Consumers feeling the pinch
The asset finance industry is experiencing rising levels of arrears and bad debt as consumers begin to feel the pinch.
William Mathee, national manager of commercial asset finance sales at Absa, says higher interest rates have put additional pressure on the cost of living for the average South African household, which now has less disposable income.
“Recently published figures from the National Association of Automobile Manufacturers of South Africa show that vehicle sales are down about 21,9% year on year.
“And the daily car sales rate is the lowest it has been in four years,” Mathee says.
As a consequence of the affordability crunch, arrears or the number of people behind on their repayments are increasing each month and the rate of repossessions for some types of vehicles has doubled, he says.
The number of car auctions has increased to cope and the number of luxury cars being sold has increased significantly.
Consumers have adopted a cautious wait-and-see attitude rather than spending money on new assets.
“When there is a shortage of income, households cut back on vehicle maintenance and when the vehicles are repossessed, their market value is less.
“At the same time some consumers are taking advantage of the opportunity and buying used rather than new vehicles,” Mathee says.
Mike Chapman, corporate general manager at WesBank, says the level of consumer debt in South Africa increased very quickly in a short space of time and as the credit crunch began to bite, so the level of arrears and bad debt rose.
“We have not seen levels like this for many years.
“The warning signs were coming through strongly about 12 months ago in the consumer market, but people did not realise the depth and likely duration of the situation,” says Chapman.
In the wake of rising arrears the level of bad debts started to move upwards.
In the past six months the industry has seen small business bad debt levels moving upwards strongly, particularly in the retail sector.
“Consumers have run out of money and they are not going into the retail centres as much.
“December was the last big splurge and then everyone woke up to a very different South Africa in January,” says Chapman.
He says the knock-on effect is hitting the retail sector and the transport and logistics sector is also showing signs of strain. The effects are also creeping through to affect mid-sized corporations.
The current situation is seen as being merely the first wave and the second wave will hit when companies begin to close their doors and the country is hit by job losses.
But it might be considerably worse if the government had not introduced the National Credit Act (NCA).
Chapman says the Act has been beneficial for South Africa and it has already begun to curtail the level of debt among consumers.
Further, he says, the NCA has forced greater transparency and better lending decisions.
Instead of the NCA being responsible for the credit crunch, it has been caused by people becoming overextended in terms of their borrowing and not being able to support the level of debt when interest rates were increased.
“In the past there was not enough knowledge about the total amount of each person’s debt exposure and the income they had available to support their borrowings.
“Now it is easier for lenders to see just how much debt an applicant has and how much is being repaid on a monthly basis.
“In fact, if the NCA had been put in place a year earlier, then we would probably be in a much better stage of recovery than we are,” says Chapman.
Mathee says the NCA is facilitating a more prudent lending process.
“The NCA has played a role in softening the impact of high interest rates and the effect this has had on affordability.
“It has been introduced at the right time for consumers,” Mathee says.
He says the NCA has also made lending more flexible in some cases..