/ 18 March 2011

Consumers are struggling to get out of debt

The National Credit Regulator (NCR) painted a somewhat gloomy picture when it released its latest figures this week: 12 000 more consumers fell into arrears of three months or more during the last three months of last year, compared with the previous quarter.

Of the 18,51-million credit-active consumers, only 53,5% (9,9-million) are classified as being in good standing. This means consumers are not managing to get out of debt, which is not good news given that interest rates are at a historical lows. From here, the only interest-rate move is up, which will put further pressure on consumers. It’s widely expected by the financial markets that the interest rate will be hiked by 50 basis points in the fourth quarter of the year.

The NCR report shows that 11,25-million South African consumers are now at least one month in arrears — that’s more than 60% of active credit consumers.

Luke Hirst, MD of Debtbusters, says an increase in the number of defaults isn’t surprising, but what was unexpected was that all improvements made in the last quarter were in effect wiped out.

“Consumers debt levels — and how to reduce these — must become a number-one priority for government and banks,” he says.

However, Darrell Beghin, manager of credit information and research at the NCR, says the picture is slightly more complex than it’s painted to be. For one thing, the number of credit-active consumers has increased, so statistically it’s not that surprising that there’s been a slight increase in consumers falling into arrears. She also points out that the deterioration isn’t as dramatic as it’s been in some quarters previously. “The majority of people are still meeting their obligations, but of course the slight increase does suggest that people aren’t doing as well as they could be doing,” she says.

An apparent discrepancy explained
If we look at figures for the year (that’s December 2009 to December 2010), 42 000 consumers’ credit records deteriorated, but the number of impaired accounts decreased by 189 000 during the last three months of the year (to 16,36-million). That’s a decrease of 0,2% over the previous quarter.

What does this mean?

Beghin explains that a consumer may have five accounts and may be keeping up with payments on four of those, but missing payments on one could push that consumer into the pool of consumers with deteriorating credit records. If impaired accounts have decreased, this means that some consumers are making good on accounts in arrears, so the decrease of 0,2% is good news.

Household debt levels too high
Of concern is the fact that households will be really hard-pressed to cope with inflation increases in budget items like rates, water, electricity and transport.

“We have luckily been buffered by lower food inflation, but this will eventually come and it is only going to hurt consumers further,” Hirst says.

Household debt levels are over 78% — this is unacceptably high. Consumers really do need to service their debt now, while the interest-rate environment favours catch-up.

The bigger credit picture
Banks and financial institutions made more enquiries on consumer credit records than anyone else — 54,2% of enquiries. Enquiries from retailers accounted for 14,9% and telecommunications providers 14,8%.

Banks’ enquiries increased while retailers and telecommunications providers made few queries. The number of credit reports issued to consumers increased to 79 635.

Of the total credit reports issued, 82,9% (66 034) were issued without charge, and the remaining 17,1% (13 601) were issued with charge (that is, the payment of R25 to obtain more than one credit report in a year — consumers are entitled to one free report each year, per bureau).

There were 14 836 disputes lodged on information held on consumer credit records for the quarter ended December 2010, which was a quarterly decrease of 34,3% but a yearly increase of 40,3%. This doesn’t indicate a significant trend on a quarter-on-quarter comparison basis. However the yearly increase is satisfying as it indicates that consumers are proactively managing the content of their credit records.

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