It’s easy to get excited at the prospect of something innovative happening and the impact it has on the status quo. Take for instance debt forgiveness and the current drive to relieve over-burdened consumers of their debt.
Debt relief or debt forgiveness … when customers settle their debt at an amount below the total outstanding amount due to the creditor …
Debt relief occurs either through a formal legal mechanism or a consensual agreement between the customer and the credit grantor. While the effort to formalise legislation to provide relief to over-indebted customers is new, debt relief through consensual agreement is not.
The secondary market for the sale of non-performing loans (“NPL’s”) has existed in South Africa for many years. Secondary Market … is the market in which the original credit grantor (e.g. bank or retailer) of a loan to a customer (an individual or a corporate entity) sells the credit agreement to a registered third party credit provider … NPLs are sold when the prospect of rehabilitation of the customer relationship and further credit extension is no longer likely.
Credit grantors are often unable to offer over-indebted customers the benefit of meaningful discounts as a mechanism to settle a customer’s outstanding debt due to the risk of contagion across their loan portfolios. Contagion … the unanticipated domino effect that an isolated action may have … Performing customers could quickly learn that holding out on paying their outstanding debt would result in them receiving discounts which would impair a credit grantor’s balance sheet. This risk is controlled by credit grantors through the sale and transfer of NPL to a third party debt acquirer.
NPL transactions are a key part of a well-functioning macroeconomic environment for any market economy, and they give rise to a critically important socio-economic benefit … large scale debt relief!
Credit grantors annually sell NPL’s in excess of R20 billion and in return receive new capital in the region of R1 billion. The NPL acquirer will likely only ever recover a maximum of R2 billion, leaving the remaining outstanding debt balance of R18 billion subject to debt relief . . . Yes, that’s 90% debt forgiveness! This debt relief is standard industry practice and driven by natural free market forces.
Government is creating a legislated debt relief framework which assists over-indebted consumers earning below R7, 500 per month with unsecured debt of less than R50, 000. The debt relief offered in the secondary market works in tandem with the legislative framework, and offers debt relief to all over-indebted customers including higher earning over-indebted customers. It is highly efficient, administratively light, places a zero cost on the state for its implementation and execution, and will continue to benefit consumers in the years ahead!
Written by Peter Watson – Executive