Red light on new debtors in SA with more risk
Business Day - May 4th 2012, 09:31
The number of credit active consumers has soared in the past few years despite net job losses, suggesting that credit is being extended to people without formal employment, according to a report released on Thursday.
BNP Paribas Cadiz Securities said that, based on figures from the National Credit Regulator and Statistics South Africa, the number of credit active consumers now exceeds the number of formally employed people by 5,8-million.
It warned that the trend could be driven by finance providers taking on new debtors with less credit history and more risk.
This could mean that current growth in consumer lending is not sustainable and may lead to an increase in impairments among finance providers, Shamil Ismail, the company’s senior research analyst, said on Thursday.
There has been a heated public debate about the rapid growth in unsecured credit seen over the past two years, which the Reserve Bank has said is not a threat to the financial system.
However, Mr Ismail’s research suggests that this development could be helping to create an unsustainable debt burden for some consumers.
In the past four years 2,5-million new credit active consumers were registered — while the economy experienced net job losses of 130000, his research showed.
During the same period the number of households with good credit standing took on more credit accounts, which meant that any default in the relatively small unsecured credit category could spread, Mr Ismail said.
Absa Capital economist Gina Schoeman said this week as most unsecured loans were extended at fixed rates, they would only become a problem if there were heavy job losses or if inflation rose high enough to erode income.
However, Mr Ismail pointed out that higher income earners were vulnerable as they had more credit accounts than they did four years ago — roughly five per household at the end of last year compared with 3,8 in 2007.
Most of the accounts were linked to credit cards, overdrafts and store cards, he said.
But some would be affected by changes in interest rates, which are expected to rise next year as growth in the economy gathers momentum. Figures from the Reserve Bank show household indebtedness had been falling in the past few years, with the ratio of household debt to disposable income dropping to 74,6% from 82,7% in the first quarter of 2008. The ratio of household debt service costs to disposable income has declined to 6,7% from a peak of 12,7% in the third quarter of 2008, according to the Bank.
The National Credit Regulator figures tell a different story, but reflect a wide pool of finance service providers including retailers.
Mr Ismail said the number of consumers with good credit standing, which was now 10,4-million, was approaching parity with the number of impaired consumers, now 8,9-million. The gap between the two has been steadily closing over the past few years.
"We believe that the increased targeting of the 10,4-million good-standing credit consumers carries the risk of overextending these debtors, which could result in higher impairments for credit retailers," Mr Ismail said.
This could affect retailers’ turnover, to the extent that a recovery in retail sales may have been funded by credit, he said.
Retail sales rose by 7,2% in February compared with the same month the previous year, up from 4,2% in January, according to the latest official data.
Borrowing by households is also accelerating — it grew by 6,8% in March compared with the same month last year.
Mr Ismail said a comparison of the number of good standing credit accounts to the number of employed people reflected a "relatively stable" ratio since March 2008, fluctuating at about 76%.
"This suggests that the credit behaviour of people with work is mostly unchanged, while the increase in impaired records may have been a result of credit extension in the absence of commensurate growth in employment," he said.
For unsecured credit, most of the growth was in three-to five-year term products, which raised the concern that there may be a mismatch between the consumption period and the loan repayment period, he added.
Consumer spending is the economy’s main engine, which is not regarded as healthy as it is driven by consumption. Investment must grow at a faster pace to raise the economy’s potential rate of growth, which is still far too slow to foster the robust creation of employment.
The South African Chamber of Commerce and Industry said on Thursday consumers needed to be more "active" in the economy to boost business confidence.
"Before business is ready to play a more active role in the economy, households need to come to the party," CE Neren Rau said after the release of the chamber’s business confidence index for last month.
It showed a decline of 1,4 points to 94,3 — its lowest level in more than three years.
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