BD Insights Credit Management (Feb 22 2024)

INSIGHTS

Innovation required to get credit flowing

from accessing banking products as banks can no longer select the best performing retail accounts from this large pool.

According to Van Jaarsveldt, the lending market and government must look at this challenge differently to find a solution To support industry innovation, Experian leverages alternative data sources to build credit profiles on millions of thin-file and credit-invisible consumers those with limited or no information on a traditional credit bureau. For example, Experian developed the Up app, which focuses on financial education and inclusion. The service targets the credit-excluded market and uses gamification to collect consumer-consented data based on user behaviours, such as budgeting, completing

financial education modules, checking their credit score or updating personal information. Completing these processes improves creditworthiness because these behavioural attributes are good predictors of future payment behaviour, explains Van Jaarsveldt. Users also become more financially literate and, over time, build a credit score through alternative data that we can eventually present to banks, effectively replacing the lost retail channel. Experian has also partnered with Chenosis to develop an API that provides access to consented data from MTN s mobile customers to establish alternative risk metrics, such as airtime and data purchase patterns, which

experienced a surge in the demand for credit, paralleled by a significant increase in rejection rates. Yet, the average value of each credit product has increased, he says.

Van Aswegen explains that SA’s credit market, influenced by affordability regulations, will naturally exhibit a correlation

pandemic, SA has

Possible

HIGH INTEREST RATES ARE FEEDING INTO THE COST OF LIVING CRISIS BY INCREASING THE COST OF DEBT ACROSS THE MARKET

Credit fraud on the rise

he says.

Moreover, TransUnion data shows that outstanding consumer credit balances grew 5.6% year on year, with all financial products contributing to the growth, except for bank and nonbank personal loans. The balance growth suggests consumers are increasingly leveraging credit to make everyday purchases. A more concerning picture emerges when reading below the top-line trends, as the credit active population in the greatest distress are the top-tier earners, who are struggling to service secured loans. Of the R2.21-trillion in outstanding debt in SA, home loans and vehicle debt account for more than 80%, with R1.8trillion owed on home loans, says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa.

Unsurprisingly, Experian data shows that the highest-tier financial affluence segment (FAS) groups the luxury living and aspirational achievers are under the most financial distress.

According to the most recent Experian Consumer Default Index (CDIx), these two groups experienced the largest year-on-year increases in composite CDI, increasing from 1.96 in September 2022 to 3.10 in September 2023 for the luxury living group and 3.83 to 5.70 for the aspirational achievers group. This represents a relative increase of 59% and 49%, respectively the highest for any FAS group.

“Effectively, 13% of the South African population holds 75% of total debt, and household finances among these FAS groups are most sensitive to interest rate hikes due to the quantum of debt they hold in interest rate-linked products. Consequently, the Experian Q3 2023 CDIx saw a significant deterioration in first payment defaults on home loans over the period under review. Similar trends emerged in the TransUnion Q3 2023 IIR, where secured products saw increases in missed payments, potentially caused by higher interest rates and affordability challenges for homes and vehicles, indicating pockets of vulnerability.

According to the report, rate escalations between November 2022 and May 2023 exerted financial strain on consumers carrying certain debt products vulnerable to interest rate increases, pushing them toward delinquency. This is evidenced by a notable uptick in serious account-level and balance-level delinquencies (90 days past due) on home loans seen in the latest TransUnion IIR, which were up 150 and 200 basis points year on year, respectively, in Q3 2023. The financial distress in the higher FAS groups is evident in the rise in demand for unsecured lending in these market segments, coupled with an uptick in requests for debt review services among the top two tiers, with the biggest growth witnessed in the luxury living category, says Van Jaarsveldt Despite the demand for unsecured lending, growth in credit card and personal loan origination trended downwards as traditional banks closed the taps on lending. The TransUnion Q3 2023 IIR shows the average value of new personal loans granted overall declined by 21.5% year on year, a trend attributable to the decreasing share of personal loans provided by traditional banking institutions. However, nonbank lenders were responsible for 80.4% of

Debt burden weighs on businesses

13.4% The total number of business liquidations decreased by this margin between October 2022 and 2023 Frank Knight longer supply chain delays in shipping, harbour and rail networks have placed added strain on company cash flows.

funding. Longer supply chain delays in shipping, harbour and rail networks have placed added strain on company cash flows, forcing businesses to access second-tier financing options such as invoice discounting or supply chain finance, he says “However, these are typically at much higher rates than traditional bank funding, adding further pressure to profitability and cash flows. The financial stress these factors place on businesses is evident in the rising rate of delinquencies, with Debtsource statistics showing a 33% increase since the start of the current interest rate hiking cycle. There is a direct correlation between higher interest rates and increased delinquencies in trade credit because more companies go out of business when interest rates increase. While the latest liquidation

new personal loans extended in Q3 2023 a 2.8% increase from 2022 s corresponding quarter. This trend indicates greater demand among more affluent consumers with higher credit scores, who generally qualify for higher average opening loan amounts. The total number of active credit cards in the market also increased 1.3% year on year. However, origination levels in Q3 2023 were down compared to the same period last year.

Van Jaarsveldt says available market data demonstrates the top end of the active credit population is overexposed to secured and unsecured loans. However, in the tough economic conditions, lenders remain hesitant to increase exposure to more vulnerable lower market segments.

Tech helps mitigate risks

Amid high interest rates, credit providers need to manage risks while keeping lending accessible to support economic activity, with technology playing a critical role in facilitating this complex balancing act, even in a challenging economy. Technology improves our ability to assess creditworthiness and affordability, which protects customers against overindebtedness and our business against bad debt, says Alfred Ramosedi, CEO at Bayport Financial Services. Digital technologies also reduce costs, which benefits our customers and enhances their experience through improved efficiencies and a comprehensive view of the customer across touchpoints. Ayanda Ndimande, Head of Business Development at Sanlam Retail Credit, says: Digital enablement via apps and the use of mobile devices improves convenience for consumers ” Digital-led innovation also helps broaden access to credit

13% of the South African population holds 75% of total debt

data released by Statistics SA on November 27 2023 paints a different picture, with the total number of liquidations decreasing by 13.4% between October 2022 and 2023, Knight says these statistics overlook a crucial trend.

The conventional focus on liquidation statistics as a bellwether for the business sector’s overall health does not account for the fact that companies are increasingly opting for business rescue instead of succumbing to outright liquidation. While providing a lifeline to struggling businesses, Knight says this shift in strategy conceals the gravity of the financial distress in the market, with Debtsource witnessing a 26% year-on-year increase in business rescues. Our records indicate companies that go into business rescue remain there for longer, which simply means liquidation stats have a lag effect.