Credit index: Households losing fight

The Consumer credit index (CCI) declined to the lowest levels since the start of 2009 in the third quarter of this year, reflecting a deterioration in loan repayments and the increasing use of revolving credit to cover monthly expenses.

Credit information agency TransUnion said yesterday that the CCI declined to 48.6 index points from 51.2 points in the second quarter to June.

This decline reflected worsening loan repayment behaviour and a greater use of revolving credit by South African households to supplement monthly budgets, it said.

TransUnion added that the number of consumer loan accounts that were now more than 90 days in arrears was up 5 percent year on year.

TransUnion used consumer borrowing and repayment behaviour obtained from its credit database together with key publicly available macroeconomic variables affecting household finances.

Released on a quarterly basis, the CCI measures aggregate consumer loan repayment records, tracks the use of revolving consumer credit facilities and quantifies the relative cost of servicing outstanding debt.

It shows that impaired accounts now comprise about 1.8 percent of total consumer accounts in South Africa.

However, Geoff Miller, the chief executive of TransUnion Credit Bureau, said the impairments were still below the levels of 2009 and they would have to increase by about 20 percent to get back to those levels. In 2009, there were impairments on about 2.2 percent of the accounts in the country.

The Reserve Bank’s decision to cut interest rates by 50 basis points in July gave a glimmer of hope that people might be able to repay their debts for the rest of the year.

“(It) should ease repayment burdens slightly on outstanding floating rate loans. In addition, there are signs that price inflation is abating, which may provide some welcome relief to consumers for the remainder of 2012,” Miller said.

On the downside, the lower interest rates would make debt more affordable for consumers, encouraging them to take out more loans. “It can also discourage them from saving because they are getting lower interest from it,” Miller added.

The rising impairments were more prevalent in the unsecured lending space. This included consumers who used unsecured lending to buy assets such as cars or renovate houses, as well as those who spent on retail accounts and credit cards.

“The index tells us that should unsecured lending continue to grow at similarly strong rates to the past 12 to 24 months, there exists the potential for a mismatch to develop between consumer borrowing and underlying consumer credit health,” Miller said.

“This is an issue to which credit committees will no doubt already be devoting considerable attention.”

But Miller said banks understood that unsecured lending was riskier and charged higher interest rates, which was why rising impairments were not hurting profit at most credit providers.

Miller said the economic indicators were not much of a contributing factor as growth had been stable year on year and inflation was moderate.

The problem was that consumers were using more credit than they could handle. In fact, the credit that consumers used was up 8 percent year on year.

People were using credit more often than cash.

The National Credit Regulator (NCR) said it would release the second-quarter credit statistics in September. But in the Credit Bureau Monitor for the first quarter, released in June, the NCR also noted a deterioration in credit performance of consumer accounts.

The number of consumers with impaired credit records increased by 119 000 to 9.05 million from 8.93 million at the end of last year.

Last week the consumer financial vulnerability index, compiled by MBD Credit Solutions and Unisa’s Bureau of Market Research, showed that consumers fed their spending habits out of savings or through borrowing.