By Ian Armitage
Credit information giant TransUnion's latest Consumer Credit Index (CCI) has a stark warning to lenders and households – beware the dangers of using credit to fund short-term consumption.
The CCI fell into negative territory for the first time in more than three years in the third quarter of 2012, coming in at 48.6 points from 51.2 points in the previous quarter.
South African consumer credit health has "deteriorated" says TransUnion Credit Bureau's CEO Geoff Miller. "Our index was influenced by two factors: the number of consumer loan accounts that have lapsed - meaning 90 days in arrears - grew by five percent year on year. In addition, we are seeing a rise in the use of credit cards on year over year basis with utilisation increasing eight percent in 2012."
He called the current pace of growth in unsecured lending "unsustainable".
"Of note is the fact that there are more people that are delinquent. Delinquencies are increasing. The numbers of customers who aren't paying back is increasing.
"Unsecured lending is up 20-30 percent so there's a lot more credit out there, a lot of banks are out there pushing for easy-to-get unsecured credit and so consumers are feeling a little stressed. We've seen a move away from 30, 60, 90 day loans to 12, 24, 36 and 48+ month loans and so consumers are having to manage longer lending term relationships and with the economy the way it is, overall, that is causing a bit of stress. TransUnion doesn't think there's a credit bubble, but that the level of growth in the unsecured lending space can't continue at its current pace."
He says big lenders are well protected, however.
"If you look at the balance sheets of the big four banks, their exposure to unsecured credit only makes up between four to seven percent of the total debt outstanding. Therefore, even if delinquencies rise substantially it won't hurt them too dramatically. The other banks that are more reliant on unsecured lending haven't shown any stress either, but they're more open to potential future stress.
"However, you have to look at it from the consumers' side also. There were Parliamentary hearings a couple of weeks back looking at credit amnesty. From our perspective it's not something that will have the desired effect that the government is wishing for.
"Regardless, the decline reflects worsening loan repayment behaviour and a greater use of revolving credit by South African households to supplement monthly budgets.
"All things said, 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."
TransUnion data shows that impaired accounts now comprise around 1.8 percent of total accounts.
While this figure has been rising, it remains below the distressed levels of 2009 when impairments increased to 2.2 percent of total accounts.
"The number of impairments would have to increase by about 20 percent to get back to 2009 levels," says Miller. "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."
What is TransUnion's CCI? Well, it is certainly unique. The CCI is driven by objective market data rather than consumer surveys or questionnaire responses.
"Our indicator combines actual consumer borrowing and repayment behaviour obtained from the TransUnion credit database with key, publically available macro-economic variables impacting household finances," says Miller.
Released on a quarterly basis to the public, the TransUnion CCI 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 TransUnion, with technical support from market intelligence firm ETM Analytics.
"Unlike other indices it's not a survey based," says Miller. "There are two major components. One is macro-economic data and the other is data from the TransUnion Credit Database. On the macro-economic side we look at things like money supply, inflation, debt servicing costs that are sourced from Stats SA and SARB and compiled by our our partner ETM Analytics. We aggregate some of those numbers to arrive at something that's more relevant for consumer credit and then the other half is from our database. TransUnion has a database of every credit active consumer here in SA. We get data from over 1200 financial institutions here as well as telecommunications companies and insurers. We look at stuff like credit card utilisation, which is basically your current balance versus your available limit. On a year-on-year basis we have seen that go up eight percent, so consumers are using more credit for their purchases.
"I guess what is unique is that it's the only index out there that's looking at consumer credit behaviour. Other industries are typically more service based and rely on feedback from individuals. Ours are all statistics or reliable data assets. We have done some studies, we've looked at it against retail sales, cars sales, GDP and it seems to correlate quite well to the business cycles. In some cases, what we've seen is that the index is actually leading and showing where certain things are going. It seems to trend quite nicely with other key indicators in the country."
According to Miller, the economy is "bumping" along.
"It's growing a little but not much.
"I don't think there's huge pessimism, but also there isn't huge optimism. I think the thing that would turn things into a positive nature would be some finality to what is happening in the eurozone. With all the uncertainty there, it has hurt SA. If there's some definitive way forward that creates stability then some of that trade will pick up and that will flow down to the rest of the economy.
"I think there is some reason for relative optimism for the remainder of 2012. The Reserve Bank cut interest rates by 50 basis points in July, 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."
TransUnion is proof of the value of data capture. South Africa is its largest operation outside of the U.S. and as well as capturing information on consumers and businesses from a credit perspective, the firm has maintained a database on almost every automobile in the country.
"We have an agreement with the original equipment manufacturers that every time they import or manufacture a vehicle here in South Africa they give us the information around the VIN number and the make model of that vehicle," Miller says. "We then get information from dealers, from the police and other areas, to do a couple of things. One is verification of the vehicle to ensure that it hasn't been stolen or it's not wrecked and is now re-titled, as well as providing valuation services - so it's from a used car perspective. We partner with the dealers and find out, for example, what did this BMW sell for? And we'll actually model what the used car value should be based on the extras, mileage and all those other things."
In April TransUnion Auto Information Solutions, the firm responsible for the capture of automotive information, developed an award-wining and innovative mobile app with the help of Business Connexion.
"The app allows dealers to punch in a registration or VIN number and find out information about that vehicle instantly as opposed to having to look it up in a guide or on the internet etc. We will be extending this service directly to consumers in the near future," Miller says.
The app provides subscribed dealers with practically instant information about specific passenger and commercial vehicles, as well as motorbikes, giving them the information they need to make an informed buying or selling decision anytime, anywhere.
"Our core business is data," Miller says. "We provide lenders with the tools and data to make effective and efficient lending decisions."
To learn more visit www.transunion.co.za.
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