Experian South Africa has released its quarterly Consumer Default Index (CDI) for quarter 3 (Q3) 2020 showing improvement from last quarter’s all-time high – down from 5,86% in June 2020 to 4,68% in September 2020.
The improvement can primarily be attributed to a combination of the impact of payment holidays applied by most lenders, especially on never before delinquent accounts, as well as the significant reduction in the volume of new accounts opened since the onset of the Covid-19 pandemic with the majority of lenders tightening their lending criteria and new credit exposure.
The combination of these factors resulted in an improvement in the Q3 CDI, however, it is important to note that this is not as a result of an overall improvement in the financial performance of the average South African consumer, with levels of distress expected to continue across all segments of the market.
According to Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian Africa, the composite index reached 4,68% in September 2020, still tracking significantly higher year-on-year (Y-o-Y) from 3,90% in September 2019.
“The deterioration is due to significant worsening across unsecured lending products in particular. We saw deterioration in Personal Loans from 8,84% to 10,12% and Retail Loans from 12,56% to 19,50% (deteriorating by 1,28% and 6,94% respectively). Secured lending also deteriorated – the Home Loans CDI worsened Y-o-Y from 1,51% to 1,98% (a relative deterioration of 0,47%) and Vehicle Loans from 3,54% to 4,67% (relatively deteriorating by 1,13%).The only exception was Credit Cards, which saw an improvement Y-o-Y from a CDI of 6,63% in September 2019 to 5,29% in September 2020,” says Van Jaarsveldt.
FAS Groups 1 and 2 exhibited the most significant deterioration between September 2019 and September 2020, primarily due to the high levels of exposure to secured debt.
Van Jaarsveldt explains: “There was a notable impact on Luxury Living group. With an average opening home loan balance in excess of R1,2-million (54% owning at least one home) and an average opening vehicle loan balance greater than R450 000, this group is highly exposed to secured credit resulting in a CDI deterioration from 2,37% in September 2019 to 3,35% in September 2020. The Aspirational Achievers group was similarly exposed to secured credit resulting in a CDI deterioration from 3,32% in September 2019 to 4,13% in September 2020.”
While the Money Conscious Majority group, which makes up the majority of the South African credit-active population (40%), also saw a significant deterioration in CDI from 5,87% in September 2019 to 7,10% in September 2020, the Stable Spenders group, saw a meaningful improvement in CDI, down from 7,26 % in September 2019 to 6,25% in September 2020.
“Considering that these consumers typically earn below-average incomes and are often highly exposed to retail credit, it seems Stable Spenders were least impacted. The main reasons for this seem to be that access to retail stores and thus use of credit facilities remained limited due to the stricter Covid19 lockdown rules and the tightening of lender credit criteria, which reduced access to new credit in this group resulting in a lower level of credit growth,” says Van Jaarsveldt.
What remains a concern is the impact the Covid-19 pandemic has had on the Laboured Living segment. Whilst access to new credit has reduced due to lending criteria tightening, first time default rates continue to increase indicating that those whom still have access to credit facilities continue to struggle with repayments as the impact of Covid-19 continues to put pressure on this segment.
With Black Friday and the Festive season imminent, it is recommended that consumers carefully consider how they approach spending on non-essential items.
“Consumers should think twice before they head out and make use of available credit facilities this Black Friday and Festive season as the impact of a struggling economy and the Covid-19 pandemic is here to stay for a while longer,” says Van Jaarsveldt. “Similarly, retailers can expect far more subdued spending this year and should remain conservative in their credit granting criteria to ensure future losses are managed as consumer distress persists.”