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BusinessDay www.businessday.co.za Thursday 25 February 2021
INSIGHTS
CREDIT MANAGEMENT
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Consumers, households under pressure
Credit demand is improving, but •lenders will continue to tighten loan criteria, writes Pedro van Gaalen
T
he Covid-19 pandemic’s economic impact unleashed the perfect credit storm, affecting consumer creditworthiness, affordability, demand and access. “The continued impact of a worsening general economic environment in SA, along with the pandemic’s impact and additional macro forces, such as rising unemployment and a lack of economic growth, has significantly impacted consumers’ ability to repay debt,” says Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian Africa. The latest TransUnion Financial Hardship Survey in South Africa showed that 82% of South African consumers reported their household income was negatively impacted by Covid-19. Serious-level delinquencies (accounts three or more
payments past due) increased across all major consumer credit categories as consumers continued to experience financial stress. And concern among impacted consumers about their ability to pay their bills and loans remains high at 84%, according to the survey. Credit products remain the bills and loans consumers most often indicate they will be unable to pay, with personal loans (37%), retail/clothing store accounts (32%) and credit card bills (32%) ranked in the top three. Experian data reveals other changes to credit repayment trends where, before Covid-19, consumers prioritised their secured payments over unsecured payments. “However, a change is evident after April 2020, when consumers started missing payments on their secured products and began to repay their unsecured products,” says
Carmen Williams … dynamics. Van Jaarsveldt. “This could be a factor of consumers being able to repay smaller credit commitments and not larger commitments, such as home loans or vehicle asset finance. Consumers started to prioritise secured lending payments again after July 2020 as many payment holidays matured and deferred payments ended.” Demand for credit also declined by double-digits across all the major consumer lending categories in Q3 2020. TransUnion attributes this
trend to “a reduced appetite for new credit reflecting increased unemployment and high levels of financial hardship”, as well as low consumer confidence, despite eased lockdown restrictions and a rise in economic activity. The report also cited level 5 and 4 lockdown regulations, which restricted physical access to locations to apply for credit, particularly retail stores, as an additional factor. Supply-side constraints have also added to the Covid-related credit crunch, despite ample market liquidity. Prevailing economic conditions have weighed on credit origination as lenders continue to adjust their risk appetite, modify their underwriting models and retain a cautious approach to credit extension. As a consequence, originations (measured by new accounts opened) fell by double digits year on year for all major consumer credit categories, according to the TransUnion report. The decline in Q2 2020 volume was most pronounced for clothing accounts — down 69.4%. Credit cards were least
Jaco van Jaarsveldt … indicators. affected (-23.1%), primarily due to their utility during the lockdown. Consumers relied on cards as a payment and purchase mechanism to complete online transactions, says the report, which correlates with the e-commerce boom experienced in lockdown. “These results show the changing dynamics of both the demand and supply sides of credit,” affirms Carmen Williams, director of research and consulting for TransUnion South Africa. While predicting the extent
Helping clients understand their customers in times of disruption. www.experian.co.za
of the pandemic’s economic impact remains largely unknown and difficult to quantify as the country remains in lockdown, consumer credit demand has already shown signs of recovery in 2021. “Through tracking and analysis of the emerging patterns in the credit and related industries, we see early indicators of what is to come over the next few months,” continues Van Jaarsveldt. “Overall, we have seen the number of consumer enquiries for additional credit has recovered to pre-lockdown levels, even slightly exceeding the levels observed over the same period in 2020.” Experian’s Consumer Default Index for Q4 2020 also
showed an improvement after reaching an all-time high of 5.93% in July 2020. The index improved from the 4.67% registered in Q3 to 4.07% in Q4 2020. “The improvement can primarily be attributed to a combination of the impact of payment holidays applied by most lenders, especially on never before delinquent accounts, as well as the significant reduction in the volume of new accounts opened since the onset of the Covid-19 pandemic with the majority of lenders tightening their lending criteria and new credit exposure,” explains Van Jaarsveldt. However, while demandside drivers stage a recovery,
supply-side factors will take longer to normalise. “The crisis has forced lenders to take more considered and differentiated views in their exposures,” says Mauro Longano, Head of Fixed Income Research & Portfolio Manager at Coronation Fund Managers. Lenders will continue to tighten their loan criteria, despite the South African Reserve Bank’s and National Treasury’s concerted efforts to ensure there is sufficient liquidity in the monetary system to support credit extension. “Unfortunately, lending still requires confidence, and this will take longer to filter through as growth improves and a vaccine deployment strategy is formulated,” says Longano.
Credit challenges loom Salary cuts and job losses due to the struggling economy and lockdown restrictions that continue to curtail trade have stretched consumer finances. In response, the government provided consumers with financial assistance through unemployment benefit programmes, while lenders offered repayment holidays and deferrals. “South African banks responded to the crisis by approving more than R30.6bn in relief to affected individuals and businesses as at July 7 2020, according to the Banking Association of SA,” says Gareth Levinsohn, Commercial Director at specialist collections agency Shapiro Shaik Defries and Associates. And these efforts had a measurable impact, according to market research conducted by short-term loan provider Wonga. By analysing data gathered during loan applications, Wonga identified a drop in loan dependency during lockdown. “Since July 2020, we have noted an 18% decrease in customers who applied for a Wonga loan with more than one other payday loan active on their bureau record,” explains Bryan Smith, Content Manager at Wonga. “There was also a 32% reduction in applicants who held more than one short-term loan with another lender.” However, as these initiatives end, numerous South Africans will find themselves without
any form of financial relief. “Many bank clients benefited from multiple payment relief measures running across different products, all activated at different times and potentially all with varying terms and conditions,” explains Levinsohn. Consumers will likely rely on a mixture of traditional and alternative secured and unsecured credit to meet any financial shortfalls, which could lead to greater overindebtedness. “For good, creditworthy clients with low loan-to-value ratios, banks can re-advance their facilities,” suggests Gary Palmer, CEO at Paragon Lending Solutions. “But with properties losing value in real terms, banks remain conservative. And without sufficient equity in a house or vehicle, a bank may decide to exit that deal.” Banks willing to extend unsecured and personal loans may add a risk premium in
Gareth Levinsohn … adapt.
response to a greater potential for defaults. “This creates a space for credible reputable, alternative lenders to enter the market to offer innovative financing solutions,” asserts Palmer. “However, the concern is that vulnerable and desperate consumers will turn to microfinanciers and alternative lenders in the unsecured lending space that are not registered with the National Credit Regulator and apply reckless lending criteria.” Lenders could also experience potential challenges related to collections on deferred debts or new loans amid the ongoing financial strife. “For at least the next 12 to 18 months, the financial services sector will need to implement a more considered and customer-centric collections and recovery approach,” explains Levinsohn. The landscape for traditional collection practices has also changed dramatically, with factors to consider from both a legislative and an ethical perspective. “Financial services providers and their outsourced collections partners will likely need to adapt their relationships to the new landscape and strike the right balance by acting in the customers’ best interests given their individual circumstances, while also collecting outstanding debts to protect financial services providers and the sector’s integrity,” says Levinsohn.
Working capital is critical Extended lockdown restrictions, reduced consumer spending and rising input costs have negatively impacted business cash flows. The ability to access credit has become critical to sustaining companies through this economic crisis. “When the crisis began, most institutional lenders increased their liquidity buffers to protect against future uncertainty and adopted a wait-and-see approach. These factors had a significant impact on access to credit for corporates,” says Trevor Rolfe, Head of Debt Solutions at Addendum Financial Technologies. “However, almost all large institutional lenders recognised the important role they play in the economy and have shown a willingness to support corporate SA in these difficult times, even more so among corporates that had a preexisting funding relationship.” This was evidenced by the volumes facilitated through the Addendum Funding Solutions Platform, with more than R4bn raised from institutional funders over the past nine months to
support local corporate clients. However, accessing credit and funding to address cash flow constraints is proving more challenging for new clients and small businesses. Many lenders continue to take a cautious approach in the prevailing high-risk environment, despite historically low interest rates. “Credit providers have to adapt their credit and risk models in response to these unprecedented times,” explains Daniel Moritz, chief financial officer at Merchant Capital. “Applying historic lending criteria in this environment would preclude many businesses from accessing capital due to the short-term disruptions to their cash flows.” Moritz believes legacy credit risk models need to be reassessed in these times to address the needs of good businesses experiencing shortterm pressure. “While it is important to provide struggling businesses with access to working capital to sustain them through the crisis, lenders must ensure they
can generate adequate future cash flows to service repayments over the long term,” continues Moritz. Says Hazel Banach, Product Head at Investec for Business: “A multifaceted assessment of the company is necessary to understand the business operation before, during and after the lockdown. Lenders must also work with owners and management to understand forecasts and growth prospects. “When assessing risk in this environment, lenders need to differentiate between an interim financial impact and a fundamental deterioration in the financial health of a business,” suggests Banach. “Tailored lending solutions should serve as business enablers by allowing companies to access the right type of funding at the right stages in their business cycle. This will help them weather the current challenging operating environment and provide ‘headroom’ to grow in step with the economic recovery and beyond,” she says.
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BusinessDay www.businessday.co.za Thursday 25 February 2021
INSIGHTS: CREDIT MANAGEMENT
Tech is vital for recovery
Rebound and •growth hinge on
investment in digital innovation and automation
A
s SA navigates its way through the pandemicinduced economic crisis, technology will play an important role in the recovery. For instance, financial services providers rely on data analytics and business intelligence solutions to gain insights into the current market. According to Experian research, 43% of decisionmakers currently struggle to get a complete picture of indebtedness or identify financially at-risk customers. Faced with the potential for a spike in nonperforming loans, financial overcommitment and defaults, more than four out of five CEOs reported increasing or retaining their technology investments aimed at improving customer insights. “The crisis has emphasised the importance of using trended data and advanced analytics to anticipate when a customer is going to face difficulty in meeting payment obligations,” says Carmen Williams, director
Ferdie Pieterse … effectiveness. of research and consulting for TransUnion South Africa. “By taking action early, lenders can give consumers the support they need while also effectively managing the risk in their portfolio.” Based on Experian’s research, a significant proportion of lenders also understand that going back to pre-pandemic operating models will constrain growth as the economy recovers. “Commercial resilience, rebound and growth hinge on investment in digital innovation, insight and automation,” says Ferdie Pieterse, CEO at Experian Africa. Unsurprisingly, 78% of decision-makers surveyed in the Experian research ranked accelerating digitisation strategies and broader online channel adoption as priorities.
However, the pandemic has highlighted critical gaps in the sector’s ability to deliver effective digital journeys. “Despite past investments, many decision-makers admit their effectiveness at engaging online customers has not improved sufficiently during the past two years and is not keeping pace with customer expectations,” says Pieterse. “The pandemic exposed the need for lenders to enhance digital channels and re-engineer customer journeys, both for general account servicing and applications,” adds Williams. Embracing advanced digital front-end and onboarding solutions would simultaneously address the challenges of rising online fraud targeting consumers. TransUnion’s latest Consumer Financial Hardship surveys found that digital Covid-19-related fraud schemes targeting local consumers increased 17 percentage points between April and October 2020 — 42% of respondents reported being targeted. However, while businesses must protect their customers and themselves, technological solutions should not create friction within the customer experience or create barriers to entry. “Despite consumer demand for a smooth user experience on digital channels, traditional fraud
Lenders keep taps open The Covid-19 pandemic hit SA as the country was grappling with ballooning debt, low economic growth and numerous structural issues. According to Nishan Maharaj, Head of Fixed Income at Coronation Fund Managers, the government’s public sector borrowing requirement doubled in 2020 and will remain high over the next few years. “Current estimates suggest SA’s debt burden will border on 100% of GDP in the next five years. Debt servicing costs will account for almost 6% of GDP and will be the fastest growing line item in government expenditure, using up about a quarter of collected tax revenue,” he explains. However, SA needs access to capital to support productive government expenditure, as we navigate through this crisis. While debt funding is necessary, government needs to be more
26%
of South African adults cannot access credit because they have never built a credit history by leveraging a financial product
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in every 400-500 B2B credit applications is fraudulent, according to estimates, which means companies must invest additional resources to verify new account applications
conservative in its approach to borrowing. “This pace of debt accumulation and servicing is unsustainable and puts SA on the precipice of a debt trap. More importantly, government must redirect expenditure towards areas that boost growth, otherwise tax revenue will remain subdued, which will push the country into a debt spiral,” adds Maharaj. Conversely, lenders will need to balance risk without constraining access to vital funding lines. “Fortunately, banks have put away provisions for a rainy day and are well capitalised. This is reflected in Fitch’s decision in December to upgrade South African banks’ national ratings to ‘AA+’ with a stable outlook based on an improvement in their creditworthiness,” explains Paragon Lending Solutions CEO Gary Palmer. “Aside from sovereign risk,
Fitch believes the banks have significant headroom to withstand current pressures on the operating environment.” This fiscal prudence positions banks favourably to assist consumers, businesses and the government and keep capital flowing through a distressed economy. “Also, banks and nonbank lenders are in the business of lending. If their margin and top line stops growing, lenders will be forced to cut bottom-line expenses, which means people. Banks and nonbank lenders also can’t afford to start putting everybody into default and selling assets to claw back bad debt. The economy and the country’s citizens are already on their knees,” continues Palmer. As such, financiers will likely keep the lending taps open. “However, they will be more careful about who they lend to and will ask much tougher questions,” says Palmer.
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Christelle Rall … create a path. detection and prevention solutions tend to negatively impact that experience,” says Keith Wardell, director for product at TransUnion Africa. “Finding the balance requires a digital onboarding process that delivers a friction-right experience, while increasing conversions and loyalty, reducing fraud and improving operational efficiencies.” Technology will also play a pivotal role in rebuilding SA’s credit-active consumer market. For example, consumers who don’t have an established credit history often don’t qualify for credit. TransUnion estimates nearly 26% of South African adults cannot access credit because they have never built a credit history by leveraging a financial product. “Leveraging alternative data to open the door to ‘thin file’ and ‘credit invisible’ consumers has become an essential growth strategy for creditors in a stagnant market, while
maintaining the ability to grow their books responsibly,” says TransUnion Africa’s CreditVision Product Manager Christelle Rall. “The Covid-19 crisis requires lenders to reconsider how they assess credit risk. Including nontraditional variables, new policies and alternative data will support their risk assessment processes and enrich decisions across the entire credit life cycle,” says Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian Africa. “Ultimately, this data-centric approach will drive greater access to credit for consumers, alongside profitable growth for lenders through more informed lending decisions.” Decision makers also plan to invest in industry 4.0 technologies to drive additional growth, reveals Experian’s research. More than half of respondents are proactively planning to “markedly increase” their investment in artificial intelligence and machine learning within the next three years to help drive growth. “Automation across all commercial functions emerged as another critical challenge that will likely receive additional focus as the sector’s recovery gathers steam,” says Pieterse. “We need every tool at our disposal to contribute to lifting South Africans out of financial hardship and creating a path toward an economically prosperous future for the country,” says Rall.
Trade credit providers caught in perfect storm Trade credit providers are feeling pressure from multiple fronts amid an economic downturn, increased fraud and a lack of cover from credit insurers due to the pandemic. Trade credit facilitates billions of rands in transactional value annually as businesses extend credit to their customers, usually on a shortterm basis, to support trade. “The average business-tobusiness (B2B) credit transaction is almost R1m,” explains Frank Knight, CEO of Debtsource. “As such, a default by a debtor poses a significant business risk and would negatively impact cash flow and profitability.” The tough trading conditions experienced in 2020 raised the spectre of rising defaults as businesses grapple with significant losses in revenue and turnover. Numerous businesses have already ceased trading. “As these market risks persist, businesses must remain cautious when extending trade
THE TOUGH TRADING CONDITIONS OF 2020 RAISED THE SPECTRE OF RISING DEFAULTS AS BUSINESSES GRAPPLE WITH LOSSES IN REVENUE AND TURNOVER
every 400-500 B2B credit applications is fraudulent, which means companies must invest additional resources to verify new account applications.
PREMIUM ESCALATIONS
Frank Knight … remain cautious. credit.” However, every declined credit transaction affects turnover and constrains business growth. “Based on research conducted on 50,000 B2B credit transactions over the past 12 months, the average decline ratio spiked to 33%, which is almost double the ratio seen in 2019,” says Knight. The rise in fraudulent trade credit applications, known as commercial identity theft, is an additional concern that constrains business growth. “When fraudsters receive the goods, it becomes impossible to recover the debt due to falsified identify and contact information obtained during the research process,” explains Knight. It is estimated that one in
And a hard market in trade credit insurance is yet another element in the credit storm. Trade credit insurance providers implemented significant premium escalations over the past 18 months to cover business’ credit transactions. “Some clients have seen insurance costs increase by as much as 40% compared to early- to mid-2019. In certain higher-risk industries with high claim ratios, insurance policies have been cancelled altogether.” Insurers have also become significantly more risk averse, with most of SA’s trade credit insurers substantially tightening their underwriting criteria.
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“The overall effect is less coverage and higher costs. That means companies have to take on more risk to continue providing trade credit to new or existing customers.” Ultimately, businesses that can’t grant credit facilities to their clients experience reduced turnover, increased costs, more risk and cash flow pressure. “Without redress, this could lead to more business closures, job losses and further credit market strain,” says Knight.