Johannesburg - A judicious approach by lenders when granting credit stabilised consumers’ credit health in the first quarter. But if rising inflation led to further interest rates hikes, millions of consumers “on the edge” would be in financial difficulty, credit information company TransUnion said yesterday.
The release of its consumer credit index showed an increase to 49.4 points in the first quarter from 48.9 points in the last quarter of 2013.
The index measures aggregate consumer loan repayment records and tracks the use of revolving consumer credit facilities such as credit cards to detect distressed borrowing.
Even with the marginal increase in the index, TransUnion chief executive Geoff Miller said the picture painted was of the index stabilising because of stringent measures taken by credit providers rather than an overall improvement in consumers’ financial situations. The stabilisation did not indicate that consumers were under less financial stress, he said.
“We don’t see this improving in the foreseeable term. There is a tremendous number of consumers who are merely making ends meet; there are millions on the edge. With the risk of inflation and interest rates rising, we expect those consumers to run into trouble.”
TransUnion said it observed a decrease in new loan defaults in the quarter. However, higher interest rates and inflation presented a risk that these would rise again.
“The interest rates will not do much damage. But if inflation continues and the Reserve Bank decides to hike rates by 100 basis points in future, it will start to affect all consumers,” said Miller.
When the Reserve Bank raised the repo rate by 50 basis points in January, economists said this was the start of an upward path. After the monetary policy committee meeting in March, which left rates unchanged, most predicted there would be another 50 basis point hike later this year, while others foresaw a more moderate 25 basis point increase.
If this happened, it would reverse the downward trend in defaults, which TransUnion had welcomed given the surge in new defaults in 2012 and 2013. Last year, TransUnion data showed consumers’ accounts in default reached the highest level since January 2007; one person was defaulting on three accounts, on average.
In the first quarter there was no movement on consumer accounts lapsing, translating into a 1.8 percent decrease on a year-on-year basis.
It was the ninth consecutive quarter in which the index was below 50 points, indicating a slump in credit health. An index reading below 50 points represents a deterioration, while one above 50 indicates improving credit health.
Besides inflationary increases in living expenses, another threat was observed on “ample evidence”, indicating that household budgets were tight. With the removal of adverse consumer credit information, Miller said lenders were seeing over-indebted consumers trying to access more credit, although banks had the information to make informed decisions.
In the quarter there was a 2 percent increase in credit card use to supplement household budgets. “This has been stable for a number of quarters and we see the rise. It’s not dramatic but we’ll need to monitor it closely.”
Last month, the First National Bank and Bureau for Economic Research consumer confidence index, which tracks confidence rather than credit health, painted a similarly gloomy picture, indicating no improvement in South Africa’s economic situation.