STUART THEOBALD: Be wary of the government letting the debt-relief genie out of the bottle

Posted in: i-Blog, South Africa on April 16, 2019

A new populist bill places the power to intervene in commercial transactions in a minister’s hands

This column was first published in Business Day

South Africans’ over-indebtedness has long been a political risk for the financial system. Almost 10-million have impaired credit records and millions more struggle to meet repayments. That is a sizable voting constituency.

Cold political logic dictates that politicians can make short-term gains by appeasing that constituency, even at the risk of dire long-term consequences for the financial industry. And that is what is happening.

It started in the run-up to the 2014 national election. Then, it was the credit information amnesty (done via regulations to the National Credit Act) that was rushed through parliament. The amnesty was a watered-down version of what had initially been proposed. The financial sector put up a spirited battle against more dangerous ideas including a debt amnesty, but ended up with regulations compelling credit bureaus to delete certain kinds of adverse credit information, making it easier for many to obtain new credit.

Fast forward to 2019 and the stakes have ratcheted up. The National Credit Amendment Bill, colloquially called the debt forgiveness bill, is currently sitting on the president’s desk awaiting his signature to become law. It gives the National Credit Regulator the power to write off debts of up to R50,000 after suspending the debts for up to two years for those earning less that R7,500 per month. It also gives the minister of trade and industry the power to declare debts “extinguished” as well as to impose caps on interest or fees. This is a clear political device that can be used arbitrarily to write off the debts of whomever takes the minister’s fancy.

This is very likely unconstitutional. Such powers enable the minister to confiscate property, given that any loan is an asset in the hands of a lender. It would therefore fail constitutional muster on at least two grounds: the sheer arbitrariness of it fails the many requirements for due process and restrictions on ministerial discretion, but also the right not to have one’s property arbitrarily removed.

The amendment bill accelerates a trend of political populism in which politicians grant themselves powers to directly intervene in agreements between commercial parties. It follows recent changes to competition legislation that grants the minister of economic development extensive powers to intervene in mergers and acquisitions. One has to remember that such discretion in the hands of ministers must be able to accommodate any future individual in the role. Our recent history provides plenty of examples of how ministerial power can be used in ways at odds with the public interest. Ministerial discretion comes back to bite.

When it comes to populist political moves on debt, the evidence is that they backfire. India provides a clear example. In 2008, shortly before a national election, the government passed legislation writing off about $16bn-$17bn of loans to farmers. While this move obviously reduced indebtedness, subsequent studies have shown that lenders thereafter red-lined all individuals eligible for debt relief, refusing to lend to them.

This was even though India’s scheme saw the government recapitalise affected banks, so the loans were effectively paid off by the government. However, lenders started to anticipate future interference in the lending market, avoiding any loans vulnerable to future write-offs. And they were right to do so. Subsequent Indian governments have followed with further debt relief programmes, usually timed with elections. With Prime Minister Narendra Modi losing support in rural areas, he is now creating a debt write-off scheme that some have estimated would extinguish about $56.5bn of farmers’ debts.

The Indian example shows that once you have admitted in principle that politicians can intervene in credit agreements and direct lenders to write off loans, the genie will never go back into the bottle. It becomes a tool in the political arsenal forever onwards to use in populist flourishes in the run-up to elections.

The industry, of course, rationally responds. It anticipates what moves politicians will make and withdraws lending. The current bill will cost the banking industry but not devastate it. There are 9-million people with loans of under R50,000, some of whom could be considered over-indebted. However, “over-indebted” is not defined in the legislation and it is hard to anticipate who might qualify. Lenders are likely to err on the side of caution and reduce lending to the segment substantially. They will also probably avoid the next tier — up to, say, R100,000 — anticipating that at some time in future the threshold will shift, probably in time for the next general election. Millions of those consumers will be ones who would genuinely benefit from access to funding, though many will also borrow in the belief that their loans could be written off by political fiat.

Certainly, SA does have a consumer debt problem. But what we need are interventions that drive lenders into providing healthy forms of debt, such as asset-based finance that allow poor consumers to build assets, rather than consumer debt. We should also work to deal with inefficiencies in the current debt resolution process, reducing the cost of debt counselling and sequestration. Some lending practices should be banned outright.

But equipping ministers with discretion that can be wielded arbitrarily will simply damage the ability of the lending industry to meet consumer needs. It is a genie that should be kept in the bottle.

• Theobald is chair of Intellidex.

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