Consumers paying debts despite economic pressures

South African consumers are paying their debts despite economic pressures, but they also opened more credit accounts to get there while lenders kept closer oversight by offering lower loan amounts and putting limits on revolving credit to mitigate risk of non-payment.

According to the findings of the TransUnion Q3 2022 South Africa Industry Insights Report, consumers signed up for credit cards, non-bank personal loans, home loans and clothing accounts, with credit originations increasing by 14.5% year-over-year and applications for new credit by 13.1% in the second quarter.

Younger consumers were driving the growth in new business, with Gen Z consumers accounting for 11.5% of all credit originations, up 2.3% from the second quarter of 2021, while millennials were responsible for 46.3%, up 0.3%. Gen X’s share of new business declined by 1.5% and that of Baby Boomers by 1.1%.

The report shows that outstanding balances across all lending product types decreased by 2.3% compared to the third quarter of last year, while account volume delinquencies on accounts that are in arrears for three months or more improved by 6.6% compared to the third quarter of 2021. Balances on most unsecured products returned to pre-pandemic levels.

However, although overall consumer confidence improved slightly from the previous quarter, it remained at a negative level of -20 for the third quarter Q3 2022.

Weihan Sun, director of financial services research and consulting at TransUnion Africa, says this low consumer confidence may be driving consumers to shift their spending from discretionary to essential items, while using credit to fund more of their spending at the same time.

This was confirmed by findings in the TransUnion Q3 Consumer Pulse Study that showed 56% of participants expected to make even more discretionary spending cuts in the following three months, despite one in three consumers reporting an increase in household income over the past three months, which may have led to an improvement in their capacity to service debts. 

Sun says these findings are 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 Banks’ target range of 3% to 6%.

“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 the inflation pressure, the bank raised the repo rate to 6.25% and the prime lending rate to 9.75% in September 2022, increasing the average consumer’s credit cost.

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More credit card debts to handle economic pressure

Credit card applications increased by 9.6% in the second quarter compared to the same time last year and lenders met demand as originations for the period were up by 39.4% compared to last year, although the average limit granted on new cards issued in the second quarter was 5.2% lower compared to 2021, due to the riskier borrowers that are driving market growth.

Despite the strong quarter of credit card growth, origination volumes remained at 18% below pre-pandemic levels compared to the same quarter in 2019. Card demand remained strong in the third quarter, up 9.1% compared to 2021.

“These trends indicate that South Africans are 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 2022. This increase in demand is due to the increased costs of living and consumer essentials, which are in turn driven by high fuel prices and international socio-political pressures,” Sun says.

“Although card issuers are managing risk carefully by offering lower limits on new accounts, they need to also deploy best practice account management practices to ensure delinquencies are managed accordingly and appropriately.”

Clothing accounts and retail revolving accounts, on the other hand, 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.

Sun says while increased opening amounts for vehicle asset finance is 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.

Aligning with credit card and clothing account trends, origination volumes for bank personal loans increased by 5.5% YoY in the second quarter, while non-bank personal loan originations grew by 14.3% and growth in bank personal loans continued for the fifth consecutive quarter.

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Better delinquency rates despite economic pressures

Delinquency rates, when consumers are three months or more behind with their payments, improved across all credit products, apart from home loans, during the third quarter, with account-level delinquencies on credit cards down 20 basis points to 13.3% compared to 2021, 90 basis points down on personal loans 33.5% and 130 basis points down on non-bank personal loans to 37.3%.

Sun ascribes this to consumers’ concern about the future outlook and being conservative in their spending in anticipation of further economic headwinds.

“They are careful to not become overly indebted as further interest rate increases are likely to put some consumer wallets under even more pressure in the coming months.”

He says it could also be that lenders are more proactive in account management, particularly now that new business is primarily driven by younger and riskier borrowers.

The report also notes that consumers will probably continue with holiday spending despite consumer sentiment suggesting cutbacks.

“It may be another reason consumers made regular payments in the third quarter to improve their delinquency levels to maintain access to revolving credit for the holiday period.”

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Taking advantage of slow house price growth

Home loan originations continued to grow by 8.9% in the second quarter compared to last year, although the average new loan amount decreased by 6.4%, as a result of consumers buying more affordable properties.

Despite new mortgage account growth, overall outstanding balances decreased by 3.5% and average balances decreased by 7.1% during the third quarter, likely driven by existing borrowers paying their loans at a faster pace in response to the rising interest rate environment.