More affluent consumers under more debt strain – consumer default index

More affluent consumers are still under more debt strain, according to the latest consumer default index, with a R19.28 billion in value defaulted for the first time between April and June. First-time consumer credit defaults increased in the second quarter, although it improved compared to the same period in 2021.

The Experian South Africa’s Consumer Default Index (CDI) for the second quarter continued to show that affluent consumers are under more financial strain, relatively speaking, than their less affluent counterparts.

The FAS Group 1, Luxury Living, showed a year-on-year deterioration, while year-on-year improvements were observed for Groups 2, 3 and 4. FAS Groups 5, Laboured Living, and 6, Yearning Youth, showed significant deterioration, after the improving trend that followed in the two years after the initial hard lockdown conditions.

This is for the most part related to the meaningful increase in new business volumes that was seen for retail over the 2021 festive season, with consumers in these segments feeling the immediate effect of higher food and transport prices as the consumer inflation rate continues along its increasing trajectory.

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Consumer default index increase

The CDI increased from 3.68 in the first quarter to 3.80 in the second quarter, while it improved compared to the second quarter of last year, from 4.05 in 2021 down to 3.80 this year, a relative improvement of 6%.

“This quarterly observation is aligned to the typical seasonality we see for the CDI, where the index increases from March to May due to credit lending increasing during the Black Friday and Festive season spending spree in the preceding year,” Jaco van Jaarsveldt, head of commercial strategy and innovation at Experian Africa, says.

However, he says, what remains to be seen is the relative negative contribution the current global financial situation has, with cost-of-living increases not experienced in decades, negatively affecting consumers.

Unfortunately, the year-on-year improvement was not observed across all products. Van Jaarsveldt says there was a significant deterioration in retail loan defaults year-on-year, primarily due to the highest post-Covid new business volumes observed during the fourth quarter of 2021.

He says it is concerning that this deterioration occurred in a market where new retail accounts opened remain 30% below pre-Covid levels, yet at these lower new account levels, more consumers are showing increasing signs of distress.

“While the deterioration for vehicle loans was more modest, moving from 4.27 to 4.36 year-on-year, the same early signs of distress in the secured market segment is evident, indicating that no consumers are immune to the broad economic and cost of living distresses experienced in the market.”

Although there was an overall improvement the credit card, personal loan and home loan segments, these are not expected to continue into the next quarters as more and more consumers feel the pinch of the current financial environment, especially the significantly higher interest rates,” Van Jaarsveldt warns.

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Cost-of-living increase

He says the cost of living has increased considerably in the aftermath of Covid lockdown restrictions. Consumers experienced a steep increase in consumer price inflation, a prolonged increasing trend in fuel prices, an interest rate upcycle with significantly shorter periods between increases and the highest unemployment rate globally.

South Africa’s increasing unemployment rate is particularly concerning for the credit industry, not only from a credit qualification perspective, but also from a continued affordability perspective, considering existing credit consumers.

“The South African market demand for credit since Covid has not only recovered to pre-pandemic conditions but has actually been exceeding it since the last quarter of 2021, aligning with what we have seen from a macroeconomic perspective, where consumers are under increasing pressure just to make ends meet.”

However, Van Jaarsveldt says, as lenders continue to enforce more conservative lending criteria, supply of credit remains well below pre-Covid levels, especially in the unsecured lending market, which is a trend that has continued even after the pandemic.

“In this tough economic climate, we continue to advise consumers to manage their budgets carefully and use credit responsibly. To maintain a good credit profile, consumers must ensure that they are paying their full instalments on time, not missing any payments and can afford the credit they take out for the full term.”