17 July 2014
The interest rate hike poses threat for consumers already struggling with debt.
For the first time since January 2014, Gill Marcus The governor of The South African Reserve Bank, has increased the repo rate by a 25 basis point, in response to the inflation rate breaking through the 3%-6% barrier.
Impact of the hike in interest rates on the current standing of South African consumers:
Recent statistics from the Credit Bureau Monitor (CBM) and Consumer Credit Market Report (CCMR) released in June 2014, revealed a record breaking number of 21.71 million credit-active consumers listed by the bureaus.
Of the 21.71 million credit active consumers, there was a 3.9 percentage point quarter-on-quarter (Q4 ended December 2013 to Q1 ended March 2014) increase in the number of consumers classified as in good standing and a 329,000 quarter-on-quarter decrease in consumers with impaired credit records, amounting to 9.60 million in total.
Although results prove to be optimistic stating that consumers are becoming more conscientious with meeting their debt repayments, the debt crisis in South Africa still remains and poses threat on the economy.
Ian Wason CEO of DebtBusters states, “Although the NCR statistics show a positive trend, this is academic, largely due to the effect of the credit amnesty. From what we can see at DebtBusters the current financial environment continues to be difficult, as our Q1 clients ended in March 2014 required 102% of their net income to service their existing debt obligations, before they came to us. DebtBusters client debt exposure to annual gross income ratio is approximately 120%. This is alarmingly high, as the majority of clients debt is short term, unsecured debt with high interest rates.”
The downward economic spiral will only be further aggravated by the hike in interest rates.
“Consumers already struggling with debt need to prepare themselves for greater challenges as the interest rate hike will have a severe impact on their financial situation,” says Wason.
Unsecured credit providers are pulling back:
Referring back to the CBM and CCMR, the amount of unsecured credit granted increased at a slower rate quarter-on-quarter, but still amounts to a total of more than R18 billion. The problem lies within the fact that fewer consumers are activity paying back their unsecured debt, as the percentage of accounts reported as ‘current’ on the unsecured credit book dropped by 2.35 percentage points to 60.74%.
Ian Wason states, “Fuelled by the rising living costs, increase in the repo rate, and overall state of the economy, this is not a surprising trend. We can only expect these statistics to decrease in Q2 2014. The interest rate hike in particular, will increase the cost of borrowing, as interest rates on loans will become more expensive. People already struggling to keep up to date with their current debt repayments will have even less disposable income. The 0.5% repo rate increase in January 2014, already caused an increase in the amount of home loan defaults, as the amount of mortgage accounts reported as ‘current’ decreased by 0.32 percentage points according to the CCMR.”
Statistics bodes for tough times ahead:
There has been a decline in short-term lending over the last 12 months, as the CCMR revealed a decrease of approximately R300 million year-on-year (Q1 ended March 2013 to Q1 ended March 2014) on the short-term credit gross debtors book.
Ian Wason states, “This suggests that payday lenders have pulled back massively on granting loans in the last year and consumers are beginning to realise that access to credit has become more difficult. Consumers no longer have the option of quick and easy short-term loans to bail them out when they need extra money.” The recent announcement from the NCR regarding Wonga’s affordability tests will accelerate this trend.
Wason goes on to say, “Credit providers have become more stringent with granting credit due to stricter affordability assessment criteria laid out in the Credit Amnesty Regulation. Consumers are now seeking the help of debt counsellors and debt management companies to alleviate their debt problems. Given the latest credit trends and as economic pressures tighten, debt counsellors will find themselves assisting more and more consumers into the next quarter and beyond. We have seen a significant increase in the number of new clients who have applied for debt review in the last quarter. Applications for debt counselling are ever-increasing.”
According to the NCR, the total number of applications for debt counselling up to March 2014 amounted to 517,008, drastically increasing from 484,690 in December 2014. In June 2014 the numbers rose again to a total of 550,169.
“In Q1 2014, DebtBusters, combined with our low income-income division, Consumer Debt Help, we assisted nearly 3,000 clients,” says Wason.
For more information contact Bhavesh Naran (Marketing Coordinator) 021 201 8567 / 083 518 1557 or email email@example.com