More people wanting more credit could be a sign of strain

First Published in Business Day on   November 27th, 2022   |   by   Isaah Mhlanga

More people wanting more credit could be a sign of strain

During the low-interest regime of the pandemic, many consumers took the opportunity to put their credit status in order. But rising interest rates could be straining budgets now

As usual at the approach of the festive season, discussion is turning to how households should spend their end-of-year bonus pay cheques so that when January comes, they do not have to run to loan sharks for help.

This year the discussion is particularly animated due to soaring unemployment, high inflation and rising interest rates.

Consumers are squeezed between the high price of food, electricity and transport on the one hand and the rising cost of servicing debt on the other as the South African Reserve Bank pushes up interest rates in response to inflation.

We looked at one indicator of financial wellbeing — credit standing of consumers — to get a sense of the impact of rising interest rates.

First, let’s go back to the pandemic, when the Bank slashed policy rates from 6.25% in January 2020 to 5.25% two months later and to an all-time low of 3.5% in July that year, in addition to taking other measures intended to help households and businesses deal with the impact of lockdown. 

Policy rates remained unchanged at 3.5% for the rest of 2020 and for much of last year until, in November 2021, the Bank’s monetary policy committee hiked rates for the first time since the pandemic by 25 basis points.  This was prompted by the fact that headline inflation had surged to 5.5% from a 2.1% trough in May 2020. It was clear that inflation was on track to break out of the 3%-6% target band over the next six months.

“Thus, the reduction in policy rates has helped just over 2-million credit-active consumers bring their credit accounts up to date and keep them there”

The MPC’s 75bp rate hike this week, for a cumulative rise of 350bp over the past 12 months, takes the repo rate to 7%, its neutral level. The Bank has now fully reversed the Covid stimulus and pushed the rate higher than where it was when the pandemic began.  

How has the credit standing of consumers changed over the same period?

Data from the Credit Bureau Monitor shows that the number of credit-active consumers rose from 25.2-million in December 2019 to 28-million in March 2020, a surge of 2.8-million over one quarter. The 28-million represented a record high since this data was first collected in June 2007.

Of the total number of credit-active consumers, 16.63-million were in good standing as of June 2022, meaning that they serviced their debts timeously. This was up from 14.5-million in December 2019. Thus, the reduction in policy rates has helped just over 2-million credit-active consumers bring their credit accounts up to date and keep them there. 

There is however some deterioration within this period. The number of consumers in good standing peaked at 17.52-million in March 2020. The subsequent deterioration to 16.63-million might be explained by the rise in unemployment during the period of record low interest rates. 

In December 2019, 46% of consumers were in good standing while 12% were one or two months in arrears. As of June 2022, 63% of consumers were in good standing and 8% were one or two months in arrears. This mean there has been an improvement in consumer credit standing since the pandemic hit.

There was a decline in impaired records from 10.7-million to 9.9-million over the same period.  The proportion of those with arrears of three months or more stood at 24.7% at the end of the second quarter but there were improvements in the proportion of those with adverse listing (down from 13% to 10%) and those with judgments and administration orders against them (down from 4.9% to 2.9%).

The data shows that many consumers took advantage of the low-interest regime to put their credit affairs in order, and that caution is now the watchword.  The number of inquiries from consumers seeking credit dropped from an all-time high of 27-million in December 2019 to pandemic low of 9-million in September 2020. But this figure had crept up to 15.3-million by June, and the rise in inquiries in recent months could be a sign of financial strain due to higher interest rates.

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