Consumers are focusing on paying off their debt and there has been a marked shift away from credit cards and overdraft facilities.
Although the banks were showing an increase of 39% in unsecured lending, much of this credit extension was being driven by debt consolidation, said Sugendhree Reddy, director of banking products at Standard Bank. In the bank’s experience about 30% of customers are using fixed-term debt to pay off their credit cards and overdraft facilities.
“Consumers are now looking at unsecured products with fixed repayment terms because many were ‘burned’ in the previous Âeconomic downturn, using incidental credit like credit cards and overdraft facilities,” said Reddy.
This enables customers to consolidate their debts and set a time frame for paying them off. By closing their credit card and overdraft facilities, they are preventing themselves from taking on further short-term debt.
FNB chief executive Michael Jordaan said customers had become far more aware of costs and were consolidating their high-cost credit card debts with less-expensive fixed-term debt.
Reddy said Standard Bank’s bad-debt experience on credit cards was lower than expected and customers had a definite lack of appetite for credit cards. Many people were turning down the option to raise their credit limits and there was an increase in the number of people who settle their credit card balances at the end of the month.
“The banks are willing to lend, but customers are saying, ‘no thank you’.”
Consumers are also focusing on building savings, and the market share of deposits for the banking industry has increased by 6.1% in the past year. Reddy said this had taken place across the income spectrum.
“People have realised after the financial crisis that they need to take responsibility for their finances. The education around these issues is also paying off,” said Reddy.
Awareness of costs and fees is changing banking transaction behaviour. People are drawing larger sums of cash from ATMs at less frequent intervals, for example, to reduce their bank costs.
Jordaan said there had been a significant increase in the number of clients switching their bank accounts to FNB because of its lower banking fees. “When we compare what they were paying previously, on average customers are saving R250 a month, which is R3 000 a year.” He said consumers were becoming more price sensitive and were shopping around for better deals.
This proactive approach is the positive side of a disturbing picture of a population indebted to the eye balls. According to the National Credit Regulator’s Credit Bureau Monitor, the number of consumers with impaired credit records rose by 174 000 to 8.8-million in the second quarter, a 0.3% increase. This comes against the background of an increase of 240 000 new credit-active consumers.
Consumer confidence has been falling, too. In the third quarter the FNB/BER consumer confidence index fell to the lowest level recorded since 2009. Although still in line with the long-term average, the fall from an index level of 11 to 4 signals a growing concern about the state of the economy and fewer consumers expect the economy to improve when compared with its state three months ago.
Stanlib economist Kevin Lings said there was a relationship between consumer spending and confidence and the current level could lead to a weakening retail environment in the next 12 months.
Credit extension remains subdued and although private sector credit rose by 5.6% year on year to July, this was driven by corporate debt, not household credit. Mortgage credit rose by only 2.9% for the year.
As credit extension figures suggest, corporates that have been sitting on cash are starting to spend. Stephan Claassen, FNB Western Cape’s provincial chairman, said there had been a move by businesses to draw down on their cash deposits as well as a significant demand for credit to facilitate business expansion. He said commercial clients, in a trend similar to retail clients, were taking on fixed-term debt rather than overdraft facilities.
Corporates are starting to borrow to build their businesses inorganically by buying other businesses or investing in their own business in expectation of an economic recovery. A major trend is that businesses are buying their own properties.
“With interest rates expected to remain low for the next two to three years and low property prices, business owners will not get this kind of opportunity again,” said Claassen.