South Africans opened more credit accounts to help them navigate the pressured economic climate, while lenders offered smaller loans and imposed limits on revolving facilities to mitigate risk. This is according to the third quarter 2022 South Africa Industry Insights Report, released by TransUnion on Monday. It showed that this trend prevailed across credit cards, non-bank personal loans, home loans, and clothing accounts.
Overall, credit originations increased by 14.5% year on year in the third quarter of the year, with applications for new credit going up by 13.1% compared to the same period last year. The report states that lenders were meeting demand as originations for the period were up 39.4%, but at the same time, the average limit granted by lenders on new cards issued was 5.2% lower.
According to the report younger consumers were mostly responsible for driving the debt craze, with millennials leading the charge for 46.3% of new business.
Aligning with credit card and clothing account trends, origination volumes for bank personal loans increased by 5.5% , while non-bank personal loan originations grew by 14.3%. Growth in bank personal loans continued for the fifth consecutive quarter.
In contrast, clothing accounts and retail revolving accounts saw higher new account limit amounts, likely due to increased product costs driven by the high inflation rate, while bank and non-bank personal loans and vehicle asset finance also saw increased opening amounts.
While increased opening amounts for vehicle asset finance was said to be likely due to rising vehicle prices, higher bank and non-bank personal loan opening balances could be driven by consumers needing to supplement their regular income in the current pressured economic climate or as a result of debt consolidation.
Delinquency rates improved across all credit products, apart from home loans, during the third quarter. Account-level delinquencies on credit cards were down 20 basis points to 13.3%; personal loans were down 90 bps to 33.5%; with non-bank personal loans improving by 130 bps to 37.3%.
Outstanding balances across all lending product types decreased by 2.3%, and account volume delinquencies on accounts that were delinquent for three months or more, improved by 6.6%. Outstanding balances on most unsecured products had returned to pre-pandemic levels, the report said.
South Africans consumers were said to have taken advantage of slow house price growth as home loan originations continued to grow by 8.9% , although the average new loan amount decreased by 6.4% as a result of consumers purchasing more affordable properties. Despite new mortgage account growth, overall outstanding balances decreased by 3.5% and average balances decreased by 7.1%. This was likely driven by existing borrowers paying their loans at a faster pace in response to the rising interest rate environment.
Even though overall consumer confidence was said to have improved slightly from the prior quarter, it remained at a negative level during the period under review. This low consumer confidence may be driving consumers to shift their spending from discretionary to essential items, and at the same time using credit to fund more of their spending, according to TransUnion.
This was confirmed by findings in the TransUnion Consumer Pulse Study for the third quarter of this year, in which 56% of those surveyed expected to make even more discretionary spending cuts in the following three months. This was despite one in three consumers reporting an increase in household income over the past three months, which may have led to an improvement in consumers’ capacity to service their debt.
TransUnion said these findings were in the context of the inflation rate reaching 7.8% in July – a 13-year high that was well above the upper limit of the South African Reserve Bank’s target range of between 3% to 6%. The annual core inflation measure, which excluded food prices, non-alcoholic beverages, fuel and energy rose to 4.4% in July – the highest rate since October, 2017.
This higher inflation environment led to higher prices across consumers’ basic needs, including food, fuel, and clothing, pressuring them to turn to credit to make ends meet. In response to these pressures, the Reserve Bank raised the repo rate to 7% two weeks ago, further raising borrowing cost which put the local benchmark repurchase rate at a five-year high.
Weihan Sun, the director of Financial Services Research and Consulting at TransUnion Africa, said these trends indicated that South Africans were turning to credit to make ends meet in the current high inflation environment, which has remained above the Reserve Bank’s target range since May. “This increase in demand is due to the increased cost of living and consumer essentials, which are in turn driven by high fuel prices and international sociopolitical pressures,” he said.
“Although card issuers are managing risk carefully by offering lower limits on new accounts, they need to also deploy best practice account management to ensure delinquencies are managed accordingly,” Sun said.
He said this was likely because consumers were concerned about the future outlook, and being conservative in their spending in anticipation of further economic headwinds. “They’re being careful not to become overly indebted as further interest rate increases are likely to put some consumer wallets under even more pressure in the coming months. It could also be that lenders are being more proactive in account management, particularly now that new business is primarily driven by younger and riskier borrowers.”
TransUnion said holiday spending was likely to continue despite consumer sentiment suggesting cutbacks. It said it might be another reason consumers made regular payments in the latest quarter, improving their delinquency levels to maintain access to revolving credit for the Christmas period.
Sun said South Africans were also turning to credit to maintain their current lifestyles, but they were doing so with caution, as shown by improved delinquency performances, reductions in discretionary spending, and fewer large purchases.
He said South Africans were buying property despite the increasing interest rate cycle – but they were buying more affordable properties, taking advantage of the more cautious market and lower prices caused by interest rate pressures. “This sector of the market is dominated by borrowers in the prime and above groups. Consumers still have an appetite to buy property, but are choosing properties that cost less than what their choices might have been in a less pressured environment.”
He said the lower outstanding and average balances showed that many consumers were paying more than the minimum requirement into their home loans, in an effort to reduce the overall balance during this high interest rate cycle. “This is likely to be particularly prevalent among lower risk borrowers with greater affordability.”
Sun said South Africans’ resilience was further tested during this quarter with load shedding again becoming a regular occurrence. “This in turn is likely to have an impact on inflation, as businesses were compelled to take costly measures to generate their own electricity to stay operational.”
He said consumers were feeling the pressure of the current economic climate, and were likely to depend more on credit to meet their day-to-day expenses. “Lenders who respond to this with carefully designed and targeted products are likely to earn the loyalty of consumers as they navigate through these challenging times, particularly through the festive season,” Sun said.
PERSONAL FINANCE