The rate at which people defaulted on their loans fell at the end of last year, primarily due to a combination of the impact of payment holidays and lenders tightening their criteria.
This is according to Experian’s Consumer Default Index (CDI) for quarter 4 (Q4) 2020, which showed an improvement, down from 4.68 in September 2020 to 4.07 in December 2020.
The number of first-time defaults was driven down by lenders introducing payment holidays, especially on never before delinquent accounts. A significant reduction in the volume of new accounts opened since the onset of the Covid-19 pandemic has also had an impact, with most lenders tightening their lending criteria and new credit exposure.
Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa, says: “Despite the improvement in Q4, it should be noted that this is not as a result of an overall improvement in the financial performance of the average South African consumer. Levels of distress are expected to increase across all segments of the market as the effects of Covid-19 and a continuously deteriorating economy weigh on performance.
“People should continue to manage their finances carefully to ensure that they can endure the uncertainty ahead, while lenders will need to use insights from data to make the best decisions on their customers.”
From a year-on-year perspective, the CDI was still tracking higher at 4.07 in December 2020 than the 3.97 observed in December 2019.
The year-on-year deterioration can largely be attributed to the significant worsening in the vehicle loans (deteriorating from 3.26 in December 2019 to 4.42 in December 2020) and personal loans (deteriorating from 9.04 to 9.81) lending category.
Payment holidays granted for home and vehicle loans were mostly effective between April and July 2020, after which most matured. Although the vehicle loans CDI deteriorated in Q4, the home loans CDI improved slightly from 1.61 in Dec 2019 to 1.42 in December 2020. This suggests people are prioritising paying their home loans before other commitments.
When looking at unsecured lending products, the personal loans index presented the biggest distress (deteriorating from 9.04 in December 2019 to 9.81 in December 2020) as the effect of the Covid-19 pandemic continues to place pressure on many people who predominantly use personal loans for monthly expenses.
Experian observed the opposite trend when looking at credit cards and retail store accounts. The positive performance of credit cards can be attributed to consumers prioritising paying their credit card debt as it most likely is their primary source of funds for daily expenses.
Retail store accounts, on the other hand, have shown steady improvement since before the Covid-19 pandemic struck. Lenders identified that people were already in distress due to the tough economic environment, subsequently tightening their credit granting criteria. The tightening of lending criteria, coupled with the Covid-19 lockdown, resulted in no lending thus a continued steady improvement in the performance of the retail segment.
It is evident from the index that segments of the South African credit-active population who were previously less impacted by the distressed economic environment are no longer immune to financial struggles. The Covid-19 pandemic, with the knock-on impact of various industries being locked down, has impacted consumers across all financial statuses.
According to van Jaarsveldt, macro Financial Affluence Segmentation (FAS) Groups 1 and 2, with the highest exposure to secured lending, exhibited the most significant deterioration between December 2019 and December 2020.
Van Jaarsveldt says: “It’s clear to see that there is a significant impact on the Luxury Living group. With an average opening home loan balance in excess of R1.2m (54% owning one home and 25% owning multiple properties) and an average opening vehicle loan balance greater than R450k. This group is highly exposed to secured credit resulting in a CDI deterioration from 2.40 in December 2019 to 2.72 in December 2020.
“In particular, this deterioration is largely influenced by their high exposure to vehicle loans, specifically, where the Luxury Living group accounts for more than 30% of the market. In contrast, this group is exposed to less than 15% of the personal loans market.
“Similarly the Aspirational Achievers group, with an average opening home loan balance of around R550 000 (51% owning at least one home) and an average opening Vehicle Loan balance greater than R250 000, is also exposed to secured credit resulting in a CDI deterioration from 3.39 in December 2019 to 3.67 in December 2020. Aspirational Achievers account for 45% of the Vehicle Loan market and 35% of the Personal Loans market, which makes them highly exposed in both the product types that showed deterioration in Dec 2020.”
The Money Conscious Majority group, which makes up most of the South African credit-active population (around 40%), also saw a significant deterioration in their CDI from 5.71 in December 2019 to 6.05 in December 2020.
While exposure to secured credit facilities is low in this group (25% own a property, and the average opening vehicle loan balances is around R160k), exposure to unsecured facilities like personal loans and retail credit is very high, with these consumers making up approximately 30% of the market in both these products.
The deterioration in the personal loans CDI had a particularly negative effect on these consumers.
Interestingly, the Stable Spenders group, saw a meaningful improvement in CDI, down from 7.35 in December 2019 to 5.98 in December 2020. Considering that these consumers typically earn below-average incomes and are often highly exposed to retail credit, it seems Stable Spenders in particular are less likely to take up new loan products, which is helping them to better meet their existing debt commitments.