New data from consumer credit reporting agency TransUnion shows that despite a declining supply of new credit, credit card balances have risen as lenders in South Africa continue to focus on increasing limits for existing cardholders.
Findings from TransUnion’s Q2 2021 South Africa Industry Insights Report cover a period when unemployment was still on the rise, but before the July civil unrest and the peak of the third wave of Covid-19 cases.
The report shows that a number of trends, observed immediately after the Covid-19 epidemic over a year ago, have continued to progress with a few notable exceptions, particularly with regard to delinquency.
Understanding the delinquency picture
Default rates during the pandemic were influenced by a number of important factors, the credit specialist said. Deferrals, payment holidays and other accommodations by lenders have helped borrowers in need. A drop in new borrowing over the year since the start of the pandemic has also altered the overall ratio of good and bad debt in lender portfolios.
While a general increase in overall debt has been apparent, the total number of new loans and accounts has declined due to the decline in loan arrangements. This means that while the numerator in the delinquency equation (i.e., existing accounts with delinquencies) increases, the denominator does not increase at the same rate, TransUnion said.
Add other factors that financially troubled consumer accounts choose to pay off – for example, prioritizing product utility such as credit card functionality for online payments or car loan payments to make sure you avoid public transport – and it’s clear that there are often several factors that change levels of delinquency, the group said.
Typically, defaults have often followed broader macroeconomic trends such as GDP growth and changes in unemployment.
In the latest figures for the second quarter of 2021, although there have been improvements in most major categories of consumer credit, unsecured personal loans have seen a significant increase in defaults at the balance level – the Bank personal loans increased by 260 basis points year-on-year and non-bank personal loans by 700 basis points.
A higher default rate is to be expected for non-bank personal loan providers, as they have historically targeted high-risk consumers who are more likely to default and will be less resilient to lasting financial difficulties, such as those caused by the pandemic.
“Finding and financing resilient consumers becomes even more crucial during tough economic times when looking to maintain a healthy portfolio default rate.
“The key is to fuel new credit growth by finding good consumers, who are likely to meet lender’s target thresholds and, in turn, can help maintain a good bad / good ratio for lender growth. long term, ”said Carmen Williams, director of research and consulting at TransUnion South Africa.
Credit application in a post-pandemic world
Throughout the pandemic, data from TransUnion showed a reduced appetite from consumers (demand) and lenders (supply) for new account openings (as measured by creations), and this continued into the second. quarter 2021.
“However, with the global economy slowly starting to reopen and immunization programs accelerating, the future shape of the consumer credit market will depend on a number of important variables,” he said.
Historically, macroeconomic conditions have played an important role in the pace of credit growth. Likewise, consumer sentiment also has a significant impact. Although the latest IIR data is for the second quarter of 2021, TransUnion also conducted its regular consumer pulse study in August 2021, which tracked civil unrest and the initial peak of wave three of Covid infections. -19 observed in early July.
The study showed a number of important trends regarding potential future demand and market direction in South Africa, the credit specialist said.
The number of South African consumers predicting in August that they would apply for new credit or refinance an existing one in the next year was just under a third (31%). Applications for personal loans (43%) and new credit cards (35%) continued to top the list, TransUnion said.
“The South African consumer credit market continues to experience significant turbulence, with a number of potential new trends emerging, particularly in the area of delinquency. Broad economic and political news continue to impact consumer sentiment and outlook, and these will shape the recovery as it continues to emerge, ”said Williams.
“Lenders must continuously monitor changes in consumer behavior and adapt to changing demand and future consumer preferences if they are to be successful. There is no doubt that the road to recovery will be bumpy, but by being informed, lenders will have the best possible chance of competing and succeeding. “
The credit card is the only credit product to show high levels of continued decline in origination since the start of the pandemic (down 23% yoy in Q2 2020, 63.2% yoy in the third quarter of 2020 and 48.6% year-on-year in the fourth quarter 2020 and 42.7% year-on-year in the first quarter of 2021). This is largely due to lenders implementing stricter credit granting policies amid economic uncertainty, the credit specialist said.
Lenders remain focused on extending credit to existing customers rather than onboarding new borrowers. Average balances increased 17.6% and total credit limits increased significantly by 15.2% while new loan amounts increased only 2.2%.
Overdue credit card balances (up 10.6% year-on-year) were driven by consumers’ need to balance household budgets, maintain liquidity and finance subsistence purchases, particularly when revenues were negatively affected. However, the increases were not evenly distributed and a clear generational gap emerged.
Younger consumers have increased their credit card balances more than older generations. The year-on-year change in Q2 2021 for Millennials (born in 1980-1994) was 9%, compared to 6% for Generation X (1965-1979) and only 3% for baby boomers (born in 1946-1964) ).
Younger generations tend to do more online transactions, and the utility of a credit card is fundamental to this business. Credit card account defaults fell 50 basis points (bps) from their high in Q2 2020, and Q2 2021 stood at 12.3%, and were unchanged level than in the second quarter of 2019.
This improvement provides further proof that credit cardholders protect and value the revolving functionality contained in this product, TransUnion said.
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