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Debt Relief Policy
National Treasury on terms of reference for data research - Trade and Industry
02 August 2017 - Chairperson: Mr A Williams (ANC) (Acting)

National Treasury recapped its support for the Department of Trade and Industry (DTI) proposals:
• The rules governing debt relief should be strict and clear to limit potential for moral hazard and abuse;
• Improving the regulatory and enforcement capability of the National Credit Regulator (NCR) in line with regulator powers under Twin Peaks, especially “internal” enforcement and settlement agreements;
• Stronger action to be taken against reckless lending.

The main recommendation for a debt relief policy was the proposal to facilitate the voluntary extinguishing of debt by banks and credit providers for the poorest of the poor, for indigents, and also deal with non-bank lenders. However, this will need careful engagement on:
• Aggregate level of the write-off: what is fair to the industry but will help the poorest South Africans? Who will bear the cost of this across banks and non-banks?
• The maximum level of debt per person to be written off?
• What about debt that has already been on-sold to debt collectors – as one must reach these?
• To get consumer behaviour right and prevent moral hazard, should we require co-payments by the borrower?
• How can we change behaviour over the long term and incentivise savings?
• Extent that government can share in this cost yet minimise the burden on the fiscus;
• This process cannot threaten the stability of the system, and must not lead to relieved persons being again indebted in six months’ time.

The Committee had requested data research and Treasury outlined the terms of reference for this:
• Demographics of consumers that use unsecured lending - for specific income cohorts, and SASSA beneficiaries will also be looked into as a special case to assess their level of indebtedness;
• Financial profile – who the consumers are, how they interact with the service providers and their behaviour across the industry and where their loans are held;
• Other financial products;
• Number of unsecured loans consumers have;
• To what extent are credit providers still lending to borrowers already exhibiting financial strain;
• Number of consumers on debt review; how many times they have been on debt review; the impact of debt review and how it working or why it is not working – so that interventions can be introduced to make it work; after debt review do people get rehabilitated.
• How consumers financial profile changes over time as they acquire more credit or settle their credit.

Eighty20 presented data research that it had done for Treasury in the past. Of the credit bureau data extracted and gathered by Eighty20, it noted the number of borrowers who are at least 90 days in arrears on their worst performing account across various product types, and retail apparel took the lead followed by micro loans and credit cards. Performance on all accounts can be explored. With regard to performance, arrears levels clearly indicated distress. For those with mortgages, 5% are in arrears on the mortgage and a further 16% are in arrears on at least one other credit product. In the case of borrowers with unsecured credit, the proportion is 48%. Of those who got credit in March 2013 around 40% were in distress in the preceding three months, and those who did not have a mortgage showed visible signs of distress.

Members asked about over-indebted public servants who are resigning so they can access their pension fund; the possibility of establishing a state bank to deal with this matter because banks are no longer interested in assisting with this; if there are programmes for debt relief and borrower’s behaviour; whether past research showing R5 billion granted to distressed borrowers and deemed as reckless lending is being dealt with; and how much money have the banks lent to borrowers that is deemed as reckless lending.
Meeting report
National Treasury on the debt relief policy
Ms Katherine Gibson, Chief Director: Financial Sector Conduct, National Treasury, noted that Treasury had presented some considerations on the debt relief policy in May and never got a chance to properly unpack the issues after that presentation. The Committee had requested that Treasury comes back to further engage on some of the questions raised then and not properly answered. The Committee had also requested that Treasury present data on the impact of the debt relief policy. Treasury had drafted the terms of reference for this impact study to get guidance on the way forward. She touched on some of the critical issues already presented in May.
Discussion
The Chairperson noted that the presentation was a recap from the previous engagement. Mr D Macpherson (DA) noted that he was not present at the last engagement. He advised that what seems to be missing in the presentation are measures that can be taken today to effect debt relief. Terminating unlawful emolument attachment orders (EAOs) is a form of debt relief and dealing with reckless credit. The National Credit Act is the most powerful piece of legislation in the government arsenal but it is not applied to its full extent. The African Bank is the great example of thousands of reckless credit agreements. He discussed this with the CEO of African Bank and there are billions worth of debt relief in those reckless lending agreements but there are no finalities in dealing with this. The irony is that the South African Reserve Bank (SARB) owns the bad book of African Bank and the government has every opportunity to write off the billions of rands that are owed but it just will not do it even though they know that those agreements were reckless. It is important that this discussion on debt relief policy takes place but it is concerning that there is no desire to use the tools that are available to write off the billions of rands in debt relief to over-indebted consumers in SA. He would like that to be incorporated into the presentation and Treasury provide views on how that can be achieved. He does not believe that debt relief can be discussed without talking about effecting changes in the National Credit Act. It is worrisome that the idea of debt relief is viewed as this once-off thing and one does not actually deal with the structural impediments that hinder the National Credit Regulator (NCR) from tackling reckless lending more aggressively. Lastly, he requested that perhaps more data on the overall economic impact on this matter be provided.

Ms S Van Schalkwyk (ANC) stated that what is of concern is that since the previous engagement the number of over-indebted consumers has increased, particularly public servants. It appears that they are resigning and cashing in on their pension funds to relief themselves of debt. However, the overall effect of that is much bigger because it increases unemployment and it is a short-term measure. Taking into account the statistics, is Treasury thinking about interventions in the form of financial advice or workshops for public servants to ensure that they are not over-indebted and prevent them from resigning.

Mr J Esterhuizen (IFP) said that in the proposed amendments, debt collection is not properly defined and it could mean anything. The suggestion to amend the National Credit Act to empower the Minister to grant relief to over-indebted households will pose major challenge in the financial sector. It may bring short term relief but the long term consequences will be disastrous. Legislation already protects consumers who are granted relief from indebtedness after three years. If a person takes a loan for 60 months and it gets moved to a much longer period, the banks capitalise on this with interest. There are a lot of wrongs and confusion and some of the proposed amendments must be scrapped entirely.

Ms P Mantashe (ANC) responded to the question “who does the government really want to rescue” posed by Treasury during its presentation. In addition to what was already highlighted by Ms Van Schalkwyk that public servants are resigning as well as teachers because of over-indebtedness, they come back to be a burden to the State after they have utilised their pension funds. Treasury noted that sometimes there are creditors who cannot be traced but the EOAs continue to be deducted from employees. She hopes that Treasury can get deeper in its investigation so that the Committee can make an informed decision. Many South Africans are drowning in debt, of which debt relief seems to be the only option being explored by government.

Mr S Mbuyane (ANC) asked, given the banks are against the debt relief proposal, if Treasury has looked at the possibility of funding and establishing a state bank to deal with this matter because banks are no longer interested in assisting with this. He asked if there are any programmes available for debt relief and the borrower’s behaviour in dealing with debt and expropriation. Lastly, he suggested that it would be ideal to check the possibilities of giving information and direction about reckless lending.

The Chairperson pointed to slide 27 (individuals getting orders that are coming out of their salaries whilst over-indebted), and said that these individuals are accessing more credit in order to pay interest on the loans/credit that they already have. Surely when a financial institution lends money to consumers that are already over-indebted that constitutes reckless lending? What measures and mechanisms are in place to prevent these greedy financial institutions from lending more money to those consumers? Secondly, is any impact assessment done on what happened when adverse credit information was removed from people’s records as was done before – did those people go out and get more adversely indebted?

Ms Gibson responded that the notion of debt relief is centred on a very specific context which is the extinguishing of debt. Debt relief or relief to consumers can be more general so it is wise to think about that more general sense on how consumers can be relieved from debt depending on their personal circumstances. About the nurses, teachers and police officers who are over-indebted, it is important to note that there are masses of people who are over-indebted but that does not mean their debt must be extinguished because they are still employed and they are getting income and have assets. In many instances, people do have assets but the challenge is identifying the critical points in society where people are not managing. It cannot be a “one size fits all” response, if some have an asset that provides an advantage for how that person can be relieved or assisted with over-indebtedness. If they have an income and depending on the level of that income, it provides additional levers on how that person can be assisted. Where there are instances where the income is low, that person gets into the territory of whether the debt should be written off completely. With that being said, for individuals receiving regular income to pay off the debt, if it means that that person will have to be committed to debt counselling for ten years, that could be argued as another form of bondage and one would then ask if it is fair.

The preliminary evidence, having spoken to the debt counsellors, suggests that in the majority of cases (90%) for persons with a regular income above a certain level, debt can be restructured but not refinanced, in under five years. More than 90% of cases, people with regular income could work under debt counselling as a mechanism to help them get back on their feet and remedy it.

On measures and mechanisms to prevent lending more money to the over-indebted, this is a very important point, but the danger is that on the one hand there is a need for evidence in order to introduce and come up with rigorous mechanisms. What can be done now is largely about the opportunity for the likes of African Bank and what opportunities can be explored to assess reckless lending and a threshold established to determine whether credit has been given out recklessly. It is in the best interest of society that these be extinguished and this is something that the industry and the regulator would have to engage on and interrogate, and there are probably hazards on both sides – those hazards can be noted by both by the industry and regulator.

On SARB owning the bad book of African Bank, this is something that can be looked into and explored. On the credit regulator capacity – the regulator can respond to this. The increase in the number in terms of the audit does not mean that there has been an increase in incidents; all it means is that the audit is not finished yet and as the EAOs of government employees are being cleaned up, so those that have been cleaned up have been added to that number.

A National Treasury representative replied that the Department of Public Service and Administration (DPSA) is handling the workshops and financial management education of government employees who are distressed. DPSA is escalating financial wellness initiatives in departments. In most departments there are financial wellness companies that are contracted to assist employees with financial management.

Ms Gibson added that the initiative is not as powerful and strong as it was meant to be – in many instances the people involved do not actually know how this is happening. There is an enormous amount of suspicion. There are massive campaigns out there that inform people to not believe what is too good to be true. In the majority of instances the EAOs are stopped by the managing personnel as opposed to the employee stopping the EAO themselves. This brings complexity in terms of wanting to take legal action as government but it is difficult to do so in terms of the capacity. Ideally, government would want those employees involved but there are practical challenges so it is unable to do so.

On amendments to the National Credit Act, the National Credit Regulator and the DTI are better positioned to talk about the ins and outs of their legislation. In terms of the Minister giving debt relief, it should not be done willy nilly, and the main objective here is to set up a rigorous process for establishing very strict parameters, and explain what debt relief is and under which circumstances it may granted as well as its impact.

Another interesting point is re-financing versus re-arrangement – it is one of those things that it is happening but the scale and the depth of this has not yet surfaced and so evidence is yet to be gathered. On the question of who should be rescued, there must be consensus on the set of principles and there has to be a basis for the rescue – government wants to help consumers but it will not be the same response throughout with other stakeholders and the policy objectives will be very clear on this. On debt extinguishing, there must be clarity on the primary objective because government might wish to extinguish for different reasons – which may not be in favour of other stakeholders. If there is no clarity on the policy objectives, the parameters on who should be scoped in or out will not be clear.

The banks are not necessarily against helping consumers, there may just be different ways on how the various relevant structures and stakeholders think is the best way this can be done. So the banks have been helpful in making data available and exploring what debt extinguishing might mean. She believes that it is the principle of debt extinguishing that is the issue which the banks respond to and it relates largely to the moral hazard question and that is part of the exploration moving forward.

National Treasury is very cautious on the notion of state banks –, the notion that government can set up a new state bank that will meet all the grievances of the current scenario. There are a number of state banks, development finance institutions (DFIs), and they are not working but they continue being funded and they are not delivering according to their mandate. The role of the state is an important one but government needs to look into what is currently happening, how it is working or not working, and learn from what is happening internationally in terms of what is working and not working. It is important to note that the issue is not access to credit, but access to more affordable credit and bringing people into effective transactional banking.

In terms of reckless lending, it appears that the lenders have been under-cautious about individuals who are already distressed, but the extent of recklessness is unknown. However, data is being interrogated to study the extent to which they are being reckless and understanding the behaviour of lenders and borrowers. With regards to adverse lending, Treasury had presented figures on this at some stage and the resilience or success rate was around 60% but she noted that this figure will be verified. This was a snapshot at a particular point in time and this is one of the issues that will be further interrogated.

Mr Macpherson commented that surely any state institution that offers credit is bound by the National Credit Act and any other regulatory framework in the financial sector. The establishment of any state bank will have to conform to the National Credit Act and do the necessary checks and ensure that money flows into the institution. He asked if that is correct.

Ms Gibson replied that it is indeed correct. However, in many instances, they have been set up so there is a varied way in which the financial regulations apply to these institutions. So to the extent that they are set up by statute, which in many instances they are, they operate under exclusions and exemptions that may lie outside of the Bank Act but she was unsure whether they lie outside the National Credit Act.

Mr Esterhuizen stated that the fashion in which debt collectors have carried themselves in South Africa has not been the best practice, and that is something that needs to be looked into. Secondly, Section 15 of the Amendment Bill appears to be in direct conflict with the National Credit Act. South Africans probably owe about R1.6 trillion that is why the Bill is needed to provide relief, but if the debts are just written off, nobody will ever be able to get a loan again.

The Chairperson noted that those answers that need to be provided by DTI and other stakeholders, responses in writing should be submitted to the Committee Secretary.
National Treasury on Terms of Reference for Debt Relief Data Research
Ms Gibson noted that she understands that Members have not yet had the opportunity to look at the document, and so she will focus on the essence and key points in the Terms of Reference document. Members can interrogate the document when they have time and any questions or comments can be submitted in writing and Treasury will respond in the same fashion.

Treasury did a study in 2014 that looked at the overall indebtedness of consumers in South Africa, in what form they were borrowing, the state of those consumers, who the lenders were and the different income categories. It showed that both the lower and upper income bands were most indebted. However, the difference between the two was that the upper band was largely driven by mortgages i.e. high level of debt but not necessarily distressed, and the bulk of it was going to assets such as houses and cars. However, on the lower income side there was a high ratio of debt servicing that was unsecured which stemmed from retailers and micro-lenders. Treasury proposed in terms of the study to expand on the work that has already been done on the vulnerability of borrowers and lenders and take into account the interventions that have already happened – and the proposed policy, but it would be too soon to see this coming through.

Key points highlighted were:
• The objective is to identify key characteristics of over-indebted consumers in SA the focus on the lower income consumers taking into account implemented and proposed policy interventions;
• In a study that was done by an independent consulting firm, the study looked into consumer and lender vulnerability on unsecured loans – the study found that the majority of consumers predominantly relied on costly and unsecured credit (clothing, credit cards, and loans); and
• Since then there has been a number of interventions – the amendments to the National Credit Act, the new regulations by the DTI to keep interest rates on credit agreements low, the EAO study, norms and standards introduced by SARB for authenticating debit orders – those will only be introduced this year.

Some of the key questions that will be interrogated:
• Demographics of consumers that use unsecured lending - for specific income cohorts, and SASSA beneficiaries will also be looked into as a special case to assess their level of indebtedness;
• Financial profile – who the consumers are, how they interact with the service providers and their behaviour across the industry and where their loans are held;
• Other financial products;
• Number of unsecured loans consumers have;
• To what extent are credit providers still lending to borrowers already exhibiting financial strain;
• Number of consumers on debt review; how many times they have been on debt review; the impact of debt review and how it working or why it is not working – so that interventions can be introduced to make it work; after debt review do people get rehabilitated.
• How consumers financial profile changes over time as they acquire more credit or settle their credit.

The final set of questions relates to the consumers’ credit journey, their default patterns, how it happens and differs across segments. Lastly, on the lender side, understanding from the lenders’ perspective – to what extent and how they are lending to borrowers who are more or less already financially distressed and vulnerable. All of this is feeding towards understanding both borrower and lender behaviour.

The Chairperson noted that the way forward on the matter is to take the document and have a look at it, and then Members will submit their comments and questions on this document by 8 August 2017 to the Committee Secretary. He proposed to move ahead with the Eighty20 presentation.

Ms Gibson introduced Eighty20 to talk through some of its experience with regards to the subject matter.
Eighty20 briefing on its work done for the Treasury
Ms Illana Melzer, Director at Eighty20, said the presentation would give Members a flavour of what is possible with data. This is work that it has done in the past for Treasury looking at two key areas: who has unsecured credit (and what was happening in that space before African Bank collapsed) as well as those customers who were visibly already in distress. These are some of the key findings that came up in the data:

• Credit bureau data indicates the number of borrowers who are at least 90 days in arrears on their worst performing account across various product types, and retail apparel takes the lead followed by micro loans and credit cards.
• Performance on all accounts can be explored but 86% of those with a mortgage have at least one other unsecured credit product. With regard to performance, arrears levels clearly indicate distress.
• For those with mortgages, 5% are in arrears on the mortgage and a further 16% are in arrears on at least one other credit product. In the case of borrowers with unsecured credit, the proportion is 48%.
• A vintage analysis indicated deterioration in loan quality, and deterioration is visible for borrowers who do not have a mortgage.
• Of those who got credit in March 2013 around 40% were in distress in the preceding three months, and those who did not have a mortgage showed visible signs of distress.
• With regards to key credit consumer trends, credit bureau data indicated that almost two thirds of borrowers have more than one credit product. In terms of products that go into default first, it appears that borrowers who do not have mortgages are more likely to default on retail apparel accounts first.
• Of borrowers with asset finance and retail apparel account in good standing as at June 2011, 42% subsequently defaulted on their apparel account while maintaining their asset finance in good standing.
• Of borrowers with asset finance and retail apparel account in good standing as at June 2011, 4% subsequently defaulted on their asset finance product while maintaining their apparel account in good standing.
• Of the borrowers that had asset finance and a mortgage account in June 2011, 7% defaulted on their mortgage before the asset finance while 3% defaulted on the asset finance before their mortgage.
• The length of time that elapses between obtaining the first and second product (and subsequent products) is shorter for borrowers who are more distressed.
Discussion
Mr Esterhuizen stated that consumers are constantly driven in this economic climate to borrow more expense money, the data is four years old and perhaps new data may suggest an increase in the numbers. He believes that the borrowing might be higher than is actually reflected.

The Chairperson referred to the statement on slide 8 “Rand value of new credit granted in March 2013 to distressed borrowers amounted to R5 billion”, and asked if that is what is being dealt with and surely that can be written off today as reckless lending? It seems that the banks lent R5 billion in 2013 to distressed borrowers, and surely the National Credit Regulator can comment on why this R5 billion has not been written off, and how much money have the banks lent to borrowers is deemed as reckless lending to date.

Ms Melzer replied that it is not necessarily only banks that granted that total credit, it is also registered micro-lenders and other service providers in the sector that have submitted data to the National Credit Regulator and credit bureaus and the banks might be a small proportion of that. However, it was not clear in the data how much of that is consolidation credit which is another critical point.

The meeting was adjourned.