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The rate at which consumers took out unsecured lending products such as personal loans and credit cards slowed last year, although there was an overall increase in the loan amounts and credit limits on the issued products.

This is according to the newly released TransUnion South Africa Industry Insights Report for the fourth quarter of last year, which also found that serious delinquency rates increased for the majority of lending products over the past year, likely due in part to the difficult economic environment last year.

The TransUnion report shows that lenders issued unsecured accounts at a slower pace in the fourth quarter last year, compared with the same quarter in 2017. The uptake of new credit cards decreased by 15% year-on-year, while bank-issued personal loans fell by 0.5% over the period.

At the same time, credit amounts for both product types increased year-on-year, with the average credit limit for new credit card accounts up 16.4% over 2017 and the average new bank personal loan amount up by 23.7%. The report says these higher amounts on new accounts “are likely due to the shift in lender origination strategy over the past year to lower-risk borrowers”.

It shows that credit cards issued to prime and lower-risk borrowers increased from 87% in the fourth quarter in 2017 to 94% a year later, while the share of bank personal loans to prime and lower risk borrowers increased from 62% to 67%. Prime and lower-risk borrowers are those with TransUnion credit risk scores of 730 and above.

“As lenders continue to adapt to changing economic conditions, they have shifted to focus more on lower-risk consumers over the past year. A result of this shift is that lenders have been able to issue larger loans and credit limits on new accounts, based on the higher likelihood of repayment by these borrowers. It will be interesting to see if this trend continues in the coming months as lenders respond to still challenging, but improving, economic conditions,” says Carmen Williams, director of research and consulting for TransUnion Africa.

In contrast to unsecured lending products, home loans showed the opposite trend. New home loans increased 9.2% year-on-year in the fourth quarter last year, while the average loan amount to new customers fell by 3.1%.

Also in contrast to unsecured loans, the share of new home loans to prime and lower-risk consumers dropped from 97% in 2017 to 92% last year.

Total outstanding balances across all major loan products were up, year-on-year. Even credit cards, which saw a 15% drop in new accounts, saw a marginal 0.1% increase in total outstanding balances. Home loan balances were up 6.6%, bank personal loans up 5.2%, and vehicle and asset finance up 3.3%.

“Outstanding balances are an important measure of overall lending and are driven by multiple factors. It isn’t just a question of lender appetite to provide credit, but also a measure of consumer desire to borrow or pay down outstanding debt,” says Williams. “Credit can be an important catalyst for growth and often mirrors, or is even a precursor to wider economic performance.”

Delinquency rates

Delinquency rates for unsecured lending products saw mixed performance last year. The serious delinquency rate for credit cards, measured as the percentage of card accounts three months or more in arrears, fell to 11.6% at the end of last year, a 1.60percentage point improvement from the end of 2017. At the same time, the rate for bank personal loans increased by 1.8percentage points to 23.1%.

Secured lending products have lower overall delinquency rates than unsecured products, owing to their focus on lower-risk borrowers and the collateral that supports the debt obligations. But rates for home loans and vehicle and asset finance have increased over the past year. The home loan serious delinquency rate increased year-on-year by 0.4percentage points to 3.7% in the fourth quarter last year, in contrast to the drop seen in 2017.

Vehicle and asset finance saw an even more marked increase in serious delinquency, increasing one percentage point to 5%. This continues a trend of rising delinquencies seen over the past two years, over which time the delinquency rate has risen by more than 50%.

Loan structures for vehicle finance may be a factor in the delinquency rise, with many loans structured with large balloon payments due at the end of the repayment term. Given the current economic environment, an increasing number of borrowers may not be meeting these balloon payments at the end of their loan terms, the report suggests.

Says Williams: “We have seen mixed delinquency results in unsecured lending sectors, with stable or improving performance for numerous products including credit cards as well as retail accounts. However, the recent uptick in home loan delinquency, and the more sustained increases in vehicle and asset finance delinquency, show that consumers are still under strain in the current environment. Lenders need to take this into account in their origination and account management strategies and ensure that they are protecting their own balance sheets while continuing to provide the necessary access to credit to those consumers who need it.” 

PERSONAL FINANCE