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A look at how Covid has impacted short term lending

File Image: IOL

File Image: IOL

Published Apr 7, 2022

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SHORT-TERM lending for the third quarter of 2021 show was still heavily impacted by Covid-19 even while the book value of total consumer credit extended increased by 1.2 percent to R2.08 trillion (from R2.05 trillion in the second quarter of 2021), the short-term lending segment of this market shrank by 5.5 percent.

The third Altron FinTech Short-term Credit Impact (AFSCI) Index, which tracks the impact of short-term credit extension on the South African economy on a quarterly basis, was released on Wednesday. The index was produced by economist Keith Lockwood, to provide a barometer of the financial health of a vulnerable, and often neglected, portion of the South African population.

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According to Lockwood, this was an important indicator that this segment of the population struggled to access credit markets, which had the potential to support low-income and marginalised households, as well as survivalist, start-up and micro-businesses.

The index tracks credit extension activity back to 2015, with the overall index declining from 96 points to 91 points in the latest results. Lockwood said this meant that short-term credit extension made 9 percent less of an impact on the South African economy in the third quarter of last year than it did at the start of 2015. “The better news is that this is still 3 percent more of an impact than it had at the height of the lockdown.”

While short-term credit makes up a very small share of total consumer credit, it is an important market for a number of reasons, including that this credit was generally advanced outside of the formal banking system by individuals and institutions using their own capital rather than the deposits of their clients, it provides first-time access to credit to many people who have never had access before and it provided lower-income households with a proportionately greater share of credit than was advanced to them by other forms of credit. It was also said to be a source of funding to households with low incomes and limited wealth assets in the event of unforeseen developments and emergencies and it provided finance to micro-business for working capital and stock and asset purchases.

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He also pointed out that consumer credit markets did not operate in isolation from the rest of the economy. “Given the lag in the release of credit data by the National Credit Regulator, it is worth remembering what was happening in the economy at that time, the dominant feature being the rapid increase in the average number of COVID-19 cases as the Delta variant spread throughout the country,” he said.

“In response the government raised the lockdown level back up to Level 4 and certain economic activities were again limited. As a result, while real GDP was still 3.4 percent higher than a year earlier, on a seasonally-adjusted quarter-on-quarter basis, it declined by an annualised 6.5 percent. Household consumption expenditure was even harder hit – dropping by over 9 percent on a quarter-on-quarter annualised basis.”

The economic conditions at that time also took a further toll on employment, with the number of people employed dropping by 660 000, while the expanded unemployment rate rose to close to 47 percent of the potential labour force.

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Lockwood said that the above factors, combined with rising inflation particularly for food and transport put the financial position of many South African households under even greater pressure. “Unfortunately, credit providers responded by adopting a more cautious approach to their lending. Of all applications for credit received in the third quarter of 2021, 67 percent were rejected up from 64 percent the previous quarter.”

As at the end of the third quarter last year, the value of credit still on the books of registered credit providers increased by R99 billion to R2.078 trillion, with increased mortgages accounting for 94 percent of the R99 billion. Short-term credit only accounted for 0.1 percent.

Lockwood said that it was therefore apparent that in response to the increased uncertainties and decline in creditworthiness, credit providers favoured credit with underlying security, such as home loans and asset finance, over unsecured credit.

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“Since the end of 2015 the value of short-term loans on the books of providers has trended lower – from a peak of R3.6 billion to less than R1.8 billion at the height of the COVID-19 Level 5 lockdown in the second quarter of 2020,” Lockwood said, adding that what started out as a recovery has since lost momentum in the face of new uncertainties.”

The decline in the value of new loans and advances between the start of 2016 and the second quarter of 2020 was accompanied by a similar reduction in the number of loans advanced. Over this period these fell by 1.7 million loans to just 431 000.

“Since the second quarter of 2020, there has been a 77 percent increase in the number of new short-term loans advanced – although the number of loans dipped from almost 788 000 in the second quarter of 2021 to around 762 000 in the third quarter of last year,” Lockwood said.

He said that the changes in both the value of new short-term credit extended and the number of loans that were advanced have given rise to a shift in the term of loans advanced. “Whereas loans with a term of up to one month made up 74 percent of the value of new loans at the start of 2015, by the third quarter of 2021 this dropped to 36 percent. Over the same period the share of loans with a term of two to three months, and four to six months increased from 7 percent to 15 percent and from 19 percent to 49 percent respectively.”

“This is probably due to a limited number of new credit applicants that are deemed credit worthy, combined with an increased capacity to more accurately assess the risk associated with established clients.”

The index also showed that whereas people with monthly incomes of R15 000 and above accessed a whopping 89 percent of the total consumer credit advanced in the third quarter of last year, those with monthly incomes of less than R10 000 only received 6 percent of the credit extended.

“By contrast, people earning more than R15 000 per month received 42 percent of the short-term credit advanced. Combined, those earning less than R10 000 per month accessed 41 percent and those with monthly incomes of R10 000 to R15 000 received the remaining 16 percent of short-term credit.”

After deteriorating steadily between mid-2017 and in the second quarter of 2020, the age analysis of the consolidated debtors’ book of short-term credit providers has improved considerably, meaning that fewer borrowers are in default, or at risk of default.

Borrowers between 31 and 40 years received 32 percent of the number of loans and 33 percent of the value, while those aged 41 to 50 received 26 percent of the number of loans, but 29 percent of their total value. Borrowers in the 20 to 30 year age group received 15 percent of the number of short-term loans, and 11 percent of the total value of such loans.

BUSINESS REPORT

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