Tighter lending criteria as well as consumer awareness is resulting in an improvement in debt levels.
The latest figures from the TransUnion SA Consumer Credit Index suggest that South African consumers are starting to wean themselves off credit and are learning to better manage their debt repayments.
Despite a weakening economy in the first quarter of this year, the SA Consumer Credit Index (CCI) showed a significant improvement, increasing from 49.7 to 52.4 – the fastest pace in two years. Since the beginning of 2016 the CCI has been showing signs of improvement but this is the first time it has crossed the breakeven level of 50, which means credit health is improving – although it is still far from the peak of 62.8 in 2010.
The index is calculated using statistics from defaults and distressed borrowing, household cashflow and debt servicing costs.
Figures for defaults and distressed borrowing have improved significantly, with the rate of new 3-month arrears falling by 5.7% year on year, the fastest rate of decline in new defaults since 2015. Revolving credit, such as credit cards and store cards, are often a sign of distressed borrowing as these are existing credit lines that individuals can tap into when times are tough. Although there was a marginal increase, it was relatively subdued at just 1% increase year-on-year.
The total household debt relative to disposable income has also improved, falling from 75.4% last year to 73%, suggesting a general reduction in overall debt.
Change in consumption behaviour
This does not necessarily mean that households are in better financial shape; in fact, household cash flow has continued to weaken, falling 1% over the last year. However, what it does indicate is that households under pressure are changing their consumption behaviour.
Lee Naik, CEO of TransUnion Africa attributes the reduction in debt to a tightening in credit extension due to the stricter affordability rules under the National Credit Act, as well as a general reluctance on te part of consumers to take on more debt. “People seem to be more prudent about the choices they make and are starting to shop around. They are moving from a mindset of ‘must have’ to ‘may have’,” says Naik who adds that there is clearly a recognition by consumers that they have to save towards those ‘nice to haves’ rather than just putting it on credit.
While this is a sign of a more responsible lending environment and better consumer financial education, it does not bode well for retailers. We have already seen higher-end retailers such as Woolworths struggling to maintain their profit margins, and retail in general is expected to show negative growth this year. According to Jason Muscat, FNB Senior Industry Economist, clothing has been particularly negatively affected, with a fall of 5.6% in March after declining in both January and February.
“Overall, we expect that consumers will use the modestly more favourable interest rate and inflation backdrop to continue deleveraging their household balance sheets, rather than increase consumption,” says Muscat.
The CCI does not take informal lending into account and there are also concerns that people who are facing extreme financial pressures and cannot access credit through formal credit lines will start to use loan sharks and mashonisas, pushing them further into debt. However, overall, it appears that consumers who have been burnt by the over-extension of credit are learning to live without credit lines.
How to interpret the Consumer Credit Index scores
- Levels above 50 are associated with higher rates of loan repayments, lower credit card utilisation, improving household cash flow, lower interest rates and credit deleveraging
- Levels below 50 indicate higher defaults, increase in credit card utilisation, weaker household cash flow, higher interest rates and increase in overall credit
This article first appeared in City Press.