The national credit regulator (NCR) has warned that consumer indebtedness may worsen as the unwinding of payment holidays and debt-relief measures introduced in the midst of the Covid-19 pandemic forces borrowers to start repaying their debts.
In a Monday statement warning consumers to be wary of taking on too much debt, ahead of events such as Black Friday and the festive season, the NCR revealed that 10.07-million South Africans have impaired credit records. That equates to 38.41% of 26.22-million credit active consumers, with 16.14-million, or 61.59%, in good standing.
While the level of overall consumer credit impairment has been fairly stable at below 39% since the end of the first quarter of 2020, the NCR says this is probably due to debt repayment holidays introduced during the pandemic. In the final two quarters of 2019 the percentage of consumers with impaired credit records was almost 43%, compared to a high of 45.1% in June 2015.
“Now that payment holidays have come to an end from most credit providers we suspect that, taking into account unemployment numbers going up and companies reducing their staff complement due to the pandemic, it will start increasing,” said Bongani Gwexe, supervisor of NCR research and statistics. “We don’t know how much that increase might be but we will be monitoring it over the next few quarters.”
The NCR defines an impaired credit record as one where a consumer is three or more months in arrears on debt repayments or has an adverse credit listing that reflects a judgment or administration order due to outstanding debt. Consumers one or two months in arrears are not yet counted as impaired by the NCR, meaning the total number behind on their debt repayments is likely to be considerably higher.
The latest DebtBusters index for the third quarter of 2021 shows debt levels are deteriorating as many consumers turn to unsecured credit to supplement their incomes. The quarterly index shows real incomes have shrunk almost a quarter over the past five years while the average debt-to-net-income ratio of consumers is now at 116% across all income bands.
While DebtBusters specialises in assisting consumers with managing their debt before they become impaired, the debt review company says it is seeing consumers increasingly turning to unsecured loans to counter the erosion of their real income. Though the average rate of arrears is between 1.2 to 1.3 months, COO Benay Sager said the size of unsecured loans is 25% higher on average than in 2016.
“It’s a trend that we’ve seen intensify over the past few years,” Sager said. “With no meaningful increase in real income, consumers continue to turn to unsecured credit to supplement their pay cheques.”
Unsecured debt accounted for 45% of the total debt under management by DebtBusters while home loans made up just under one-third. The remaining 23% comprised vehicle and asset finance.
Although unsecured debt is the main loan type DebtBusters deals with, mainstream commercial banks are the dominant creditor of consumers who turn to it for assistance. Banks accounted for 67% of the loans managed by DebtBusters at the end of the third quarter, with the rest supplied by retailers and unsecured lenders.
While the NCR is more focused on debt that is three months or more in arrears, as opposed to the typical DebtBusters’ customer who is only about six weeks behind on repayments, the regulator confirms that commercial banks are usually the first port of call for consumers who end up in arrears. That would suggest that smaller microlenders and loan sharks are lenders of last resort rather than the main cause of credit impairments.
“Most people start borrowing from the main lenders and the more loans they get, the more likely they are to start moving to smaller lenders,” Gwexe said.
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