Both the richest and poorest South Africans cannot pay their debts

The most and least affluent consumers are battling to pay their debts for various reasons, while they drive the growth in clothing account and credit card applications in an environment of high inflation and high interest rates.

The latest Experian Consumer Default Index (CDI) for the first quarter shows a return to the former trend of long-term deterioration, expedited by the rapid increase in living expenses experienced by South African consumers and exacerbated by the significantly intensified load shedding applied by Eskom during the first quarter.

The CDI exhibited a quarter-on-quarter deterioration from 3.93 in December 2022 to 4.51 in January 2023. The CDI is designed to measure the rolling default behaviour of South African consumers with home and vehicle loans, personal loans, credit cards and retail loan accounts.

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Accounts are considered to be in default or arrears when a lender deems the statement balance of a consumer account to be uncollectible due to it being in arrears for more than 90 days or has a status of repossession, foreclosure, charge-off or write-off.

“A significant deterioration for the latest reporting period was already pre-empted in the fourth quarter when we saw an earlier-than-usual deterioration in CDI. It seems that the CDI has not only fully returned to the long-term deteriorating trend observed pre-Covid, but that the deterioration is happening at a faster pace,” says Jaco van Jaarsveldt, head of commercial strategy and innovation at Experian Africa.

Experian found rapid deterioration in CDI terms on the two extreme ends of the consumer landscape: the most affluent and the least affluent consumers, with the biggest relative deterioration in the luxury living group.

“Although these consumers are typically of the highest affluence and generally represent the lowest credit risk, their CDI has been under severe pressure, particularly since the pandemic. We also note that these consumers typically not only continued to qualify for new or more credit throughout the pandemic but have also become increasingly dependent on credit to fund their standard of living,” Van Jaarsveldt says.

Mid-affluence and money conscious paying debts

On the other hand, the mid-affluence stable spender group and the money conscious group who are typically of mid-range affluence, generally showed minor changes, while the less affluent group showed the second-most significant deterioration in Composite CDI, worsening by 36% compared to 2022 as they used more unsecured credit since the fourth quarter of 2021.

The total number of debt review applications also increased markedly over the past two years as the cost of living remained on an upward trend. Market appetite for credit increased even further, as consumers tried to use credit to bridge the gap in covering living expenses.

“All South Africans need to establish strong financial practices to get through the challenging economic environment we are facing. It is vital that consumers stay on top of their credit health, carefully monitor how they use credit and maintain accurate household budgets,” Van Jaarsveldt says.

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The TransUnion South Africa Industry Insights Report for the first quarter found that consumers drove growth in new credit demand and supply for clothing accounts and credit cards during the first quarter amid the ongoing challenges of a high inflation high interest rate environment.

“Consumers manage their debt carefully, with serious delinquency rates across major unsecured lending products improving. Clothing account originations increased by 36.4% year-over-year, although the average limit on new clothing accounts only increased by 1.2% over that time. Outstanding balances increased by 6.8%, supported by new business growth, while average balances increased by 6.1%.

“We saw significant growth in new business for clothing accounts, just as there was a notable increase in outstanding balances, likely driven by existing account holders leveraging their accounts more frequently as a result of higher prices driven by inflation,” says Weihan Sun, director for financial services research and consulting at TransUnion Africa.

New retail revolving accounts surged with a 34.7% increase and the growth in new accounts aligns to the growth in retail sales, particularly for the clothing, footwear, textiles and leather goods sector, which grew by 6.3%.

New revolving accounts demand

Sun says the demand for new revolving accounts can be attributed to the continued shift towards credit being the preferred means to finance retail purchases as economic constraints continued to put pressure on consumer wallets.

Consumer demand for new credit cards remained robust, with origination volumes increasing by 27.1% in the first quarter, while average limits on new cards declined marginally (0.8%) from the year before. Originations increased across all generations, with Gen Z consumers (born 1995 to 2010) accounting for 18.9% of the new cards issued, an increase of 3.4% compared to last year.

It is clear that lenders are managing risk carefully in the current climate, which is why the number of originations to low-income consumers decreased by 10.3%, while originations to super prime consumers increased by 8.6% compared to last year. There was growth in new business, as well as consumers leveraging their existing card facilities to pay for everyday purchases.

“Existing cardholders are leveraging their credit facilities, although, viewed in tandem with retail trends, it is likely that they use credit for basic needs rather than luxuries. In terms of performance, account-level delinquency rates have improved slightly, demonstrating lenders’ management of risks, highlighting the value that South Africans place on the liquidity and ease of payment made possible by credit cards.”