Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since lawmakers began looking at debt forgiveness in 2016.
It dropped from R3.64 billion in the final quarter of 2015 to R2.27 billion in the second quarter of this year, data from South Africa’s National Credit Regulator (NCR) shows.
Cas Coovadia, who heads the Banking Association of South Africa, said the law would either raise the cost of credit for some of the most vulnerable borrowers or stop banks lending to them.
This risks some being pushed back into the informal sector, dominated by a large network of illegal loan sharks known as mashonisas, Coovadia, bank executives and some debt counsellors say.
“You don’t want people to end up in the informal sector, that is never good,” said Absa’s Rautenbach. “It’s a very bad unintended outcome.”
This was echoed by Brett van Aswegen, South Africa CEO of payday lender Wonga. He said his company’s research showed mashonisas were already widely used, adding it would be “naive” to think consumers in need of cash would not go there.
Mashonisas like 31-year-old Dani, who operates in and around Northam, a mining town in the northern province of Limpopo, commonly charge interest rates as high as 50%, and sometimes use violence to get their money back, according to debt campaigners.
Dani, who declined to give her surname as she is breaking the law, takes identity documents and bank cards as security, and if clients don’t pay on time, hikes the interest to 100%.
It boosts her business when people can’t go to the bank for loans, she told Reuters.
“If the economy is bad, it is good for me, like if there is a strike at the bank, (customers) have to come to me,” she said.
The NCR, and Clark Gardner, CEO of consumer advice firm Summit Financial Partners, disputed that borrowers would be pushed into the hands of loan sharks and said it would not be a bad thing if they had less access to credit.
Lesiba Mashapa, NCR company secretary, said big lenders granted loan sizes he viewed as excessive.
Gardner provided Reuters with loan agreements from two big banks in 2016 and 2017 respectively, with repayment periods of three and four years, where the cost of credit – interest rate plus charges – was 60% and almost 100%.
Differential Capital, an asset manager, agreed in a report published in August that irresponsible unsecured lending was far from the preserve of mashonisas, with formal providers “preying on financial illiteracy”.
The NCR moved to protect borrowers in the wake of a leap of almost 290% in unsecured lending between 2007 and 2012 following measures to tackle racial discrimination in the credit market.
Differential Capital’s report said two-thirds of the 7.8 million, usually low-income, consumers with unsecured loans spent more than a quarter of their net income on servicing their debt, while around half are in default.
The new law will see the credit regulator take over debt counselling for indebted consumers earning less than R7,500 per month – who are largely unable to afford private fees – and with unsecured loans of less than R50,000.
It will allow all or part of their debt to be suspended for up to 24 months and wiped entirely in some circumstances, for instance if they lose their job.
Estimates vary, but the National Treasury projected in October 2017 that up to R20 billion ($1.3 billion) of consumer debt could qualify for forgiveness. That’s small in an overall consumer debt stock of 1.9 trillion rand.
Brendan Pearce, chief executive of FinMark Trust, said measures to open up the credit market in South Africa had worked “almost too well”.
He said that while the NCA credit amnesty could provide some short-term relief, it was not a long-term solution because so many people depended on debt to put food on the table.
“I can’t sit here and say we shouldn’t be allowing more credit to consumers who otherwise wouldn’t be able to survive.”
More was needed to tackle the problem, Pearce added, including working to address its roots: the state of South Africa’s economy.