Report shows top-tier consumers taking strain
• Household finances among these FAS groups are most sensitive to interest rate hikes
Consumers are using credit to navigate the cost of living crisis caused by stubborn inflation and interest rates that remain at a 14-year high.
The TransUnion South Africa Industry Insights Report (IIR) for Q3 2023 showed originations saw the strongest year-on-year growth in personal loans (+7.5%) and clothing accounts (+11.2%).
While new credit card originations declined (-6.3%) compared to the same quarter in 2022, as did retail revolving loans (-10.3%) and vehicle loans (-7.5%), Lee Naik, CEO of TransUnion Africa, says declines in some product originations are likely driven by caution among consumers in the current high interest rate environment.
“However, the increase in originations among below prime consumers may indicate distressed borrowing to meet financial needs,” he says.
Moreover, TransUnion data shows that outstanding consumer credit balances grew 5.6% year on year, with all financial products contributing to the growth, except for bank and nonbank personal loans. The balance growth suggests consumers are increasingly leveraging credit to make everyday purchases.
A more concerning picture emerges when reading below the top-line trends, as the credit active population in the greatest distress are the top-tier earners, who are struggling to service secured loans.
“Of the R2.21-trillion in outstanding debt in SA, home loans and vehicle debt account for more than 80%, with R1.8trillion owed on home loans,” says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa.
Unsurprisingly, Experian data shows that the highest-tier financial affluence segment (FAS) groups — the luxury living and aspirational achievers — are under the most financial distress.
According to the most recent Experian Consumer Default Index (CDIx), these two groups experienced the largest year-on-year increases in composite CDI, increasing from 1.96 in September 2022 to 3.10 in September 2023 for the luxury living group and 3.83 to 5.70 for the aspirational achievers group. This represents a relative increase of 59% and 49%, respectively — the highest for any FAS group.
“Effectively, 13% of the South African population holds 75% of total debt, and household finances among these FAS groups are most sensitive to interest rate hikes due to the quantum of debt they hold in interest rate-linked products.”
Consequently, the Experian Q3 2023 CDIx saw a significant deterioration in first payment defaults on home loans over the period under review.
Similar trends emerged in the TransUnion Q3 2023 IIR, where secured products saw increases in missed payments, potentially caused by higher interest rates and affordability challenges for homes and vehicles, indicating pockets of vulnerability.
According to the report, rate escalations between November 2022 and May 2023 exerted financial strain on consumers carrying certain debt products vulnerable to interest rate increases, pushing them toward delinquency. This is evidenced by a notable uptick in serious account-level and balance-level delinquencies (90 days past due) on home loans seen in the latest TransUnion IIR, which were up 150 and 200 basis points year on year, respectively, in Q3 2023.
“The financial distress in the higher FAS groups is evident in the rise in demand for unsecured lending in these market segments, coupled with an uptick in requests for debt review services among the top two tiers, with the biggest growth witnessed in the luxury living category,” says Van Jaarsveldt.
Despite the demand for unsecured lending, growth in credit card and personal loan origination trended downwards as traditional banks closed the taps on lending.
The TransUnion Q3 2023 IIR shows the average value of new personal loans granted overall declined by 21.5% year on year, a trend attributable to the decreasing share of personal loans provided by traditional banking institutions.
However, nonbank lenders were responsible for 80.4% of new personal loans extended in Q3 2023 — a 2.8% increase from 2022’s corresponding quarter. This trend indicates greater demand among more affluent consumers with higher credit scores, who generally qualify for higher average opening loan amounts. The total number of active credit cards in the market also increased 1.3% year on year. However, origination levels in Q3 2023 were down compared to the same period last year.
Van Jaarsveldt says available market data demonstrates the top end of the active credit population is overexposed to secured and unsecured loans. However, in the tough economic conditions, lenders remain hesitant to increase exposure to more vulnerable lower market segments.