SA consumers hungry for more credit, while delinquencies stabilise

Consumers are ready for more credit while delinquencies stabilise, according to a new survey.

The overall number of credit consumers has remained flat but the total amount borrowed, measured by outstanding balances, continues to increase across major credit products.

According to TransUnion’s South Africa Industry Insights Report for the second quarter of 2021, when unemployment was still rising but before July’s civil unrest and peak in the third wave of Covid-19, delinquencies also decreased with the exception of unsecured personal loans.

“Consumer credit market conditions remain volatile and are an evolving picture. Any potential impact from the recent civil unrest and spike in Covid-19 cases will not be seen until data for the third quarter are published,” Carmen Williams, director of research and consulting for TransUnion South Africa, says.

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Consumer credit growth

Credit demand remained subdued, but could change when the world reopens, as more people are vaccinated. Almost a third of participants plan to apply for new credit or refinancing in the next twelve months. Personal loans and credit cards top the list.

The overall number of consumers participating in the credit market has not grown materially compared to pre-pandemic levels, falling year-on-year in three of the last four quarters and remaining broadly flat at 0.8%, although this is often for very different reasons depending on the product.

During the pandemic TransUnion’s data have shown reduced appetite from consumers (demand) and lenders (supply) for new accounts and this continued in the second quarter, although it can change with the world economy slowly starting to reopen and vaccination programs gaining pace.

TransUnion’s Consumer Pulse Study in August, after the civil unrest and the initial peak of the third wave, showed a number of important trends. The percentage of South African consumers optimistic about the future dropped to 69% in August, down from 75% in June and 76% in March.

The study also showed a similar drop in the percentage of consumers saying they were confident that their household finances will fully recover in the next twelve months (47% in August, down from 52% in June).

The number anticipating they would apply for new credit or refinance existing credit within the next year was relatively unchanged at (31%, while personal loans (43%) and new credit cards (35%) applications continued to be top of the list.

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Outstanding balances in consumer credit

Outstanding balances for home loans increased by 15.3% in the second quarter, primarily driven by consumers who have maintained or improved their income and credit access to finance house purchases.

Rising home prices contributed to higher new home loan balances, but in contrast outstanding balances for credit cards that increased by 10.6% year-on-year were driven by consumers’ need to balance household budgets, maintain liquidity and finance subsistence purchases, especially if their incomes have declined.

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Consumer credit delinquencies

A general rise in delinquencies across most major consumer lending categories also contributed to growth in outstanding balances in recent quarters, as missed payments were added and principal amounts remained outstanding.

This has now changed in the second quarter, with delinquencies stabilising and decreasing. Delinquencies for credit cards decreased by 50 basis points from a peak in the second quarter of 2020, while it was at 12.3% in the second quarter at the same level as the second quarter of 2019.

Williams believes that it remains to be seen if the improvement in delinquencies can be sustained and therefore will be monitored in the coming months.

“Delinquency rates during the pandemic have been influenced by a number of important factors. Deferrals, payment holidays and other accommodations by lenders have helped borrowers in need.

“A decline in new borrowing in the past year since the onset of the pandemic has also shifted the overall ratio of good versus bad debt in lenders’ portfolios. While a general increase in overall debt has been apparent, the total number of new loans and accounts has decreased as a result of the decline in originations.”

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Other reasons for delinquencies

She says this means that while the numerator in the delinquency equation is rising, the denominator is not growing at the same pace.

When you add other reasons why consumers pay their accounts, such as prioritising products that are more useful like credit cards for online payments or car loan payments to avoid public transport, it is clear that there are often many reasons for changes in delinquency levels.

Williams explains that delinquencies often follow wider macroeconomic trends, such as GDP growth and changes in unemployment. Although there were improvements in the second quarter for most of the major consumer credit categories, unsecured personal loans recorded a significant increase in balance-level delinquencies.

Personal loans from banks increased by 260 basis points year-on-year and other personal loans by 700 basis points.

She says a higher delinquency rate for non-bank personal loan providers is to be expected because these lenders have historically targeted higher risk consumers who are more likely to default and will be less resilient to sustained financial hardships, such as those caused by the pandemic.

“Finding and funding resilient consumers becomes even more crucial during challenging economic periods to maintain a healthy portfolio delinquency ratio. The key is to fuel new credit growth by finding good consumers, who are likely to perform within lenders’ target thresholds and in return can help maintain a healthy bad-to-good ratio for longer-term lending growth.”