South Africa had a garnishee order in place for creditors to deduct repayments against their salaries.

“This is not only a moral concern, but contributes to the wide-spread problem of over-indebtedness and must be investigated,” says Van Schalkwyk.  “There is currently no statutory cap on how much creditors can take from employees via a garnishee order and the creditor or attorney decides unilaterally on the amount.”
 

“The problem is exacerbated because consumers must incur legal costs if they try to apply for a reduction in the garnishee order,” says van Schalkwyk.  “The situation is unsustainable.”


He adds that some workers are taking zero or near zero take home pay, even though the Magistrates’ Courts Act (MCA) says garnishee orders must not cause the employee not to be unable to support himself or his dependents.  

 
Van Schalkwyk concludes: “Through continued constructive engagement between government, regulators and the credit industry, over-indebted consumers are likely to get a better deal.”