Debt relief a double-edged sword for South Africans living on loans

Moody’s says unless its sees corrective action by February, there's a risk the country's credit rating could be downgraded to junk.

JOHANNESBURG - Millions of South Africans rely on credit to feed their families.

Their situation shows both the potential benefits -- and unintended consequences -- of a new law signed by President Cyril Ramaphosa in August, aimed at protecting vulnerable borrowers.

The National Credit Amendment (NCA) comes as some lenders make healthy profits on loans while many of the country's poorest people spend huge chunks of their income on repayments.

READ: Debt relief for some as controversial Bill signed into law

It could see some South Africans have their debts suspended or wiped entirely, and force more responsible lending.

This could be good news for many who are stuck in debt traps.

However, a number of big banks told Reuters that the new rules -- and the potential risks entailed for lenders -- meant they had or would cut back on lending to those low-income customers who might qualify for relief in future.

READ: South Africans debt-stressed: Ombudsman

Around a third of the population rely on loans for necessities like food, according to financial inclusion organisation FinMark Trust.

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.

READ: Bill could save over-indebted South Africans

African Bank, a smaller lender that targets low-income consumers, said it already had and would further reduce its lending to qualifying borrowers in response to the NCA.

Arrie Rautenbach, the retail bank CEO of Absa, told Reuters it would cut back on new lending to the riskiest borrowers among those who qualify for NCA relief, while Jacques Celliers, his counterpart at another of South Africa's big four lenders FirstRand, said it had already gradually trimmed new lending to the group in anticipation of the law.

Capitec said in August it had, over the past two years, reduced the proportion of borrowers who would qualify for NCA relief in its lending book to less than 5 percent.

The other two members of South Africa's big four -- Standard Bank and Nedbank -- said they were watching how the situation developed.