Consumer Credit Balances and Delinquencies Rise as COVID-19 Continues to Shift Market Dynamics

  • Payment holidays contributed to a rise in outstanding credit balances
  • New credit enquiries, often a function of consumer confidence, fell significantly
  • Delinquencies increased as household finances came under increased pressure due to rising unemployment and income shocks

TransUnion (NYSE: TRU), today released the findings of its Q2 2020 South Africa Industry Insights Report (IIR). The results chronicle the impact of COVID-19 on the consumer credit market. With a fall in GDP* and associated rise in unemployment, consumers are having to prioritise their personal finances to cope with the dramatic effects of the pandemic.

The latest report shows that in Q2 2020, total outstanding balances grew year-on-year (YoY) as consumers looked to secure payment holidays to help manage household budgets. At the same time, stretched consumer finances led to a rise in delinquencies, especially for non-bank personal loans and home loans.

Carmen Williams, director of research and consulting for TransUnion South Africa, said: “The latest report encompasses the first full quarter where COVID-19 related lockdowns and social distancing measures were in effect. Consumers and lenders have had to adapt to very challenging conditions and we are starting to see the emergence of a number of important trends. The use of payment holidays has contributed to a general increase in outstanding balances. At the same time, demand for new credit declined significantly.”

Originations, a measure of new accounts opened and a sign of both consumer demand and lenders’ willingness to advance credit (supply), showed a more nuanced picture. During the most recent period (Q1 2020 for originations due to reporting lag), credit cards saw the biggest decline YoY (-12.2%), followed by vehicle finance (-4.8%) and bank personal loans (-3.3%). Conversely, home loans recorded the largest growth at 8.1%. The rate of change in originations only represents a short period of lockdown measures that came into force towards the end of Q1. To better understand consumer demand during the pandemic, the report observes Q2 enquiries as a measure of new applications. Enquiries for credit cards declined by more than half the volumes reported in the prior year – a sign that consumer confidence has been significantly impacted by the pandemic. Conversely, the only category to see an increase in enquiries was home loans, primarily as pent-up demand caused by lockdown came through and interest rates fell improving affordability.

Payment holidays and increased credit usage causes growth in outstanding balances

Whereas in the normal course of time, the majority of consumers would be making regular payments against outstanding debts, during Q2 2020 a significant number of South Africans applied and qualified for payment holidays. The latest TransUnion Financial Hardship Survey in South Africa** shows that over three-quarters (78%) of South African consumers reported their household income being negatively impacted by the COVID-19 pandemic. Of these, around one-fifth (between 17% and 21% depending on month of survey) have received some form of financial accommodation such as a deferral, forbearance or in most cases a payment holiday from a lender. This has driven an increase in outstanding balances, with interest continuing to accrue as repayments have been put on hold. The increase in balances may also be due to some consumers having increased individual borrowing – an observation supported by the TransUnion Financial Hardship Survey which showed 17% of consumers increasing usage of available credit.

Pandemic puts a dent in demand for credit

As predicted by TransUnion’s most recent South Africa consumer credit forecast, demand for consumer credit fell during the quarter in response to the COVID-19 crisis and associated deterioration in economic conditions. The YoY fall in enquiries was apparent for most major credit products, but most pronounced for the unsecured lending categories – credit cards (-62%), bank personal loans (-47%) and non-bank personal loans (-39%). The drop in enquiries is symptomatic of the fall in consumer confidence, especially in the short-term, resulting from the difficult conditions arising from a global pandemic. This fall in consumer sentiment is also evidenced in the latest figures from the Bureau for Economic Research*** which recorded a significant decline in consumer confidence in Q2 2020.

Home loans was the only category to record a rise in enquiries, up 11%, as pent-up demand from a hard lockdown was released as measures eased. During lockdown, deeds offices were closed for several months, which added to the pent-up demand. With these now open since 1 June, when the country moved to less restrictive lockdown level 3, this constraint has eased.

Williams observed: “The reduction in demand for lending products is pronounced and is likely to continue, especially in the short term. We learnt from our recent Financial Hardship Survey that the number of consumers who have seen an impact on their income as a result of the pandemic continues to be significant. This means people have less confidence in being able to afford credit. Also, to meet obligations and manage household budgets impacted consumers have reported that they are cutting back or delaying spending, which means the need for credit might be muted.”

Delinquencies increase, as expected

Against the backdrop of increased unemployment and stretched household finances caused by the impact of COVID-19, delinquencies rose across all of the major consumer credit categories YoY in Q2 2020. The increase was most pronounced for non-bank personal loans, up 440 basis points (bps) to a delinquency rate of 32.1%. Home loans saw a similar magnitude of increase, up 410 basis points to 7.8%. Having more than doubled in the last year, the delinquency rate on home loans is now higher than vehicle finance loans, which increased YoY by 190 bps to 7.4%.

Non-bank personal loans tend to be concentrated within higher-risk borrowers. As such, a larger increase in delinquencies is to be expected as financial hardship will have a bigger impact proportionally amongst financially stretched consumer groups.

“Although many of the trends identified in the latest report are to be expected, it is important lenders and consumers don’t become complacent. These are extraordinary times and lenders need to adopt new ways of thinking. Maintaining a deep understanding of portfolio risk as well as the potential impact of further shifts in the economy as consumers continue to adapt to a COVID-19 world, will allow lenders to develop strategies that can help them grow customer loyalty and build business resilience,” concluded Williams.

More information about the TransUnion South Africa Industry Insights Report, including details about a variety of credit products, can be found here. It includes more information about balance and delinquency trends, including for credit cards, personal loans, vehicle finance and mortgage loans.

* Statistics South Africa (Stats SA) figures show the South African economy slumped by 51% in the second quarter of 2020 (8 September 2020) and is expected to contract 7.2% in the 2020 fiscal year (as per announcement in finance minister Tito Mbowenie’s supplementary budget 24 June 2020)

** Survey conducted week of 30 August. Survey sample of 1,101 adults in South Africa

*** The FNB/BER Consumer Confidence Index (CCI) Q2 2020 showed a decline from an already depressed level of -9 in Q1 to -33 in Q2. Source: Bureau for Economic Research press release 21 July 2020

About the South Africa Industry Insights Report

TransUnion’s South Africa Industry Insights Report is an in-depth, full population-based report that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across virtually every active credit file on record. Each file contains hundreds of credit variables that illustrate consumer credit usage and performance. By leveraging the Industry Insights Report, institutions across a variety of industries can analyse market dynamics over an entire business cycle, helping to understand consumer behaviour over time. Businesses can access more details about and subscribe to the Industry Insights Report. The South Africa Industry Insights Report looks at major consumer lending categories: credit cards, personal loans, home loans, vehicle and asset finance (VAF), and clothing. The report primarily focuses on three dimensions across these categories: originations (new accounts opened), balances (outstanding total and average lending balances) and delinquencies (accounts in payment arears).