Interest rate storm looms for credit-dependent consumers

TWO recent reports from the credit industry covering the second quarter of the year (Q2) show that the credit market has stabilised in the aftermath of the pandemic and there has been growth in credit card spending. However, consumers have left themselves vulnerable to rising interest rates, which are likely to have a negative impact going forward.

The Eighty20/XDS Credit Stress Report notes that the current balance on all loans increased by 1.7% (R37 billion) in Q2 to R2 214bn. (About half of this figure comprises mortgage bonds.) Total balances of more than 30 days in arrears decreased by R4.4bn (2.3%) in Q2, marking the second consecutive quarter-on-quarter decrease after more than two years of consecutive increases.

Credit card balances saw the largest year-on-year increase, at 14.6%, with a 27.8% year-on-year increase in overdue balances despite a 2% drop in Q2.

The number of loans in arrears decreased by 1.7% to 18.6 million in Q2 and now make up 38% of all open loans. This represents an 11.9% decrease from the five-year high in the number of loans in arrears reached in 2020 Q2. Loans more than nine months in arrears decreased by 2.2% quarter-on-quarter, making up 48.7% of all loans in arrears, the Eighty20/ XDS Credit Stress Report notes.

Consumer segments

The report categorises consumers into four segments, each of which will be affected differently by rising inflation and interest rates.

1. Mass Credit Market: “Few in this segment have home or vehicle loans, so the impact of rising interest rates will not be significant, but nearly 50% of their loan value is in high-interest-rate unsecured debt. The challenges will be felt more in their everyday spending on clothing, food and transport. Some 80% use retail credit to purchase the items they need, nearly 10% higher than the national average.” The average person in this segment spends 34.8% of his or her income servicing debt.

2. Middle-class Workers: “The middle class is the hardest hit segment due to the uptick in inflation, interest rates and loss of jobs. Unlike more affluent segments, this segment does not have additional income from investments that can help cushion the impact of the deteriorating consumer environment. This segment is also heavily indebted with almost two-thirds of their income going towards instalments.” The average person in this segment spends 64.9% of his or her income servicing debt (including mortgages).

3. Heavy Hitters: “Even the wealthiest three million South Africans will be impacted by inflation and interest rate increases. This segment accounts for 61.5% of the total loan value in South Africa. While this segment has the lowest proportion of individuals in default, those with mortgages with a high loan-to-value ratio and no savings will be under financial pressure.” The average person in this segment spends 57% of his or her income servicing debt.

4. Comfortable Retirees: “When inflation is rising, the hardest hit are often older people living on a fixed-income pension. Roughly half a million of these retirees have a mortgage, and the rise in interest rates will put further pressure on their spending. This segment has low default rates overall, but nearly half of those with unsecured credit (roughly 400 000) is more than 90 days in arrears.” The average person in this segment spends 42.2% of his or her income servicing debt, which is alarming, considering retirees should have already paid off their mortgage bonds.

Credit card growth

TransUnion’s South Africa Industry Insights Report for Q2 gives details on new credit card accounts and who is opening them.

New credit activity grew despite overall consumer sentiment indicating a cutback on spending, the report states. Credit card origination volumes – the measure for new accounts opened – increased by 37.9% year-onyear in Q1 (the latest period for originations due to reporting lag). “The volume of credit card originations has been steadily growing since its low in Q3 2020, indicative of increased lender appetite for growth as well as higher consumer demand for credit,” the report states.

From an age perspective, 74% of all card originations came from Gen Z and Millennial consumers, indicating higher demand for credit from younger consumers and a willingness by lenders to extend credit to these borrowers.

“The significant rebound in card originations compared to the depressed levels at the height of the pandemic reflects a returning appetite from lenders seeking growth from new business,” said Lee Naik, chief executive of TransUnion Africa. “Our analysis tells us it is younger and generally higher-risk borrowers who are primarily driving new credit card growth. While expanded consumer access to credit is generally positive for the economy, lenders should closely monitor portfolio risk and leverage predictive tools to manage and predict pre-delinquency behaviours.”

Delinquency rates

Serious delinquencies – loans on which borrowers have missed three months’ payments or more – are generally down for Q2, with only credit cards showing a slight rise (0.7%), the TransUnion report notes. Credit categories with the highest delinquency rates are non-bank personal loans (37.5%), bank personal loans (32.3%), retail instalment accounts (31.2%) and clothing accounts (30.8%).