TransUnion, global credit and information management analyst, has released its South African Consumer Credit Index (CCI) report for the second quarter of the year. The index is unchanged from the first quarter, at 54.4.
This indicates a marginal improvement in consumer credit health for the second quarter and the first half of the year compared to 2014, says the group. In addition, there has been an improvement in new account defaults and distressed borrowing levels.
However, while the report shows a number of positive aspects, on-going economic challenges indicate that consumers are still under strain and will continue to feel the pressure in the second half of the year.
The CCI is an indicator of consumer credit health that measures the ability of consumers to service existing credit obligations within the constraints of their monthly household budget. It is based on a 100-point scale, where 50.0 is the break-even level between improvement and deterioration of credit health.
“Any number above 50 in the context of the CCI means that consumer credit health has improved over the past year,” explained Owen Sorour, the senior vice-president of analytic and decisioning solutions. “However, a number under 55 is considered only a moderate improvement. Given that the Q2 CCI is the same as Q1, we can ascertain that credit health has stabilised for the time being.
“The improvement can be attributed in large part to more conservative lending from credit providers. We have seen a drop in the number of credit applications and an increase in the rate of declined applications, and these more prudent lending requirements by providers are paying off,” Sorour said.
“However, despite this promising trend, the future for consumers is not optimistic. In the past few months the exchange rate and instability of the rand have resulted in price increases, and a recent interest rate hike will further contribute to decreased cash flow.”
Fewer defaults, less distressed borrowing
According to the TransUnion payment profile database, the rate of new consumer loan defaults, (accounts three months in arrears) declined by 8.3% year-on-year in Q2, compared with an 8.5% year-on-year decline in the first quarter. The rate of this decline has slowed since late 2014, which indicates that the best phase of improvement in repayment records may now be in the past.
Distressed borrowing shows the amount of revolving credit, such as credit cards and store cards, used by consumers as a percentage of their overall credit limit. Currently, households are using just over 50% of their credit limits, up from around 40% in 2007.
However, while the numbers have increased over the past eight years, for the first time since the third quarter of 2010, the CCI shows the level of distressed borrowing declining on a year-on-year basis. TransUnion data show that revolving credit utilisation fell by 0.3% year-on-year in the second quarter. The trend towards improvement first observed in the first quarter of 2012 continues.
Reduced cash flow
Consumers’ cash flow levels are also down, as a result of a number of factors. The household cash flow measure shows growth in household cash flow fell from 2.6% year-on-year in the first quarter to 1.6% year-on-year in the second quarter.
Price increases on non-discretionary items such as food, accommodation, petrol and other basic necessities have placed strain on consumers, particularly those from lower income groups. In addition, disposable income growth has slowed.
Inflation as a result of the unstable rand, coupled with slow gross domestic product growth, lower salary increases and high unemployment rates are all weighing on consumer cash flow and disposable income. And the Reserve Bank forecasts inflation will keep rising in the second half of the year. As such, household cash flow is likely to come under more pressure as the year continues.
Growth in debt service costs remained stable in the second quarter, increasing modestly compared to the same quarter a year ago, TransUnion says. However, while the benchmark repo rate remained at 5.75% during Q2, the Reserve Bank raised this rate by 25 basis points to 6% in July.
In addition, more rates hikes are likely on the cards to guard against the inflation risks resulting from a weaker rand. This suggests that debt servicing could become a bigger problem in months and quarters ahead.
Implications for consumers and credit providers
Rand depreciation poses a significant risk, as a stronger US dollar and slow domestic economic growth are placing the currency under renewed pressure. A weaker rand raises inflation and interest rate risks, which in turn affects household budgets and can place strain on credit markets.
Ultimately, what the CCI indicates is that the South African economy is struggling to recover from the downturn. In the short to medium term, we can expect pressure on consumers to remain as a result of rising interest rates and constrained cash flow.
“For credit providers, the key message of the CCI currently is to continue with cautious and conservative lending measures,” Sorour said. “It is vital to continue to assess risk accurately and predict the lower risk income earners, in order to keep default levels and distressed borrowing as low as possible.
“The new affordability assessment requirements mandated by the [National Credit Regulator] will ensure more sharing of information around affordability, which will in turn assist credit providers in making improved decisions around lending,” he concluded.
About the CCI
Released quarterly, the TransUnion CCI measures aggregate consumer loan repayment records; tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing; estimates household cash flow as a means of determining financial pressure/relief; and quantifies the relative cost of servicing outstanding debt.
These aspects are then combined into a single numeric score of consumer credit health. The index is compiled by the TransUnion Credit Bureau with technical support from market intelligence firm ETM Analytics.