Business Day Credit Management Insights (February 24 2022)

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BusinessDay www.businessday.co.za Thursday 24 February 2022

INSIGHTS

CREDIT MANAGEMENT

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Consumers to bear brunt of interest rate hikes

Households •must allow for

additional expenses, writes Pedro van Gaalen

A

s the South African Reserve Bank moves to quell rising inflation by raising interest rates, the next few years promise to be volatile for credit markets.

While rising rates are a positive indicator of a strengthening economy, explains Ayanda Ndimande, Strategic Business Development Manager: Retail Credit at Sanlam, it is ultimately the consumer who bears the brunt.

“Interest rate hikes are unfortunately always to the detriment of the consumer, especially when it comes to bigticket items such as home and vehicle loans. A rise in 25 basis points could mean the difference of a few hundred rand or more each month, depending on the initial debt.”

The bank started its latest rate-hiking cycle in late 2021, raising the repo rate by 25 basis points in November, with more hikes set for 2022.

“South African households had an average debt to disposable income ratio of 76% following the rate increase in November 2021, and the latest

Ayanda Ndimande … difference. increase could push this as high as 77%,” explains Weihan Sun, Director of Research and Consulting at TransUnion Africa.

The impact on already overindebted consumers and businesses battered by the Covid-19 pandemic’s economic fallout will likely have significant implications for access to credit and creditworthiness.

Berniece Hieckmann, Head of Metropolitan GetUp, believes many consumers could find themselves in challenging financial positions amid rising interest rates due to the lending environment the pandemic created. “In some cases, consumers who had a good credit record prior to lockdown might have applied for credit in the low interest rate environment to get them through any financial difficulty.

In turn, credit providers may have been more willing to

extend credit based on the client’s unblemished credit record and historic cash flows.”

Now, with income and employment levels yet to return to pre-pandemic levels, Hieckmann believes consumers could face increased risks in serving the debt secured to tide them over during the pandemic.

TransUnion’s Q4 Consumer Pulse Study showed that among consumers who said their household income is currently impacted, 85% remained “highly concerned” about their ability to pay their bills and loans.

“The period of rising interest rate cycles we’re moving into increases the cost of money and introduces additional expenses to the consumer wallet without a corresponding increase to their income. This development could impact the demand and supply characteristics of the market,” says Sun. Brett van Aswegen, CEO of Wonga, adds that rising interest rates also means an increase in the cost of interest for the credit provider and credit consumer.

REPAYMENT STRESS

“Unfortunately, the credit consumer is unable to pass on this additional cost, which means, for many, the higher monthly repayment can lead to repayment stress and an increased risk of defaulting on credit agreements.”

Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian, explains that middle and upper-class consumers will

Chris Ogden … impact. likely experience the greatest distress in response to rising interest rates.

According to the Experian Q4 Consumer Default Index (CDI), pockets of financial distress have emerged in the local market, particularly in those segments with the greatest exposure to secured lending products.

For example, data from the report shows that defaults in the most affluent consumer group, the Luxury Living segment, deteriorated 7% on a year-onyear basis.

“This group has access to the greatest quantum of secured and unsecured credit in the market. Those who were already in financial distress when the latest interest rate hiking cycle started will struggle with affordability as even a 50 basis point rise adds significantly to their repayment

obligations,” says Van Jaarsveldt.

“And when credit starts getting more expensive before affordability normalises, the credit bubble created by the pandemic’s unprecedented demand and supply dynamics could pop. If this happens, consumers will face further pandemic-triggered financial hardship,” adds Hieckmann.

Faced with these risks, Ndimande recommends that consumers review and adjust their household budgets.

“Allow for the additional expense that comes when interest rate hikes increase repayments on their credit purchases. It is vital to ensure they can still afford to service their credit payments.”

More broadly speaking, credit providers will also likely feel the impact of rising interest rates, suggests Chris Ogden, the CEO of RubiBlue.

“While rising interest rates mean more revenue, the likely rise in defaults will impact the business. It also remains to be seen if providers will attract more loans in a lending environment where consumers are under financial pressure and cannot afford the repayments,” he concludes.

Covid-19 spurs rise in cybercrimes: report Cybercriminals are using the pandemic to exploit consumers and business owners, many of whom are desperate to access capital and credit amid the cash crunch brought about by stringent lockdowns and the economic slowdown.

With people spending more time online while working, shopping and schooling remotely, Covid-19 has given cybercriminals a unique opportunity to exploit new vulnerabilities, which has helped fuel what experts are calling the “cybercrime pandemic”.

According to the 2021 Cybercrime in a pandemic world: The impact of Covid-19 report by McAfee and FireEye, 81% of global organisations experienced an increase in cyber threats, while 79% experienced costly downtime due to a cyber incident during the pandemic, mostly during

THE PRIVATE AND PUBLIC SECTORS ARE COLLABORATING TO MITIGATE THE RISK POSED BY THE THREAT OF IDENTITY THEFT AND OTHER FORMS OF CREDIT FRAUD

creditworthiness in the context of the crisis.

Furthermore, the report highlights that individual business models, even those within the same subsector, may differ in their suitability to survival and a faster recovery in the current environment. In

addition, analysing businesses on historical data has also became misleading.

As such, lenders can no longer assess credit risk using traditional approaches alone as many conventional data sources typically used have became obsolete.

In this regard, the report states that the unique features of the pandemic-triggered crisis have prompted lenders to build digital intelligence capabilities such as real-time data and analytics into their creditdecision engines to make more informed decisions.

peak season.

Among consumers, the African Cyberthreat Assessment Report 2021 published by the International Criminal Police Organisation (Interpol) identified online scams as one of the most prolific threats.

The modus operandi used in these attacks involves using fake emails or text messages claiming to be from a legitimate source to trick individuals into revealing personal or financial information.

In response, the private and public sectors are collaborating in various ways to mitigate the risk posed by the rising threat of identity theft and other forms of credit fraud.

From a credit provider perspective, Chris Ogden, CEO

BIOMETRICS

“More recently, there has been a shift towards biometric account security such as facial recognition, fingerprinting and voice recognition.”

In this regard, there has been a commitment from government departments and agencies to combat cyberfraud, affirms Van Aswegen.

“For instance, the department of home affairs opened up its database to vetted third parties, which enables them to do comparative facial recognition.”

Borrow for the right reasons

Lenders adjust their risk thresholds A combination of rising inflation, tepid economic growth, record unemployment and higher interest rates will continue to constrain lending in the local market as credit providers tighten their loan criteria and closely vet creditworthiness among increasingly financially distressed consumers and businesses.

“Compliance is playing a significant role in the financial services sector. Clients are vetted deeply when it comes to loans,” explains Chris Ogden, CEO of RubiBlue.

“Credit providers need to protect their loans by ensuring they do their homework on a consumer first. It is a delicate battle but compliance dictates the rules, and providers interpret these rules to suit their business risk appetite.”

While the methods used to assess creditworthiness have not changed, in an already overstressed credit environment many credit providers have adjusted their risk thresholds around credit scoring and affordability, according to Brett van Aswegen, CEO of Wonga.

“This leads to lower approval rates. In turn, this may drive consumers towards the informal, unregulated credit market,” he says.

Lenders will apply similar levels of vetting when assessing credit risk among businesses, particularly due to variable sector-specific recoveries and outlooks.

According to a McKinsey & Company white paper on managing and monitoring credit risk after the Covid-19 pandemic, the crisis-induced shock to profit and loss will differ by sector and subsector, and will result in variable recovery paths.

The paper states that banks must go beyond analysing sectors or subsectors and also assess individual borrowers to properly evaluate

Brett van Aswegen … facial recognition and fingerprinting.

of RubiBlue, highlights multiple steps that the sector has implemented to protect consumers.

“These measures include hiring white hat hacking professionals to run various penetration tests to fine-tune any identified loopholes and prevent hacks on technical assets,” he says.

Ogden adds that adhering to strict processes remains a vital step for maintaining robust controls. “In this regard, vetting information across multiple data streams is essential to ensure accuracy.”

The sector has also accelerated its adoption of multifactor authentication, says Brett van Aswegen, CEO of Wonga.

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22

BusinessDay www.businessday.co.za Thursday 24 February 2022

INSIGHTS: CREDIT MANAGEMENT

Data, digitalisation spur market growth

Capabilities •empower

consumers by putting them in the driving seat of their finances

R

apid digital platform adoption due to pandemicinfluenced trends is helping to drive a new wave of fintech innovation within lending markets.

How businesses and consumers interact has fundamentally changed amid rising demand for digital-first approaches.

“Digital-led innovation is empowering consumers by making it easier to access personalised financial information such as credit scores and reports, along with steps they can take to improve their creditworthiness to access credit,” says Berniece Hieckmann, Head of Metropolitan GetUp. “These capabilities empower consumers by putting them in the driving seat of their finances, and it increases affordability by cutting out middlemen.”

Digital solutions are also helping to broaden access to credit within new consumer markets, especially the younger digital-native and digital-first

Ferdie Pieterse … informed. generations entering the credit market for the first time.

“Another key industry focus is growing the market to build a more inclusive economy by responsibly providing more people with access to credit,” says Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian.

However, in a disproportionately unequal society such as SA, where a significant proportion of consumers remain unbanked or unemployed, with little or no credit history, credit providers need to think differently.

“Leveraging alternate data sources will become a fundamental enabler of credit extension as traditional data sources have become insufficient in growing a more inclusive credit economy.”

According to Van Jaarsveldt, alternate data comes

predominantly from device and geolocation data when consumers opt in to a datasharing process that meets all regulatory requirements.

“Providers use this information to build granular consumer and credit risk profiles based on behaviours, not just credit history data. This approach is proving more accurate than the traditional risk rating mechanism because it is more predictive about future behaviours.”

However, many consumers remain reluctant when sharing their personal data beyond basic information, particularly when it comes to their transactional financial details.

“This reluctance can cause difficulties for organisations when they want to embrace a data-driven approach,” says Ferdie Pieterse, CEO at Experian Africa.

“However, organisations have identified how better data can improve everything, from onboarding and quicker decisioning to more accurate analytics, while also reducing the cost for manual processes, all of which improves the customer experience.”

LEVERAGING ALTERNATE DATA SOURCES WILL BE A FUNDAMENTAL ENABLER OF CREDIT EXTENSION

/123RF — WIROJSID Simply put, organisations struggle to provide the best services to the end-user without adequate data.

According to research conducted by Forrester on behalf of Experian in 2021 and published in the Data, Digitalisation and the Return to Pre-Pandemic Growth report, lack of sufficient data to get valuable insights was seen as the third biggest challenge prohibiting companies from achieving their top initiatives.

“Findings from the report show people are willing to consider sharing their data but want to make an informed decision by understanding what they can receive in return,” continues Pieterse.

“Businesses that can demonstrate the value people derive from consenting to share

their data stand to grow rapidly in the digital world.”

In this regard, Van Jaarsveldt highlights benefits such as streamlined onboarding with shorter processes, improved services and better rates through more accurate credit risk assessments.

“From a credit risk perspective, tracking online behaviour and activity, including e-commerce activity, coupled with geolocation data that indicates where you spend most of your time, helps to create a more accurate profile of an individual.”

Making this information available to credit providers can also make it easier to enter the credit environment for younger generations or the previously unbanked, should applicants meet the employment and

affordability regulatory requirements. “In particular, the younger Gen Y and Gen Z generations understand the trade-off between privacy and the potential benefits from sharing data, which makes them more receptive to this exchange. As such, many credit providers are focusing on those market segments.”

Says Hieckmann: “Deeper consumer insights can also help credit providers manage their risks and collections with greater precision while being discerning about the needs and financial situations of individual consumers. Furthermore,

understanding consumers through digital data and their behaviours can also deliver customised financial solutions.

“This will give credit and financial service providers a competitive advantage because more traditional, one-size-fitsall products and processes are becoming less competitive from a price and consumer experience perspective.”

Digital innovation is also filtering through to other areas of the credit management industry, with debt recovery and collections platforms helping to transform legacy operating models.

Growing trust deficit hurts trade credit A growing trust deficit in the business sector has created enormous challenges in trade credit extension. Consequently, businesses that require capital to grow turnover and improve profits, which creates jobs and supports economic growth, are finding it harder to secure credit from their trading partners.

Frank Knight, CEO at DebtSource, explains trust is the fundamental basis for all trade credit transaction decisions.

“Trade credit transactions are differentiated from consumer credit transactions by the average account size.

Consumer transactions require a lender to make a high volume of low-value decisions, while the average commercial account size is roughly R900,000. These values require credit grantors carefully consider whether to trade with each potential debtor.”

Making these high-value credit extension decisions in the prevailing market conditions is becoming significantly more complex.

“Rating-agency downgrades, state capture, local economic policy uncertainty, a slump in the global economy, the effects of the pandemic on businesses and the riots in July 2021 eroded business trust,” explains Knight.

“An increase in commercial fraud, coupled with less information available to assess commercial credit risk to inform decisioning because companies are less willing to provide information following the introduction of the Popi Act,

Frank Knight … more complex. further exacerbate the issue.”

Companies that previously provided supplier trade references are now reluctant to do so, fearing contravention of the Popi Act. Furthermore, two of SA’s biggest banks have stopped issuing bank codes.

“Trade references provide potential credit grantors with an insight into how a debtor has fulfilled their credit obligations to those who already extend them credit, and a bank code is a rating provided by bankers about how a business conducts their banking affairs.

DECISIONING ELEMENTS

“With companies reluctant to provide proper financial statements and information, these two credit decisioning elements were good indicators of future payment ability — critical information that credit grantors must now live without,” says Knight.

Rising commercial fraud levels have further eroded critical business trust.

“Five years ago, fraudulent transactions averaged one per 1,000 commercial applications processed. This figure has increased fourfold to one in every 250,” elaborates Knight.

Detecting application fraud is a complex process and credit grantors must scrutinise each new application more carefully to avoid potential losses.

“Moreover, the agonisingly slow court system in SA, further ravished by the pandemic, has done nothing to help commercial credit grantors.”

According to Knight, it now takes more than eight months on average to obtain a default judgment in the magistrates’ court, and leaves credit grantors out of pocket for extended periods if their debtor does not meet their credit obligations.

“The nett effect is that companies now spend more time and resources making trade credit decisions and decline ratios in commercial credit continue climbing.

Understandably, trade credit insurers or credit agencies now see decline ratios of up to 25% amid the prevailing conditions.”

Worryingly for SA’s economic recovery and rampant unemployment, smaller businesses suffer most in these conditions.

“Without access to trade credit, SMEs can’t trade and grow turnover, which has a knock-on effect on employment and constrains the economic growth needed for a successful post-Covid-19 recovery,” says Knight.

Capital: businesses look to alternative lenders Businesses that survived stringent lockdowns must continue adapting to shifting conditions and altered business cycles as trading conditions, while substantially improved, continue to remain unpredictable and volatile, says Itumeleng Merafe, Head of Sales at Investec for your Business.

“While businesses initially needed access to capital to sustain them through the atypical business cycle, more businesses are now looking to improve cash flow and position for growth during the recovery by buying inventory to meet rising consumer demand.”

Growth opportunities will emerge as global vaccination rates rise and more economies and markets open up.

“The resultant uptick in activity should create jobs and drive renewed consumer confidence, which will drive spending at a time when fiscal support packages are tapering off,” explains Merafe.

However, businesses require quick access to funding lines to capitalise on opportunities amid these shifting economic fundamentals and the subsequent market recovery.

Yet, despite record low interest rates over the past 24 months, some traditional lenders and financiers have taken a cautious approach

Itumeleng Merafe … confidence. when extending credit to businesses amid heightened pandemic-related risks.

“We have experienced an uptick in businesses turning to us as a lending alternative to traditional financiers as many have implemented more onerous processes, and delays in the approval process have become a more common occurrence,” says Innes Janse van Nieuwenhuizen, Head of Legal and Risk at Corpfin.

Van Nieuwenhuizen says transaction speed has emerged as a key driver of business to alternative lenders. “The opportunity cost related to a delay in funding is just too high.”

While interest rates from alternative lenders are typically higher, the cost to the business

related to missing the economic upswing is far greater, believes Van Nieuwenhuizen.

“Injecting capital into the business allows owners to realise the opportunity and they can then use the proceeds generated to repay the loan.”

In these instances, accessing funding from a lending partner that understands the business and can offer guidance and advice provides businesses with a critical lifeline.

“The right lending partner will ensure your business accesses the appropriate quantum of debt for the right purposes and will closely align fund flows and facilities to the working capital cycles in your business,” adds Merafe.

Many lenders are adapting their credit and risk models in response to unprecedented market conditions to broaden funding accessibility, doing so in a responsible manner.

Van Nieuwenhuizen affirms that Corpfin adjusted its mandate to accommodate the prevailing business climate.

“While we maintain a set of nonnegotiable requirements, we analyse businesses on a case-by-case basis, taking into consideration factors such as their credit, cash flow, bank balance, track record and the purpose of the loan when making a decision.”

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BusinessDay www.businessday.co.za Thursday 24 February 2022

INSIGHTS: CREDIT MANAGEMENT

Mixed bag for consumer Financial literacy is key credit as volatility persists Report shows growth in originations in all categories, driven predominantly by younger generation

D

espite a slight improvement in key indicators, record unemployment, a slowdown in economic growth, higher interest rates, rising consumer price inflation and lower earnings continue to place South African consumers under financial pressure.

Social events, such as the civil unrest seen in July 2021, also impacted consumer incomes and their ability to repay credit.

Findings from TransUnion’s Q3 2021 South Africa Industry Insights report highlighted divergent performances across product categories.

Worryingly, delinquencies showed a deterioration across all major unsecured lending categories as more consumers buckled under the strain the pandemic placed on household finances.

In Q3 2021, the primary unsecured credit categories of nonbank and bank personal loans and credit cards recorded a year-on-year increase in delinquencies of 550, 520 and 120 basis points, respectively.

Outstanding credit card balances continued to grow — up 14.4% year on year in Q3 2021 — as SA’s consumers relied on credit cards throughout the pandemic for the utility they provide, particularly in facilitating online transactions and to access a flexible source of credit to meet household bills due to financial pressure.

“The volatility in the consumer credit market created

by Covid-19 persists, and with low vaccine take-up and new variants in the population, this uneven recovery is likely to continue,” explains Weihan Sun, Director of Research and Consulting at TransUnion Africa.

Jaco van Jaarsveldt … defaults.

And with many South Africans still experiencing financial hardship because of the pandemic and mounting inflationary pressures, it is proving difficult for lenders to chart a path to recovery.

“Only by portfolio benchmarking and constant monitoring can they remain agile and respond to the changing dynamics of the market,” adds Sun.

THE LATEST FIGURES SHOW SIGNIFICANT MOMENTUM IN CLOSING THE GAP Experian’s Q4 2021 Consumer Default Index (CDI) also highlighted important shifts in the financial health of specific consumer segments.

“Consumers with credit and loans are starting to feel the pinch due to rising interest rates and record unemployment, with significant job losses experienced across all consumer segments,” says Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian.

More specifically, the home

loan and credit card indexes deteriorated slightly in Experian’s latest report.

“We are witnessing pockets of distress within consumer segments that have the greatest exposure to secured lending products. Even the middle and upper levels of the consumer credit market are starting to struggle,” says Van Jaarsveldt.

According to the Experian CDI report, between December 2020 and 2021 the most affluent consumer group, the Luxury Living segment, experienced a 7% year-on-year deterioration in defaults.

“If these consumers are already in distress at the start of the latest interest rate hiking cycle then we can expect defaults will rise over the coming year,” he says.

However, pockets within the South African consumer credit market are heating up, especially as younger generations show increased participation. TransUnion’s Industry Insights report showed strong year-on-year growth in originations across all major categories, with the exception of credit cards, driven predominantly by younger consumers.

Capitalising on these shifting generational dynamics will become vital to drive market growth, with younger consumers already accounting for much of the growth in several key categories.

When looking at nonbank unsecured personal loans, millennials (born 1980-1994) accounted for 41% of total originations volume, according to TransUnion data. A similar trend emerged in the home loans category, where millennials accounted for more than half (52%) of all originations in Q2 2021.

High unemployment rate constrains credit market According to the most recent employment statistics provided

by Stats SA, the unemployment rate increased by 2.2 percentage points to 46.6% in Q3 2021 compared to the previous quarter based on the expanded definition of unemployment.

The country’s stubbornly high unemployment levels mean many South African consumers are still struggling to attain financial freedom.

This reality is borne out in data from the quarterly TransUnion Consumer Pulse study, which found that, despite an improvement on previous periods, more than half of household incomes have not recovered from the pandemic’s economic impact.

Job losses, and reductions in salary and work hours, emerged as the main reasons why household incomes decreased. Among respondents, 34% of surveyed consumers said someone in their household had lost their job, while a similar number (32%) said someone in their household had their salary reduced. Overall, 28% of respondents had work hours cut in the previous month.

Thabo Hermanus, Chief — Credit & Bureau Services, Experian Africa, attributes these job losses primarily to the impact the pandemic had on small and medium-sized enterprises (SMEs).

“Industry reports indicate that SMEs employ about twothirds of the nation’s workforce and since the pandemic there has been a marked decline in their numbers.”

Despite their importance in creating gainful employment opportunities, these businesses are often the least robust during times of crisis because they do

Thabo Hermanus … education. not have large funding reserves, client bases and commercial pressure management capabilities compared to larger enterprises.

“These factors mean small businesses require finance to see them through extended periods of low turnover and cash flow, yet these businesses tend to find it more difficult to access credit during tough economic times as the risks associated with borrowing increase,” says Hermanus.

“Loan providers will scrutinise the applicant’s credit history more intensely than usual to fully understand the business’s financial health and ability to service debt. That is why more financial and credit education is required to help SMEs overcome the financial difficulties caused by the pandemic and start people on the path to financial recovery.”

The resultant job losses

SMMES FIND IT DIFFICULT TO ACCESS CREDIT DURING TOUGH ECONOMIC TIMES AS THE RISKS ASSOCIATED WITH BORROWING INCREASE

impacted lower-income consumers (households earning less than R50,000 per annum) hardest, with 38% indicating someone in their household lost their job in October 2021.

TransUnion’s ongoing Consumer Pulse study showed that among consumers who said their household income is currently impacted, 85% remained “highly concerned” about their ability to pay their bills and loans.

Among those with these bills and loans, unsecured credit remains their top worry, with the main items consumers cannot pay being personal loans (29%), loans from informal and/ or unregistered credit providers (28%), private student loans (24%) and retail and clothing store accounts (21%).

“While we’re seeing a slight improvement in the number of people negatively impacted financially by Covid-19, the study highlights the fact that many South Africans remain under pressure,” explains TransUnion Africa’s Director of Research and Consulting, Weihan Sun. Despite these financial hardships, the study revealed a lingering wariness of credit.

While eight in 10 households considered access to credit “important or moderately important”, only 34% believed they currently had sufficient access to credit.

Nearly half (47%) of consumers whose household income was impacted during the pandemic said they had considered applying for credit but ultimately decided against doing so. The major reasons for this were fear of being declined due to the status of their income or employment (35%) and the cost of new credit, which many felt was too high (34%).

Weihan Sun … dynamics.

“While we expect an increase in lending to younger generations over time as their income and credit needs grow, the current trend is significant because it starts to reverse what we saw earlier in the pandemic when younger generations were the first to withdraw from the market,” elaborates Sun. “While in most categories, lending to younger generations has still not returned to prepandemic levels, this latest round of figures shows significant momentum in closing the gap.”

Overall, home loans recorded the largest percentage

increase in originations in TransUnion’s most recently released data — up 149.6% year on year in Q2 2021. This figure reflects increased activity in the market due to record low interest rates, as well as a relatively low corresponding base from the same period in 2020.

Similarly, the auto market experienced a recovery, especially for newer used models. This activity helped vehicle finance record strong year-on-year originations growth of 95.8%.

Van Jaarsveldt also highlights significant trends in the retail sector, where defaults were 10% lower than a year ago, according to Experian’s latest CDI data.

PAID DOWN DEBT

“Consumers were more cautious over the period, and they also paid down outstanding debt with money they saved from subdued spending on social activities due to lockdown restrictions,” adds Van Jaarsveldt.

“However, we are seeing the end of this trend as consumers are again starting to lean more on credit cards.”

SA finds itself in a consumer debt spiral. According to results from Experian’s Q4 Consumer Debt Index (CDI), households hold a cumulative R1.7-trillion in outstanding debt.

“Worryingly, consumers access credit to cover day-today expenses, which has created a credit market built on consumption lending,” says Alfred Ramosedi, CEO at Bayport Financial Services.

“Consequently, most overindebted consumers are not using credit to finance assets that can appreciate in value to create long-term wealth.”

And amid this rising indebtedness, more consumers are defaulting. Data from DebtBusters shows that fourthquarter enquiries for debt counselling increased 18% year on year. This trend intensified in 2022, with enquiries increasing by 32% in January compared to the corresponding month in 2021.

Ramosedi bemoans the traditional staid approach to debt consolidation and counselling that pervades the industry, which has largely proven ineffective at addressing the rising flood of defaults.

“Based on our work in the market, roughly 60% of employed South Africans are overindebted. These consumers utilise 74% of their net monthly income to service debt.

“In an attempt to manage their debt and maintain monthly cash flow, employees access credit from multiple providers, including formal and informal lenders,” says Ramosedi.

Alfred Ramosedi … basic skills.

This rising debt burden on employed South Africans has a knock-on effect on productivity and employee relations, which is detrimental to economic recovery and growth.

“Employees inevitably bring their financial issues into the workplace because they are stressed. Many can’t afford to send their kids to school or can’t afford their car repayments and, as such, cannot focus at work.”

This has become an untenable situation employers can no longer ignore as it creates additional risks within the workplace, such as the potential for theft and fraud.

In an attempt to break this cycle, Bayport determined this well-understood problem needed a new solution — one that offered meaningful longterm support, rather than a one-off loan.

The company subsequently developed a debt rehabilitation model that incorporates the employer to rehabilitate overindebted and defaulting employees through a combination of financial

literacy, debt consolidation and, eventually, a return to purposebased loans to help employees build wealth.

“After entering into an agreement with a person’s employer, we enrol them into our financial literacy programme. We teach them basic skills like how to manage money and budget for daily expenses and event-based budgeting, and how to forecast costs,” says Ramosedi.

After completing the financial literacy component, employees learn about creditworthiness and how to manage their credit score.

Thereafter, Bayport approaches creditors to consolidate the employee’s debt.

“This frees up income and we show people how to spend the extra cash to pay down their debt while still covering day-today expenses.”

Employers also receive aggregated feedback about how employees are progressing through the rehabilitation process.

Finally, this programme delivers creditworthy customers to the market, which enables employees who successfully complete the rehabilitation programme to qualify for purpose-based secured loans to help them create long-term wealth.

“Ultimately, the employer gets a happy and productive employee, and we create more financially responsible consumers, which has a beneficial knock-on for the economy,” says Ramosedi.