What are the positives and negatives of the upcoming amnesty?
1) No reward for good behaviour
People with good credit histories will be indistinguishable from those with poor credit histories (if they have settled their debts). This means that the banks will no longer give favourable interest rates to good clients OR clients will have to go out of their way to prove that they have good credit histories (more paper work).
2) Higher costs for banking
As credit providers will no longer be able to accurately assess risk they will have to change prices accordingly. This will mean higher interest rates and fees when South Africans lend. These price hikes could also mean higher prices across the banking sector (any excuse right?)
3) More hoops to jump through to get a home loan:
The National Credit Act stipulates that the lender is responsible for defaults if they lend to a client who cannot afford to service the debt. This means that if you are given a loan, you default and you can prove that the bank should not have given you the loan you can walk away clean from the debt.
The problem is that many smaller credit agencies and micro-lenders are apparently willing to forgo these checks and risk the defaults because the volumes of business they do are so large while the individual loan amounts they deal with are so small. If a few clients walk away clean or default it isn’t much hassle and no big loss.
Unfortunately the home loan default creates a massive amount of hassle. Sure, there is a piece of immovable property that the bank can claim but selling a house takes time, effort and there are fees or employees to pay. Remember that banks aren’t in the property business: they want your money not your house.
This means that since 2007 the process for applying for a home loan has become increasingly arduous as reputable institutions seek to indemnify themselves against liability and defaults. With this new amnesty it is set to become much worse.
1) A second (or third) chance
If you have any bad debts and late payments and you settle these accounts right now your credit history will be cleared by June 2014. You will then be able to gain access to credit where previously you might not have done so.
This is good for the unfortunate entrepreneur who had a run of bad luck and can now bounce back into business. Or for the citizen who was preyed on by an unscrupulous lender and has suffered for years trying to clear their history.
2) Awareness of Credit History
The additional hoops applicants have to jump through may actually reduce defaults in the long run. Additional requirements may force people (at least prospective home buyers) to become more frugal and thoughtful about their credit profile.
We understand (sort of) the good spirit in which the Amnesty is intended. We have no interest in scaremongering. We must make it clear that this is still largely speculation until the banks and other credit providers play their hands. But our speculation here is based on years of experience that has seen the ebb and flow of the property market, the implementation of the NCA (good idea) and a previous amnesty (bad idea).
There is almost nothing to be done to change course now but we feel that this amnesty will only prove to be a positive force if something is done concurrently to really regulate the small and micro-lending industry and better educate credit users about their rights and responsibilities. If not we’re simply going to have the majority of people who have their histories cleaned default again and be joined by a future generation on those blacklists.