FirstRand sees higher debt review activity, even among those not in arrears

Banking giant FirstRand has expressed concern that debt review service providers have become more active, targeting higher-income customers who are not in debt distress.

During its full-year results presentation on Thursday, group CEO Markos Davias said FirstRand has observed that debt counselling inflows are manifesting on higher value loans, particularly in the private segment with a focus on the home loan as well as unsecured portfolios.

“In many instances, customers are entering debt counselling arrangements without any arrears. We are monitoring this closely and implementing response strategies and educational programmes aimed at ensuring better outcomes for customers,” he noted.

Davias’s utterances correspond with the concerns raised by other major lenders, which told Moneyweb in June they have also observed higher incidences of debt counselling – especially among the middle- to higher-income segments.

ALSO READ: Debt counselling – this is what you are letting yourself in for

Higher defaults, higher credit loss ratio 

Davias says the increase in FirstRand’s retail debt counselling portfolio means potentially higher default rates from customers and a lower ‘loss given default’ (LGD) experience over the medium term, which in turn could hurt its credit loss ratio.

(A loss given default refers to the amount of money a bank or other financial institution forfeits when a borrower defaults on a loan.)

FirstRand’s credit loss ratio increased slightly to 0.81% due to strain from consumers with residential mortgages and personal loans.

According to Davias, the strain that the “higher-for-longer” interest rate cycle has placed on consumers, coupled with debt counselling inflows, has also led to a higher formation of non-performing loans (NPLs), meaning that debtors do not make their scheduled payments on time or in full.

“Debt counselling inflows have been more pertinent in the second half of the year and were up 17%,” he adds.

ALSO READ: Don’t fall for calls to help with your debt – it could be debt counselling

Consequences of going into debt review

In June, FNB, which forms part of FirstRand, told Moneyweb in an email that it had noted an increase in predominantly middle-income to affluent South Africans entering debt counselling.

“Often customers do not fully grasp the consequences of entering debt review, only realising later that they would not be able to use any of their credit facilities or that it would impact their credit bureau listings,” the bank said at the time.

Another worry is that those who enter debt review are often not aware of the costs associated with the process.

Capitec, also among the concerned lenders, noted earlier that around 20% of consumers exit debt counselling after 12 months, paying at least R9 000 in fees, with no change in their levels of indebtedness.

Nedbank this week sent a WhatsApp message to its customers, asking them to contact the bank first before making any decisions about entering debt review.

Nedbank warns its customers in a WhatsApp about entering debt review prematurely. Image: WhatsApp (supplied)

Nozizwe Tshabuse, managing executive for retail and business banking and client debt management at Nedbank, told Moneyweb earlier that a lack of financial education often leads to customers entering into premature debt counselling arrangements that are “ill-advised”.

She says the credit scores of people under debt review are adversely affected because the process is registered with all the credit bureaus.

Once they have agreed to debt counselling, they can’t get any kind of funding until the debt review period is concluded.

“Being under debt review could also affect all future funding negatively,” according to Thabuse.

This article was republished from Moneyweb. Read the original here.