A new report from consumer credit reporting agency, TransUnion, reveals that consumer demand for credit remains high, with outstanding balances increasing across all major credit categories when compared to the same time a year ago.
This increase in borrowing levels is likely driven in part by the current challenging economic conditions and the need for consumers to use credit as a means to help finance day-to-day expenses as well as larger ticket purchases, it said.
Delinquencies have risen for most credit products over the past year, as volatile economic conditions and continued weak household income growth appear to be putting a strain on household finances.
In addition to the increase for non-bank personal loans noted above, the serious delinquency rate for bank personal loans increased by 310 basis points (bps) over the past year to 24.8% in Q1 2019.
“Of particular concern is the continued increase in delinquencies for secured products, including home loans and vehicle finance.
“This is the third consecutive quarter that home loan delinquencies have increased, up 60bps YoY to 4.0% in Q1 2019, while vehicle finance delinquency rates also continue to climb, up 70bps to 5.2%,” TransUnion said.
It noted that delinquency rates for secured products tend to be far lower than those of unsecured products like personal loans and credit cards, particularly given that lenders focus much of their originations on lower-risk consumers. “But the steady rise in delinquencies for secured products over the past year indicates that even consumers in the lower-risk credit tiers are not immune to the current economic challenges.”
Exception to the rule
The exception to the trend of rising delinquencies is credit cards, which saw serious nonpayment rates actually improve YoY in Q1 2019, down 130bps to 12.6%.
In light of economic uncertainty, consumers may be protecting their credit cards to a greater extent in order to maintain access to this most liquid form of credit for future use.
TransUnion South Africa recently published a study looking at the payment hierarchy for consumers with multiple products in their wallet, to understand which products they are likely to protect, and which they are more likely to stop paying, in the event of economic distress.
The study found that consumers are more likely to prioritize their credit cards ahead of other unsecured products, including non-bank personal loans and retail accounts.
This relative prioritization of credit cards speaks to future utility of credit cards for consumers experiencing financial difficulties and their desire to preserve access to their cards.
“With inflation still well above average wage growth, real household incomes continue to fall. This is the second consecutive quarter we have observed this trend for delinquencies – i.e. rising across all categories except for credit cards,” said Carmen Williams, director of research and consulting for TransUnion South Africa.
“It’s fair to say the magnitude of the recent drop in GDP – negative 3.2% for Q1 2019 – caught many by surprise, but the weakness we have seen in other economic indicators, including unemployment and wage growth, have been putting pressure on consumers’ personal finances for some time.
“In light of this, we have seen consumers increasingly using credit, possibly to finance day-to-day living expenses, and are prioritising the payment of credit cards – a product they perceive to be of greater future utility.”
It said that the most recent GDP figures could cause further concern and may prompt lenders to reflect and adjust their credit portfolio strategies as a result, TransUnion warned.
“Lenders will continue to observe key economic performance measures like the rate of unemployment closely.
“Many had already started to change their underwriting criteria and rebalance their portfolios in anticipation of continued uncertainty.
“It is important for the market to remain calm and not to have an adverse reaction to the continued economic headwinds,” Williams said.
|Product||Serious Delinquency Rate||YoY % Change in Delinquenc y Rate|
|Credit card||12.6%||-130 bps|
|Bank personal loans||24.8%||370 bps|
|Non-bank personal loans||24.4%||610 bps|
|Home loans||4.0%||60 bps|
|Vehicle finance||5.2%||70 bps|