New data from consumer credit reporting agency TransUnion shows that despite a decline in new credit supply, credit card balances have risen as lenders in South Africa continue to focus on raising limits for existing cardholders.

TransUnion’s South Africa Industry Insights Report results for Q2 2021 cover a period when unemployment was still rising, but before the unrest in July and the peak of the third wave of Covid-19 cases.

The report shows that a number of trends seen immediately after the Covid-19 outbreak more than a year ago have continued, with a few notable exceptions, particularly when it comes to payment defaults.

Understand the picture of delinquency

The default rates during the pandemic have been influenced by a number of important factors, the credit specialist said. Deferrals, payment holidays, and other lender accommodations have helped borrowers in need. A decline in new debt over the past year since the pandemic began has also shifted the overall ratio of good to bad debts within lenders’ portfolios.

While there is a general increase in total debt, the total number of new loans and accounts has decreased as a result of the decline in lending. This means that while the numerator in the default equation (i.e., existing accounts with defaults) is increasing, the denominator is not growing at the same pace, TransUnion said.

Add other factors that financially troubled consumers choose to repay – e.g. in crime, the group said.

Typically, defaults often followed broader macroeconomic trends such as GDP growth and changes in unemployment.

In the most recent figures for the second quarter of 2021, unsecured personal loans saw a significant increase in defaults at the balance level, despite improvements in most of the major categories of consumer credit – bank personal loans rose 260 basis points and non-bank personal loans 700 basis points year-over-year .

Non-bank personal loan providers can be expected to experience higher default rates as they have historically targeted higher risk consumers who are more likely to default and less resilient to ongoing financial hardships such as those caused by the pandemic. are.

“In tough economic times, finding and funding resilient consumers becomes even more important when it comes to maintaining a healthy portfolio default rate.

“The key is to fuel new credit growth by finding good consumers who are likely to perform within lenders’ target thresholds and in turn can help maintain healthy bad-to-good ratios for longer-term credit growth,” said Carmen Williams , Director of Research and Advice at TransUnion South Africa.

Credit Demand in a Post-Pandemic World

Throughout the pandemic, TransUnion’s data has shown that both consumers (demand) and lenders (supply) have less appetite for new account openings (measured by origins), and this continued into the second quarter of 2021.

“However, as the world economy opens up again and vaccination programs accelerate, the future shape of the consumer credit market will depend on a number of important variables,” it said.

Historically, macroeconomic conditions have been a major driver of credit growth. Consumer sentiment also plays an important role. Although the latest IIR data is for the second quarter of 2021, TransUnion also conducted its regular consumer heart rate study in August 2021, which took place in early July after the unrest and the first peak of the third wave of Covid-19 infections.

This study has identified a number of key trends that are relevant to the potential future demand and direction of the market in South Africa, the credit specialist said.

Just under a third (31%) of South African consumers who expected in August to apply for a new loan or refinance an existing loan within the next year was just under a third. Personal loans (43%) and new credit card applications (35%) remained high on the list, TransUnion said.

“There is still significant turmoil in the South African consumer credit market, with a number of potential new trends, particularly in the area of ​​default. Broader economic and political news continues to affect consumer sentiment and outlook, and this will shape the recovery once it emerges, “Williams said.

“Lenders must constantly monitor changes in consumer behavior and adapt to changing demand and future consumer preferences in order to be successful. There is no doubt that the road to recovery will be bumpy, but if lenders are informed, they have the best possible chance of competing and succeeding. “

Credit card is the only credit product that has seen a high level of sustained decline in lending since the pandemic began (a 23% yoy decline in the second quarter of 2020, 63.2% yoy in the third quarter of 2020, and 48.6% yoy) fourth quarter of 2020 and 42.7% year-on-year in the first quarter of 2021). ). This is mainly due to the fact that lenders are implementing tightened lending policies in the midst of economic uncertainty, said the credit specialist.

Lenders continue to focus on lending to existing customers rather than taking on new borrowers. Average balances increased 17.6% and total credit limits increased significantly by 15.2% while new loan amounts only increased 2.2%.

Outstanding credit card balances (up 10.6% YoY) were driven by consumer needs to balance household budgets, maintain liquidity, and fund subsistence purchases, especially when income was negatively impacted. However, the increases were not evenly distributed and a clear generation gap has emerged.

Younger consumers increased their outstanding credit card balances more than older generations. The year-on-year change compared to the second quarter of 2021 was 9% for Millennials (born 1980-1994), compared to 6% for Gen X (1965-1979) and only 3% for Baby Boomers (born 1946-1964).

Younger generations tend to do more online transactions and the usefulness of a credit card is fundamental to this activity. Credit card account defaults were down 50 basis points (bps) from their peak in Q2 2020 and were 12.3% in Q2 2021, at the same level as Q2 2019.

This improvement provides further evidence that credit card holders protect and value the revolving functionality of this product, TransUnion said.

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