Easy way to boost South Africa’s economy by billions

Rethinking the current debt counselling system could facilitate the release of over R100 billion worth of outstanding personal debt into the South African economy, which totals R2.5 trillion.

This is according to the National Debt Counsellors’ Association (NDCA), which said that around R70 billion to R100 billion of this outstanding debt belongs to consumers currently in debt counselling.

“South Africa has a world-class debt-counselling system, which has been proven to work,” NDCA chairperson and Chief Operations Officer of the Intelligent Debt Management Group (IDM) Benay Sager told African Business Quarterly.

“It’s conceivable that if more people sought help to manage their debt, the R15 billion being returned to the economy annually could be increased to R25 billion.”

There are an estimated 250,000 consumers in debt counselling who pay around R1.25 billion per month back to creditors.

This debt includes regular repayments on 20,000 homes and 60,000 vehicles. While this debt remains with the original lenders, it is still an asset they want to recover, even when restructured as part of the debt-counselling process.

High interest rates and below inflation rates have had a major impact on South African consumer debt.

Earlier this year, Sager told SABC News that DebtBusters, which is part of IDM, saw an over 40% year-on-year increase in queries for debt review in January.

“I think that’s driven by a few things. One is that last year was probably the most difficult financial year for South Africans, at least in the last 15 to 20 years,” he said.

In particular, he pointed to the pressures added by high inflation – particularly for food, electricity, and petrol – load-shedding’s impact on small businesses and a lack of increases in jobs and salaries.

“All of those things really impacted a lot of consumers, and we’ve certainly seen a significant increase in January,” he said, adding that he expected this trend to continue throughout 2024.

The South African Reserve Bank (SARB) has also pointed out that consumer debt is on the rise.

According to the SARB’s latest Quarterly Bulletin released in March 2024, household debt accelerated from 6.4% in 2022 to 6.9% in 2023.

“As a percentage of nominal disposable income, household debt edged marginally higher to 62.4% from 62.0% over the same period as the increase in household debt exceeded that in households’ nominal disposable income,“ the bank said.

“Households’ cost of servicing debt relative to nominal disposable income increased to 8.8% in 2023 from 7.3% in 2022, reflecting the cumulative 125 basis point increase in the prime lending rate in 2023 as well as the higher outstanding stock of debt.”

Debt counselling as part of asset management

Sager explained that because debt counsellors help manage the repayment of these assets, this sector should be considered as an arm of the asset management industry, even if it manages some of the distressed assets.

“Rather than being dormant while lenders try to recover it, the annual R15 billion being repaid to creditors is put to good use by lenders to help grow the economy,” he explained.

“This money is lent many times over, and if it increased by further R10 billion per annum, then more money would be available to kickstart the growth of the economy.”

“At the same time, while in debt counselling, assets such as houses and cars are protected, so consumers don’t endure the pain and humiliation of having these repossessed. It’s a win-win.”

Encouraging more financially constrained consumers to seek help with debt management would benefit the economy in other ways as well. High-interest debt would be repaid first, which could free up some income and encourage saving – something many South African consumers struggle with.

“Debt counselling has an important and, arguably, in these straitened times, an increasingly critical role to play by restructuring debt to get more money circulating in the economy,” said Sager.

While debt counselling offers an opportunity to address personal debt within the current regulatory framework, its potential could be further expanded to encompass other forms of debt.

Presently, debt counsellors are unable to restructure levies, municipal rates, and school fees, as these fall outside the scope of the National Credit Act (NCA).

Sager hopes that the NCA will be amended in the future to allow for this kind of debt restructuring, which would allow the recovery of much-needed money owed to struggling schools and municipalities.

“Debt counselling is too often considered only a means to help consumers restructure their debt and get back on their feet. What is often overlooked is that it enables lenders to recover what they are owed,” he said.

“With personal debt at or near record levels and a stagnant economy, a functioning, efficient debt counselling sector is good for consumers and good for the country.”