Consumer credit health deteriorating

Its Consumer Credit Index (CCI), a unique indicator of consumer credit health based on a 100-point scale, declined to 48.6 in Q3 2012 from 51.2 in Q2 2012. On this index, above 50.0 indicates improving credit health while one below 50.0 represents deterioration.

The decline in the index reflects worsening loan repayment behaviour and a greater use of revolving credit by South African households to supplement monthly budgets. Credit health refers to the ability of consumers to service existing credit obligations within the constraints of monthly household budgets.

According to the company, the number of consumer loan accounts that have lapsed more than 90 days in arrears (impairments) is up 5.0% year-on-year. Its data shows that impaired accounts now comprise around 1.8% of total accounts. However, while this figure has been rising, it remains some way below the distressed levels of 2009 when impairments increased to 2.2% of total accounts.

"This essentially shows that the number of impairments would have to increase by about 20% to get back to 2009 levels," said TransUnion Credit Bureau CEO, Geoff Miller.

He also pointed out that rising impairments were not necessarily hurting most credit providers. "Credit providers make provisions for loan impairments, especially in light of the growth in their unsecured credit business which inherently carries a higher risk of impairment than secured credit."

Some optimism

There is, however, some reason for relative optimism for the remainder of 2012. "The Reserve Bank cut interest rates by 50 basis points in July 2012, which should ease repayment burdens slightly on outstanding floating rate loans. In addition, there are signs that price inflation is abating, which may provide some welcome relief to consumers for the remainder of 2012."

Nevertheless, the CCI declined in Q3 2012 to below 50.0 for the first time since Q1 2009, ending more than three years of improvement in consumer credit health following the acute consumer credit market distress of 2008/09.

"While the national consumer credit market as a whole does not appear to be undergoing acute levels of distress, there are indications that certain market segments are indeed coming under pressure. South Africa is not one household but millions of households and, within the broader view of consumer credit health, one must bear in mind that different households or groups of households may experience very different degrees of financial distress around servicing their debt obligations.

"The index tells us that should unsecured lending continue to grow at similarly strong rates to the past 12 to 24 months, there exists the potential for a mismatch to develop between consumer borrowing and underlying consumer credit health. This is an issue to which credit committees will no doubt already be devoting considerable attention."

Index offers macroeconomic variables

Unlike other indices in the market, the CCI is driven by objective market data rather than consumer surveys or questionnaire responses. "The indicator combines actual consumer borrowing and repayment behaviour obtained from the extensive company credit database, with key, publicly available macroeconomic variables impacting household finances," he explained.

Released on a quarterly basis to the public, the index measures aggregate consumer loan repayment records; tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing; estimates household cash flow as a means of determining financial pressure/relief; and quantifies the relative cost of servicing outstanding debt. These aspects are then combined into a single numeric score of consumer credit health. The index is compiled by the company, with technical support from market intelligence firm, ETM Analytics.

Analysis suggests that the CCI may be a good leading indicator for business activity in certain economic sectors, particularly those more closely related to consumer spending. A full report on the quarterly index can be found on www.transunion.co.za.

CCI Q3 Data

TUCCI Q3 2012 Report