Consumers that have already defaulted on payment obligations are likely to face a tougher time to pay off their debt.
A Consumer Credit Rehabilitation Index (CCRI) launched by Transaction Capital shows the rehabilitation prospects of consumers already in default positions fell 1.1% year-on-year in the second quarter of 2017.
The index is based on a random sample of more than five million consumers in credit default listed on Transaction Capital Risk Services’ (TCRS) internal database. TCRS, one of the country’s largest recovery agents, collects on a host of non-performing loans valued at R29 billion on behalf of banks, credit retailers, specialist lenders and telecommunications companies among others.
Data from the National Credit Regulator (NCR), shows there are 24 million credit active consumers in South Africa of which 9.8 million are considered non-performing or in default. As such, TCRS’ sample is reflective of more than 50% of credit active consumers that are in arrears, said David Hurwitz, chief executive of Transaction Capital.
“Credit rehabilitation is often overlooked as a crucial element towards growing an inclusive economy as it allows consumers to fully re-enter the mainstream consumer market through access to conventional finance. Simultaneously, it allows lenders to maintain a cleaner balance sheet to continue extending credit at affordable costs,” explained Hurwitz.
He went on to say that a deterioration in the national index is largely linked to a record-high unemployment level of 27.7%, the rising cost of household essentials as well as high levels of household debt-to-disposable income, all of which reduce the amount of money available to repay debt.
At a regional level, the propensity of indebted consumers to repay debt decreased in eight of the nine provinces. The Western Cape was the only province to show an improvement, registering an annual increase of 4.8%. Down by 16%, conditions in the Free State deteriorated the most while Gauteng was flat at -0.2%.
Source: Transaction Capital
As the index is new, Transaction Capital does not have a definitive answer as to why the Western Cape bucked the trend. However, it believes that consumer credit rehabilitation prospects in the Western Cape are higher as the province is more urbanised and has a lower unemployment rate than the other provinces.
The results appear to be in line with the expanded unemployment rate and labour force participation rate data in Statistics South Africa’s latest Quarterly Labour Force Survey.
Labour Market Measures: Q2 2017
Source: Statistics South Africa
Although debt-to-disposable income levels gradually improved from to 73.2% from 86% some three years ago, South African consumers still rank among the most highly-leveraged in the world. Hurwitz said the improvement is largely due to a slow down in the pace of debt growth rather than an absolute decline in household debt. He added that the recent 25 basis point cut in interest rates by the South African Reserve Bank may only contribute to a moderate improvement in households’ debt servicing burdens.
“There are currently no longer-term signals that a meaningful correction is on the cards and we believe that a gradual deleveraging of the consumer will prevail.”
He said consumers that show an intent to settle debt by establishing and sticking to regular repayment patterns are more likely to have a portion of their debt paid off. The NCR’s legal framework with respect to debt review can also help indebted consumers see “light at the end of the tunnel” in that it allows for loan terms to be lengthened and interest rates to lowered, he added.