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South Africans and debt – it’s worse than it seems

Data shows consumers using debt to finance living expenses.

MIDRAND – Although the numbers from the Credit Bureau Monitor for the second quarter of 2012 are already painting a bleak picture of South Africans and their debt position, the total debt situation is even worse.

In a presentation to the Joint Credit and Over-indebtedness Summit 2012 in Midrand on Wednesday, Professor Bernadene de Clercq of Unisa’s Personal Finance Research Unit said that just looking at National Credit Regulator (NCR) data does not accurately reflect the picture.

The latest Credit Bureau Monitor shows that of the 19.6m credit active consumers, only 10.38m are in good standing with 9.22m consumers having impaired records. De Clercq said you also needed to distinguish between credit accounts and other non-credit accounts where South African consumers also owe money to services providers. These include municipal accounts, medical accounts, cell phone accounts as well as money owed in school fees.

When it comes to credit accounts, about 75% of these are up to date, when the non-credit accounts are taken into consideration, the percentage drops to around 55%.

Pay serious accounts first

De Clercq said that consumers would rather service credit debt first, where consequences are serious if you don’t pay, than for example paying school fees where the chances are smaller that immediate repercussions will be faced.

“If you can’t pay the dentist, you just change your dentist,” she said.

Charlotte van Sittert of the University of Pretoria Law Clinic highlighted another indication of how much further over-indebtedness stretches in South Africa. She said that once you also look at municipal accounts, the levels of debt increases significantly. In August 2012 National Treasury, for example, released statistics showing that municipalities are owed R76.6bn, of which households owe two-thirds.

Data from the South African Reserve Bank for the first quarter of 2012 show that total household liabilities amounted to R1 378bn, of which 95.9% is consumer credit, with other debt and liabilities adding the final 4.1%. Although this is still a small percentage it makes up 43.4% of the total number of accounts.

Unsecured lending

A lot has been made of unsecured credit extension and the rapid growth in this segment. Although unsecured credit in value remains a small portion of total credit extended, research by Dr Penny Hawkins of Feasibility shows that unsecured credit extended has grown more than four times in the period between 2002 and 2010. In comparison the value of credit on credit cards and store cards has grown 3.2 times and mortgages only 2.1 times.

While it is often argued that unsecured credit is used by consumers to fund education or renovations to homes, data from the Finmark Trust’s FinScope study showed respondents indicating that they use credit firstly to buy food, secondly for personal use and then for transport.

Dr Sabine Strassburg of the Finmark Trust said that this differs from the data supplied by formal credit suppliers, as people do not often tell banks truthfully what they use the credit for.

Speaking on the sidelines of the conference credit ombudsman Manie van Schalkwyk suggested that the fact consumers appear to be using debt to pay-off living expenses is a “major concern.” He agreed that the situation would imply an irrecoverable position of indebtedness amongst such consumers. He added that he was “most frightened” by statistics, which suggested that the number of consumers who sometimes had to go without food because they could not afford it had risen from 21-23% between 2010 and 2011, according to the FinScope study.

When probed on whether the continued deterioration in consumer credit health raised concern that the unsecured market might be approaching bubble territory he said, “of course we are concerned about it, but we should be careful about creating a bubble in the minds of people.” He pointed to the fact that while 47% of consumers has at least one impaired account, 75% of accounts as a whole where in good standing. “If I look at the number of accounts getting repaid I think it’s under control but I do think there is a squeeze (on consumers).”

Of additional worry to him was the fact that consumers are facing increased pressure from a rise in the cost of living.


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