Regulatory Meddling in the Credit Industry Never Ends Well

Yesterday, Tuesday the 1st of April 2014, marked the day when “credit amnesty” kicked in for millions of South Africans. The dispensation requires credit bureaus by law to expunge consumer credit history on accounts that had been in default and a judgement taken out on them. In simple terms, black-listed consumers who took on too much debt and failed to repay it properly will have this negative information wiped away.

Moneyweb explains the technicalities [my emphasis]:

Come April 1, regulations for what is called the Removal of Adverse Credit Information and Information Relating to Paid Up Judgments will be passed.

The regulations stipulate that from this date, registered credit bureaus will have two months to remove the above information, which largely relates to the negative credit history of South African consumers.

Once removed, this information cannot be retained on the credit bureau’s register, nor can it be given to credit providers either after or during the two-month period (i.e. from April 1).

After the two-month period has passed, credit bureaus are required to continue to remove information relating to paid-up judgments received by credit providers, who are themselves required to submit these and are not allowed to use adverse consumer credit information for any reason, including credit scoring and assessment.

It is telling that after the much-vaunted National Credit Act of 2007, which was supposed to rein in reckless lending and borrowing, South Africa has embarked on a borrowing binge that has seen the most unhealthy kinds of credit soar. Unsecured lending that we know about alone has rocketed by about R300bn in recent years. Much of this is to government employees because the unsecured lenders deem their paychecks to be more stable. But these borrowers are themselves paid out of a shaky tax base of profits and incomes that too is driven by debt accumulation and from government borrowing. A debt pyramid has been erected on top of more debt.

With the NCA proving to be a soft rulebook, the ANC government has decided that how you fix the problem now is just by wiping the slate clean. Unfortunately, real life is not a make-believe fairyland.

Now, while this is NOT debt forgiveness, it does force the credit bureaus to remove crucial market information and prohibit their clients (credit providers) from accessing that information. The results are predictable. Credit providers will be forced to rely on their own internal credit history information for individuals, but will not be able to access how much credit a borrower is taking on with other institutions. This will create a blindspot in the industry that will lead to credit-worthy people being denied loans, or bad credit prospects being offered too much credit, repeating the cycle of resource misallocation, which foster malinvestment cycles. In very simple terms, the market has just been made less efficient and as a result will be opened up to greater business cycle risk and economic inefficiency. It will be to the overall detriment of growth in South Africa.

The law is not without considerable opposition. As eNCA points out, the law was passed,

…despite protests from banks and opposition parties that branded the move as populist vote-buying.

The ANC voter base, which consists largely of state employees and low-income earners have been swamped with debt in recent years up to breaking point. Indeed, the R12,500pm wage demands by striking platinum miners is largely driven by a need to cover spiraling debt obligations. The issue is firmly political, and credit markets are always prime candidates for political interference at the best of times.

When the credit stops flowing then the government runs out of scope to offer its ambitious populace the bread and circuses that tend to keep a lid on social unrest and regime change at the ballot box or otherwise. A credit-addicted system wants credit and little else. Have now pay later. High time preference. Impatience. Call it what you will, new injections of credit ease the withdrawal symptoms.

But, like all state meddling, the private sector will merely respond in order to minimise risk and maximise efficiency. According to Moneyweb [my emphasis],

…banks have warned that the regulations will heighten their risks and increase the cost of credit, since they will no longer be able to rely on adverse credit information supplied by credit bureaus.

Both Wonga and Real People said that they have reconfigured their credit scoring models to not be dependent on the data being removed. “If nothing else, these regulations will further motivate our search for good quality data,” said Hurwitz.

And in yet another show of how the private sector beats the regulators, it is likely that credit bureaus have already sold the credit history data to the credit providers. So while the credit bureaus have to destroy it, the credit providers have it. BUT, a) they won’t have it going forward, impairing market information, b) not all of them have it (particularly the smaller credit providers), entrenching the big established players, and c) they had to pay for it, which is an added and unnecessary cost of doing business and providing credit. All this can only mean one thing: all else equal, credit will get more expensive.

So in governments never-ending and vain attempts to make credit cheaper, it just made it more expensive by forcing key chunks of information to be destroyed.

Perhaps Rob Davies, minister of Trade and Industry, is not aware that markets function best on information. But then again, he has never displayed a good understanding of markets.


About Russell Lamberti

Russell Lamberti is a regular contributor to Mises SA. He is Chief Strategist at ETM Analytics, an Austrian-influenced economic research firm based in Johannesburg. Although he wrties about many topics, you'll most often find him slaying patent and copyright law and exposing the biggest bubble in history: fractional reserve banking.
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