The rate people defaulted on their loans for the first time improved in the fourth quarter of 2021, according to Experian South Africa’s Consumer Default Index (CDI).

People defaulted on their loans at a lower rate than the fourth quarter of the previous year, although the index remained relatively flat compared with Q3 of 2021.

The downward movement of the index was largely due to significant improvements in the Vehicle Loan as well as the Personal and Retail Loan Indices. The latter two product sets contribute around 17% towards the Composite CDI, while Vehicle Loans carry 23% of the Composite. The improvements seen in these three products’ CDI metric exceeded the deterioration seen in the Home Loans and Credit Card indices on a year-on-year basis.

Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa, says: “With the impact of the Covid-induced economic lockdown now seemingly a thing of the past, South Africa can prepare for increased levels of economic activity by consumers over the next few months.

“However, as travel restrictions are lifted, and entertainment curfews are done away with, people must be responsible and pragmatic – especially if they are inexperienced in the world of credit and seeing interest rates increase for the first time.

“Lenders will rely on credit information to understand which people are best placed to afford to make loan repayments.”

The CDI remained stable in the fourth quarter of 2021 at 3.45 , improving only marginally from 3.50 when compared with the third quarter. However, the improvement was more significant year on year, moving down 0.57 from 4.02 in 2020 quarter four.

According to Van Jaarsveldt: “The latest CDI indicates that the rate of first-time default among South African consumers has continued to improve on a year-on-year basis largely due to three factors.

“Firstly, credit lenders have, for the most part, shown increased credit risk aversion since the onset of the Covid lockdown regulations, and as such fewer people overall have qualified for credit.

“Secondly, the economic lockdown conditions have resulted in significantly fewer opportunities for consumers to spend a weighty share of their income on travel and entertainment, resulting in due payments on credit commitments being made to a greater extent.

“Lastly, the extended low interest rate environment has supported accelerated debt reduction and made access to new credit more affordable.”

The most affluent consumer group, the Luxury Living segment, makes up 2,5% of the South African population yet accounted for 35% of total credit exposure in 2021 Q4. This group deteriorated in CDI terms, with the default rate increasing year-on-year from 2.30 to 2.47, resulting in a 7% deterioration in the CDI.

It contrasts strongly with the relative improvements observed in all five other FAS Groups. People in Luxury Living have 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 and is typically deemed the least risky consumer segment.

Says Van Jaarsveldt: “The deterioration in this group is concerning. Historically they have been the most stable segment, suggesting they are increasingly feeling the pressure of increased fuel prices and the daily cost of living, not to mention the impact of the recent increase in lending rates.”

The Yearning Youth, which makes up about 16% of the SA population but contributed only 0,5% of total credit exposure in 2021 Q4, saw the greatest relative CDI improvement from 17.09 in 2020 Q4 to 12.10 in 2021 Q4 (29% relative CDI change). Although this improvement is smaller (in relative terms) than what we saw for the Yearning Youth in Q3 (at 37%), it is still very significant. This is because their exposure to secured credit is negligible (<0,1 %), but exposure to unsecured credit – particularly Retail Loans, is more substantial at 6%.

“Whilst increasing interest rates less impact this segment, they are more exposed to direct cost fluctuations in everyday necessities like transport and food. As a result, they find it increasingly hard to adjust to the tougher economic climate,” says Van Jaarsveldt.

“This indicates that the recent improvements in CDI are unlikely to continue as the underlying structural inefficiencies in the broader economy start to take a toll again after months of being masked by forced changes in consumer spending patterns caused by Covid lockdown measures.”

Focusing on the younger segments in the market, Experian notes similar trends, but not for exactly the same reasons. The same phenomenon of an improving CDI has been playing out among the younger consumer segments (30 and under) – but even to a greater extent. Specifically, the rate of improvement in CDI for young consumers is significantly faster than that of the total market.

What makes this particularly interesting is that this is not coupled with an observation of reduced volumes of loans being extended to this segment. In fact, there has been an increase in the loans extended to young, employed, and qualifying consumers since mid-2020.

The increase in expendable income (due to limited spending opportunities on travel and entertainment) has enabled the South African Youth credit consumers to qualify for and honour their increasing debt commitments quite impressively. In addition, the record-low interest rates that have been prevailing since mid-2020 has also had a positive impact.

Looking at the products that South African Youth took up over the last two years, the data shows these younger people made good decisions. Marked increases in the secured loans portfolios of Vehicle and Home Loans and much less pronounced growth in unsecured loans – both from a consumer volume and exposure value perspective – were observed over the last two years.

This is positive for young credit consumers, as this means that more of them are using ‘healthy’ credit products to facilitate their growth and financial wellbeing.

Van Jaarsveldt concludes: “Looking ahead for younger people, the temptation to increase expenditure on travel and entertainment could potentially cause them to fall behind on their credit commitments. The repo rate increased in South Africa in November 2021, following almost two years of lowering and sustained low interest rates, the impacts that interest rate increases can have on monthly credit repayment amounts and, by implication, on a monthly budget, may not be entirely obvious.

“Careful planning and self-discipline will stand young credit consumers in good stead long into the future – especially considering the interest rate increase cycle that lies ahead.”