South Africans choking on debt
South Africans are increasingly using debt to fund consumption, a worrying sign for lenders, which are increasingly selling loans to boost earnings to ward off competition from digital newcomers.
IT’S A TYPE OF LEVERAGING THAT IS NOT HEALTHY FOR THAT MARKET ... AS A PROPORTION TO THEIR INCOME IT IS VERY EXPENSIVE
More South Africans are using debt to fund their consumption, which comes as a worrying sign for lenders that are increasingly selling loans to boost earnings to ward off competition from digital newcomers.
Recent figures from the Reserve Bank, TransUnion, the SA Savings Institute and the National Credit Regulator (NCR) raise a red flag about the increasing debt burden South Africans are taking on, the lack of household savings and the increasing number of people seeking debt counselling.
The warning signals come as traditional brick-and-mortar banks prepare to take on digital newcomers such as the Patrice Motsepe-backed TymeBank, which is working on a competitive new credit offering to entice consumers to take on debt.
They also come four years after African Bank collapsed under a wave of unpaid consumer loans, prompting the Reserve Bank to step in with a bail-out package to avert a wider system shock.
However, SA’s household debt is at a dangerously high level of about 73% of disposable income, according to the Bank, while recent data from the National Credit Regulator showed that about 10-million people, or 40% of credit-active consumers, have impaired credit records.
This means that they are more than three months in arrears or have adverse listings and judgments against them. “It
does look like a ticking time bomb, but we don’t know how long it will tick for,” Citibank economist Gina Schoeman said.
The biggest problem facing the industry and the regulator is keeping the growth in unsecured lending in check.
Unsecured loans are not backed by collateral and are therefore riskier for the bank and more expensive for the borrower.
A study by consumer credit reporting company TransUnion showed unsecured loans rose 11% in the first quarter of 2019 — the only type of credit to have shown a year-on-year increase
as consumers used credit cards and personal loans to buy clothing and pay their store credit cards.
The NCR also found that the value of unsecured credit in SA was more than three times that of developmental debt, which is used for developing small businesses, paying for education or building low-cost housing.
Unsecured debt accounted for nearly R200bn, or 11%, of outstanding debt extended to consumers. This was the fastest-growing of all credit products granted in 2018, jumping 24% while developmental credit shrank 27%.
Banks can charge interest largely pegged to the 10.25% prime rate for loans with collateral, but unsecured credit can return as much as 25%.
Unsecured credit is popular with low-income households, many of which lack assets to put up as security for loans.
This underlines SA’s apartheid legacy as millions of black South Africans still live in poverty and are unable to find employment.
“It’s a type of leveraging that is not healthy for that market because as a proportion to their income it is very expensive. It’s also a market that is susceptible to job losses,” said Schoeman.
Companies that have announced retrenchments in 2019 include mining groups Sibanye Stillwater and Alexkor, MultiChoice, construction company Group Five, Absa and Standard Bank.
Schoeman said that the debtto-income ratio more than doubled for households with income of less than R8,000 a month, rising from about 25% in 2008 to about 65% in 2016.
For households with monthly income of R9,000-R25,000, the debt-to-income ratio rose from 50% to 80% over this period.