The rate people defaulted on their loans for the first time increased in the first quarter of the year, according to Experian South Africa’s Consumer Default Index (CDI).
The index deteriorated from 4.02 in December last year to a reading of 4.33 in March 2021, as people struggled to keep up with their payments related to the increased economic activity following the easing of strict lockdowns towards the latter part of 2020.
Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa, says: “This deterioration is primarily due to the increase in business volumes during the latter parts of 2020 when strict lockdown rules were relaxed at the end of the second Covid wave – particularly for credit cards and personal loans over the Black Friday and Festive season period in 2020.
“The combination of the economy opening up and the extended Black Friday ‘month’ have resulted in an increase in the incidence and value of first-time defaults among South African consumers.”
According to Van Jaarsveldt: “The decline resulted from the collective worsening for all products comprising the CDI, except home and retail roans.
“Home loans showed a slight improvement from 1.86 in March 2020 to 1.73 in March 2021 as consumers continue to focus on and invest in their homes as it has increasingly become a hybrid place of work.
“Retail loans continue to show an improvement from 13.22 in March 2020 to 11.20 in March 2021 due to tighter lending criteria imposed prior to Covid, exaggerated by very constrained trading conditions during the various periods of lockdown.”
In spite of these improvements, the CDI recorded a Y-o-Y deterioration, due to the deterioration in vehicle loans (3.67 in March 2020 up to 4.1 in March 2021), credit card (6.74 in March 2020 up to 8.39 in March 2021) and personal loans (9.67 in March 2020 up to 10.42 in March 2021).
What is evident is that the deterioration correlates with consumer needs – vehicles have become less of a priority since the onset of Covid as commuting to work was no longer essential.
Similarly, consumers are increasingly accessing personal loans and using available revolving credit card facilities to cover daily living expenses during these trying times, which started well before the Covid pandemic struck and was and still is underpinned by an economy that, whilst recovering faster than anticipated, is still marred by structural issues that require addressing before any long term sustainable growth can be realised.
As has been the case over the past three quarters, Financial Affluence Segmentation (FAS) Groups 1 and 2 continue to exhibit the most significant deterioration (CDI percentage change).
Van Jaarsveldt explains: “We continue to see the most affluent FAS Groups being the most negatively affected due to their high exposure to secured credit. There was a notable impact on Luxury Living group. With an average opening home loan balance in excess of R1,2-million (54% owning one home and 25% owning multiple properties) 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 2.65 in March 2020 to 3.42 in March 2021.
“The Aspirational Achievers group similarly exposed to secured credit resulted in a CDI deterioration from 3.55 in March 2020 to 3.80 in March 2021.”
The Money Conscious Majority, which makes up the majority of the South African credit-active population (~40%), saw an improvement in CDI from 6.44 in March 2020 to 6.08 in March 2021. While exposure to secured credit is low in this group (25% own a property, and the average opening vehicle loan balances is approximately R160 000), exposure to unsecured facilities like personal loans and retail credit is high, with these consumers holding ~ 30% of the market in both these products.
The drastic improvement in retail CDI has a been the driver for the nett improvement in FAS 4 CDI.
With June being youth month, it is relevant to look at how the South African youth are managing their credit. Young South Africans (20-29 years of age) constitute roughly 27% of the adult population. These consumers, who generally fall in the less affluent Experian Financial Affluence Segments, only makes up 3,1-million or 10,7% of the 29-million credit active population.
What is, however, more concerning is that, due to limited access to secured lending products, this segment only contributes 6,3% of the R1,9-trillion of consumer debt.
As a result of the overexposure to unsecured banking and retail products, the youth segment has shown a significant improvement in CDI over the last year, dropping in first time default rate from 6.20 in March 2020 to 4.65 in March 2021.
This, however, does not signify improved credit health for the youth. As these young consumers typically find themselves struggling to find sustained employment and with limited access to credit, with unsecured loans and retail credit products typically their only sources of credit, their access to these facilities have been severely impacted by tightening in credit lending criteria by retailers and the Covid pandemic.
For the few that have the ability to access credit, it is further evident that, by nature of their preferred needs and immediate wants, their credit consumption has a strong affinity to vehicle asset finance (14%) and retail loans (9%). On the other end, the exposure of SA youth is the smallest (in relative terms) when it comes to home loans, where they hold only 3% market exposure.
Van Jaarsveldt concludes: “Both credit providers and consumers alike should carefully consider any lending or borrowing activity and take a longer-term view of their activities and finances.
“For businesses, focussing on short term profits by driving volume in the incorrect lending categories could result in the risk of increased impairments as the impact of the structural challenges faced by the South African economy and the persisting impact of Covid takes its toll over the longer term.
“For consumers supplementing monthly cash flows through unsecured personal loans and credit card facilities could result in a lasting debt spiral as re-payment demands increase.”
As for the youth, the age-old advice of ensuring you invest in wealth generative assets holds firm, says Van Jaarsveldt. “While we’ve all been lured by that nice new car or trendy outfit, the current economic environment presents many opportunities for those fortunate enough to have some extra money to invest in wealth creating assets such as property, with interest rates at very low levels. For those less fortunate, always think twice before taking on credit to fund purchases that are not needed and rather save towards future credit facilities that supports a wealth creating journey.”