The end of June marked the end of payment holidays offered by many lenders, but many consumers’ pockets remain empty as a result of the Covid-19.
According to the DebtBusters debt index for the second quarter of 2020, unsecured debt increased by 18% in comparison to 2016 levels. For those earning R10 000 or more, the unsecured debt levels rose by between 30% and 40%. This means consumers are increasingly using unsecured debt to supplement their dwindling incomes.
Benay Sager, DebtBusters’ chief operating officer, said payment holidays offered by lenders to consumers at the start of the lockdown was similar to putting ice on an injured knee. The ice provides much-needed temporary relief, but it will have to be removed, and a medical professional will have to inspect the injury more closely to examine the extent of the damage caused.
Traditionally, when incomes decrease, households prioritise budgets and opt to pay off the debts such as vehicles, mortgages and credit cards first. Sager said the payment holidays relieved consumers of the burden to reprioritise budgets, but only for a short period.
Sager says the uptick in economic activity has done little to ease the burden of consumer debt. From July there has been a significant uptake in the number of people interred in debt counselling services.
“From July, these payment holidays started to dwindle, and now we have seen people in worse debt than before in terms of the size of the debt,” Sager says.
Unsecured lending in South Africa is big business. In 2019, the National Credit Regulator (NCR) found that the industry was valued at R220‑billion. The data for 2020 is expected to be available by the end of September, according to the NCR’s supervisor Bongani Gwexe.
For instance, Sthembiso Mbatha (not his real name) is considering hanging up his security guard uniform to concentrate on his other income stream: operating as a loan shark. The 42-year-old security guard has added 50 new clients, in just three months, to his debtor’s books and says his day job “takes up too much of [his] time.”
Ordinarily, Mbatha’s loan shark business adds on average two new customers per month, but “times are tough, and people need more help than usual. People usually ask for a minimum of R100 and the most a person has loaned from me since April is R3 000,” he says.
Borrowers are in a bind, Mbatha says. They have lost their jobs or a significant part of their income due to the Covid-19 pandemic and the subsequent lockdown. His business, although illegal and unregulated helps those who are in need, he says.
Loan sharks are notorious for charging exorbitant interest rates on their loans. Mbatha considers himself one of the “kind ones” — he charges no more than 40% interest on his loans and does not ask borrowers to hand over their identity cards to him as “collateral” until their debts are paid up.
According to asset manager Differential Capital, in 2019 the cost of unsecured and short term credit ranged from 37% a year for a 61- to 90-month loan to 225% for a one-month loan.
Even before the lockdown, South Africans were heavily indebted. The SA Reserve Bank quarterly bulletin for March 2020 notes that household debt increased at a faster pace than disposable income in the fourth quarter of 2019, with the ratio of debt to disposable income rising slightly to 73%.
A TransUnion survey found that consumers are either withdrawing from their savings or borrowing to make up for lost incomes. More than 40% of affected consumers say they are using money from their savings to help pay bills, up 11% from April, while 31% of respondents are borrowing from friends or family.
The survey, released last month, also found that 49% of respondents who had opted to take up payment holidays offered by lenders plan to create a repayment plan, while 19% plan to extend the deferral for an additional period if possible.
Between January to March, this year, consumers spent 64% of their net income on servicing their debt, according to DebtBusters.
Meanwhile, the Banking Association of South Africa (Basa) said that from March 2020, banks had offered payment breaks totalling R33.49-billion, to individuals as well as small and medium-sized and commercial businesses to assist them through the lockdown. Basa said banks granted 84% of their loans, while 95% were approved for small, medium and commercial businesses.
Government and banks’ relief schemes see cautious uptake
Since the start of the pandemic, South African banks have provided relief to the tune of R19.48-billion to individuals and R14.01-billion to commercial and small and medium enterprises as part of their Covid-19 relief measures.
Separate to this, the Covid-19 loan guarantee scheme by banks was able to guarantee R14.54-billion to businesses. This guarantee is set at a maximum of R200-billion, but so far, the national treasury has made R100-billion in loans available to companies in need.
These loans are granted at the prime interest rate and repayment may be deferred for a maximum of one year. According to the Banking Association of South Africa , because of the relief given by banks, outside the scheme, to their existing customers, demand from this scheme has slowed.
Nedbank told the Mail & Guardian this week that it has received applications for the Covid‑19 loan guarantee scheme amounting to R3-billion, of which R1-billion had been approved. The bank did not explain why the R2-billion had not been approved.
Absa said that it had received 1 798 applications by 30 June 2020. Of these applications, 526 have been sanctioned, and 341 have been approved, to the value of R500‑million.
FNB only revealed that it had approved R1.2-billion under the scheme.
While some is money being granted, President Cyril Ramaphosa told media he was dissatisfied with how banks have lent only a small portion of the money, saying his concerns were with the criteria for offering the loans.
The South African Reserve Bank said it is true that the take-up of the loan scheme has been less than initially expected. It said reasons include the banks’ own loan restructuring efforts, weak demand for credit and heightened uncertainty about future economic prospects. But it said that in responding to such a crisis, regulators have to balance the need to expand lending to support the economy with the need to ensure financial stability and to minimise the likelihood of bank failures.
Thando Maeko and Tshegofatso Mathe are Adamela Trust business reporters at the Mail & Guardian