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BusinessDay www.businessday.co.za Thursday 25 February 2021
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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.