Since 2006, South African household spending has consistently outstripped domestic income – the difference primarily being funded by credit. This has resulted in a situation where 6 200 South Africans are applying for debt counselling each month and, according to the National Credit Regulator, one in two credit-active South Africans have impaired records, a measure indicating the state of having an account in arrears for a period of at least 3 months.
In an attempt to combat this general over-indebtedness, Cabinet has adopted a decision that will result in the elimination of all adverse credit information regardless of value or debt non-payment. Further, all adverse credit information relating to paid-up debts will be cleared on an ongoing basis once the outstanding debt is repaid. Government expects this to affect about 1.6 million South Africans, assisting them in not only acquiring credit (a move that is hoped to boost consumer demand) and incentivising them to repay that debt, but also, and perhaps more importantly, assisting people in getting jobs which their negative credit history had previously prevented them from acquiring.
Credit providers and rating agencies have criticised the proposals, arguing that, without a history of how consumers previously managed their debt, the risk of more consumers defaulting would increase, resulting in a general increase in the cost of credit. Reserve Bank Deputy Governor, Lesetja Kganyago, encapsulated these fears when he warned that the amnesty may “undermine the flow of credit" and cause inappropriate expectations as “you have an amnesty now and a few years down the line people will ask, ‘Give me some more.’”
Questions have also been raised regarding the efficacy of such an undertaking. A similar credit amnesty was granted in 2006 which seemingly resulted in undesirable borrower behaviour. According to South Africa’s Credit Bureau Association’s statistics, 64 percent of those affected by the 2006 amnesty took on more debt. Of these, 48 percent had defaulted or had a judgement against them within 5 years. Based on this, the risk of a moral hazard is seemingly present, and the resultant increase in borrowing costs may have perverse consequences, namely the restriction of credit supply.
Although commentators have widely suggested that the amnesty will affect loan portfolio performance, the extent of the possible ramifications remains unclear. Research by Fitch Ratings suggests that the effect on the large lenders will be limited, as these banks will still have access to their own borrowers’ history. Non-bank lenders, many of whom are dependent on credit bureaus for risk assessment, may find themselves in a much more precarious situation.