The Cabinet’s efforts to push through the proposed credit information amnesty has no possible explanation other than being a cheap attempt to attract votes in a core African National Congress (ANC) constituency in the run-up to next year’s elections.
None of the other explanations offered by the National Credit Regulator (NCR) and Department of Trade and Industry makes sense.
The idea is to delete "adverse information" held by credit bureaus for some consumers with less than R10,000 in bad debt, as well as the records of default judgments when consumers have paid back the debt. This will free about 1.6-million of the 9.5-million consumers currently credit impaired in the books of credit bureaus. The proposal accepted by the Cabinet was not as wide-ranging as the one first proposed by the National Council of Provinces last year, but it is still a bad idea.
The justifications proffered by the NCR and the department are firstly to provide new opportunities to consumers who were negatively affected by the post-2008 recession. The NCR has told me there are many consumers who defaulted through no fault of their own, such as retrenchment, family illnesses and so on.
The suggestion seems to be that such borrowers are not any greater risk. But in making that argument, the department must recognise that lenders are perfectly capable of such reasoning themselves. The market is quite able to discount information that is irrelevant to the question of whether some one will pay back a new loan.
The second justification is that the adverse information affects people’s ability to obtain jobs, or leases from landlords, who it seems regularly do a credit check on new employees or tenants. I agree that it would be silly for employers to not hire people because of their credit record in cases where credit history has nothing to do with the job being performed.
But the market should do the job of sorting this out. Running a credit check costs money and could lead to bad hiring decisions, which is why I doubt the problem is as big as the department believes.
The third, and most laughable, is that the amnesty would stimulate economic activity by driving consumption behaviour. You must remember that this line comes from the same department that has previously berated lenders for driving borrowing for consumption. It is also the sort of thinking that drove the subprime crisis, where consumer spending was prioritised over investment and saving as a way to develop economies.
And here the department is asking that lenders do so with even less information upon which to base decisions about whom they should lend to.
What is devastating to the department’s case is that the previous attempt at a credit information amnesty showed clearly why it is a bad idea.
In 2006-07, a similar process deleted the information of certain classes of consumers. The credit bureaus then commissioned a study on those who benefited. Some 64% of those newly freed from their impaired credit records opened credit accounts. But five years later, only 13% of those still had "good" credit profiles. The rest had either missed payments or defaulted.
That is a shockingly high proportion and shows that adverse information really does indicate credit risk.
The proposal still has to go through Parliament, where many objections will no doubt be aired. But when the ANC is fully behind a proposal the parliamentary process is largely a charade, especially when there’s an election to be won. The consequences of the amnesty can only be an increase in credit costs as lenders seek to cover their higher risk. What other lunacy will the election bring us?
BY STUART THEOBALD
STUART THEOBALD gradauted from Rhodes University
Article Source: Business Day