The realities of unsecured lending

Data released by the National Credit Regulator (NCR) shows total outstanding consumer credit amounting to R1.32 trillion at the end of the first quarter of 2012, with the vast majority being mortgage debt.

Credit bureau data indicates there are 19.3 million credit active consumers. Of these, according to our estimation, almost 15 million consumers have open credit accounts.

We estimate that 30% of borrowers in the R3, 500 to R10, 000 income earning segment spend at least half their income repaying debt.

As at Q4 2011 the gross debtors book for most categories of consumer credit, including mortgages, secured loans and credit facilities, had declined in real terms compared to the last quarter of 2007. In contrast the unsecured debtors’ book has been growing strongly at over 20% per annum in real terms. In 2011 unsecured credit accounted for almost one quarter of all credit granted, compared to 10% in 2008.

“Growth in unsecured credit granted is most noticeable in higher income earning segments. In 2008 the NCR reported that a total of R5.5 billion of unsecured credit was granted to borrowers earning R15 000 or more per month. In 2011 this had increased to almost R30 billion, a growth of 67% per annum. In the next tier down growth in credit granted to borrowers earning between R10 000 and R15 000 grew in excess of 60% per annum between 2008 and 2011,” adds Illana Melzer co-founder of research firm Eighty 20.

This growth is explained by several factors including market growth, increased penetration and increased average loan sizes.

While there has been a recession the income pyramid has continued to shift since 2008. Survey data indicates that in 2011 there were 1.2 million more people who earn R10,000 per month compared to 2008.

In part this is explained by inflation-driven ‘bracket creep’ but it has also been fuelled by a growing public sector which together with state owned enterprises employed an additional 270,000 workers between 2008 and 2011. Over that same period the public sector wage bill increased by R110 billion.

“The average number of new unsecured loans per person has increased across all segments of the market with the notable exception of those earning up to R3500 per month. In 2008 the ratio of new loans to adults earning R10 000 or more per month was 0.3. In 2011 it was 0.5. At the same time, average loan sizes in this higher income earning segment of the market increased from just under R16 000 to over R26 000,” continues Melzer.

As average loan sizes increase, loan terms have been extended. Capitec now offers an unsecured loan for R230 000 repayable over seven years at fixed interest rates. In 2009 its maximum loans size was R50 000 repayable over three years.

“While longer loan terms mean more affordable installments for borrowers, it also means they get locked in for long periods,” says Melzer. Should the borrower need to access asset-backed credit such as a mortgage in the future, their ability to do so may be limited by their high usage of unsecured credit.

There is no reliable data available to inform us about the uses of these loans by consumers. Based on fairly limited published data it appears that consolidation – using loans to repay other loans – is significant, with roughly one quarter of all unsecured credit being used for this purpose. Consolidation may well be a sign of a maturing industry as lenders find fewer opportunities to grant credit to new clients, and focus on granting more credit to existing borrowers.

“With regard to the health of the book, NCR data indicates that the proportion of unsecured loans that are 90 days in arrears or more has remained fairly stable. However, given that the book is growing rapidly and that lenders have varying write off policies, it is not easy to draw firm conclusions from the data,” adds Melzer.

XDS data indicates that borrowers typically have multiple products with differing arrears profiles. XDS data indicates further that roughly one third of borrowers who have unsecured loans are 90 days or more in arrears. In contrast 7% of those with mortgages are 90 days or more in arrears. However, a further 16% of mortgage borrowers are current on their mortgages but 90 days or more in arrears on at least one other credit product.

“These borrowers are vulnerable and mortgage lenders need to watch them carefully. Our data also indicates that many individuals who were granted micro loans in 2011 are serial borrowers. Of those who took out a micro loan in 2011, 28% took out five or more micro loans in that year, adds Vivian Pather, CEO of XDS.

In each segment there is a noticeable margin of borrowers who seem to be stressed. This is highest in the R3, 500 to R10, 000 income category where 30% of that segment allocates more than half of its income to repaying debt.

It is important, when dealing in a consumer orientated industry, that a credit bureau is consulted as it is well placed to shed light on the trends that are emerging in the consumer space and can present insightful information that is informative to both credit facilitators and lenders. When presenting such findings, the credibility of the data given is imperative and research shows that most consumers are not honest when asked about their debt levels.

That is why companies such as Eighty20 rely on us to provide an accurate measure of credit information.