The cost of living has increased considerably in the aftermath of Covid lockdown restrictions.
Consumers have seen a steep increase in consumer price inflation, a prolonged, increasing trend in fuel prices.
An interest rate upcycle with significantly shorter periods between increases and the highest unemployment rate globally.
The rate people defaulted on their loans for the first time increased in the second quarter of 2022, according to Experian South Africa’s Consumer Default Index (CDI).
The CDI increased quarter-on-quarter, moving from 3.68 in the first quarter of 2022 to 3.80 in the second. Year-on-year, however, an improvement was observed, moving from 4.05 in the second quarter of last year down to 3.80 in the same period in 2022, constituting a relative improvement of 6%.
Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa, said: “This quarterly observation is aligned to the typical seasonal behaviour, where the index increases between March and May, due to credit lending increasing during the Black Friday and Festive season spending spree in the preceding year. However, what remains to be seen is the relative negative contribution the current global financial situation has had, with cost of living increases not experienced in decades, negatively impacting on consumers,” he states.
According to the media statement, retail loans saw a significant deterioration in CDI year-on-year, mainly as a result of the highest post-Covid new business volumes observed during the fourth quarter of 2021. “What is concerning is that this deterioration occurred in a market where new retail accounts opened remain 30% below pre-Covid levels, yet at these lower new account levels, more consumers are showing increasing signs of distress,” says van Jaarsveld.
For vehicle loans, whilst the deterioration was more modest, moving from 4.27 to 4.36 year-on-year, the same early signs of distress in the secured market segment is evident – indicating that no consumers are immune to the broad economic and cost of living distresses experienced in the market.
While there were overall improvement in CDI for the credit card, personal loans and home loans segments, Experian does not expect it to continue into the next quarters as more and more consumers feel the pinch of the current financial environment, especially the significantly higher interest rates,” adds van Jaarsveldt.
What was most interesting of the period under review is that affluent consumers under more financial strain than most, relatively speaking, than their less affluent counterparts. Luxury Living, showed a significant year-on-year deterioration in CDI, whilst year-on-year improvements were observed for Groups 2, 3, and 4 - see table.
Interestingly, Laboured Living, and Yearning Youth, showed significant deterioration in CDI after the improving trend that followed in the two years after the initial Covid hard lockdown conditions. This is, for the most part, related to the meaningful increase in new business volumes that was seen for retail over the 2021 Festive season, with consumers in these segments feeling the immediate effect of higher food and transport prices as the consumer inflation rate continues along its increasing trajectory.
For the credit industry, South Africa’s increasing unemployment rate is particularly concerning – not only from a credit qualification perspective but also from a continued affordability perspective when looking at existing credit consumers.
“The South African market demand for credit since Covid has not only recovered to pre-Covid conditions but has actually been exceeding it since 2021 Q4. This aligns with what we have seen from a macroeconomic perspective, where consumers are under increasing pressure just to make ends meet. However, as lenders continue to enforce more conservative lending criteria, supply of credit remains well below pre-Covid levels, especially in the unsecured lending market, which is a trend that has continued even after the pandemic,” says Jaarsveldt.
In this tough economic climate, Experian advises consumers to manage their budgets carefully and use credit responsibly.
BUSINESS REPORT