DATA released by Experian South Africa’s Consumer Default Index (CDI) this week showed that affluent consumers defaulted experienced a significant increase in loan defaults, while younger consumers were honouring their debt commitments.
The most affluent consumer group, the Luxury Living segment, makes up 2.5 percent of the South African population yet accounted for 35 percent of total credit exposure in 2021 fourth quarter (Q4). This group deteriorated in CDI terms, with the default rate increasing year on year from 2.30 to 2.47, resulting in a 7 percent deterioration in the CDI.
It contrasts strongly with the relative improvements observed in all five other Financial Affluent Segments (FAS) groups. People in Luxury Living had an average opening home loan balance in excess of R1.2 million (54 percent owning one home and 25 percent owning multiple properties) and an average opening vehicle loan balance greater than R450 0000. This group was highly exposed to secured credit and was typically deemed the least risky consumer segment, Experian said.
Jaco van Jaarsveldt, the chief decision analytics officer at Experian Africa, said: “The deterioration in this group is concerning. Historically they have been the most stable segment, suggesting they are increasingly feeling the pressure of increased fuel prices and the daily cost of living, not to mention the impact of the recent increase in lending rates.”
The Yearning Youth, which makes up about 16 percent of the South African population but contributed only 0.5 percent of total credit exposure in 2021 Q4, saw the greatest relative CDI improvement from 17.09 in 2020 Q4 to 12.10 in 2021 Q4 (29 percent relative CDI change).
“Whilst increasing interest rates less impact this segment, they are more exposed to direct cost fluctuations in everyday necessities like transport and food. As a result, they find it increasingly hard to adjust to the tougher economic climate”, said Van Jaarsveldt.
Focusing on the younger segments in the market, thirty and under, the rate of improvement in CDI for young consumers was significantly faster than that of the total market.
Experian noted that what made this particularly interesting was that this was not coupled with an observation of reduced volumes of loans being extended to this segment. In fact, there had been an increase in the loans extended to young, employed, and qualifying consumers since mid-2020.
The increase in expendable income (due to limited spending opportunities on travel and entertainment) had enabled the South African Youth credit consumers to qualify for and honour their increasing debt commitments quite “impressively”. In addition, the record-low interest rates that have been prevailing since mid-2020 had also had a positive impact, the index found.
This segment increased their secured loans portfolios of vehicle and home loans with less pronounced growth in unsecured loans – both from a consumer volume and exposure value perspective – were observed over the past two years.
“This is positive for young credit consumers, as this means that more of them are using ‘healthy’ credit products to facilitate their growth and financial wellbeing,” Experian said.
However, overall, Experian found that the rate people defaulted on their loans for the first time improved in the 4Q of 2021.
People defaulted on their loans at a lower rate than the fourth quarter of the previous year, although the index remained relatively flat compared with Q3 of 2021.
The downward movement of the index was largely due to significant improvements in the vehicle loan as well as the personal and retail loan Indices. The improvements seen in these three products’ CDI metric exceeded the deterioration seen in the home loans and credit card indices on a year-on-year basis.
Van Jaarsveldt said: “With the impact of the Covid-induced economic lockdown now seemingly a thing of the past, South Africa can prepare for increased levels of economic activity by consumers over the next few months.
The CDI remained stable in the fourth quarter of 2021 at 3.45, improving only marginally from 3.50 when compared with the third quarter. However, the improvement was more significant year on year, moving down 0.57 from 4.02 in 2020 quarter four.
Van Jaarsveldt said: “The latest CDI indicates that the rate of first-time default among South African consumers has continued to improve on a year-on-year basis largely due to three factors. Firstly, credit lenders have, for the most part, shown increased credit risk aversion since the onset of the Covid lockdown regulations, and as such fewer people overall have qualified for credit.
“Secondly, the economic lockdown conditions have resulted in significantly fewer opportunities for consumers to spend a weighty share of their income on travel and entertainment, resulting in due payments on credit commitments being made to a greater extent. Lastly, the extended low interest rate environment has supported accelerated debt reduction and made access to new credit more affordable.”
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