he rate of consumers who defaulted on their loans for the first time increased in the second quarter of 2022, new data from Experian South Africa’s Consumer Default Index (CDI) shows.
The CDI increased quarter-on-quarter, from 3.68 in Q1 2022 to 3.80 in Q2 2022.
Year-on-year, however, the improving trend still remains, although not as pronounced as the 16% improvement seen in 2022 Q1. The index moved from 4.05 in Q2 2021 down to 3.8 in Q2 2022, representing a relative improvement of 6%.
The information services company said that this increase in consumers who defaulted on their loans for the first time from Q1 to Q2 2022 is aligned with the typical seasonality observations by the CDI.
This is where the index increases from March to May – mainly due to credit lending increasing during the Black Friday and Festive season spending spree in the preceding year, Experian said.
However, the relative year-on-year improvement suggests that the market is rapidly moving away from the tail end of reduced credit lending during the pandemic and is, in all probability, returning to the trend observed before the pandemic, it added.
The most significant year-on-year improvement in CDI was observed for Home Loans, moving from 1.82 in Q2 2021 to 1.62 in Q2 2022 – showing an 11% improvement.
According to Experian, however, the year-on-year improvement was not observed for all products. Vehicle and Retail Loans saw a 2% and significant 12% deterioration in CDI, respectively.
In a previous report on the CDI in Q1 2022, head of commercial strategy and innovation at Experian Africa Jaco van Jaarsveldt said: “The impact of the rapidly rising fuel, gas and grain costs, which are significant contributors to the global rise in inflation, is starting to have a direct impact on consumers across all products”.
Therefore, the deterioration of vehicle and retail loans could be viewed as evidence of this direct impact.
The continued quarter-on-quarter decline in Q1 2022 indicates that consumers are becoming increasingly exposed to the rising cost of living, said Experian.
Additionally, recent interest rate hikes to manage inflationary pressures and increased fuel prices have resulted in consumers across all market segments being exposed to higher living costs and increased credit instalments – in many cases.
Financial Affluent Segments (FAS) most affected
While a year-on-year improvement trend in CDI is visible across all consumer segments, the quarter-on-quarter trends are vastly different, with signs of distress clearly visible, said Experian.
The most affluent consumer group, the ‘Luxury Living’ segment, represents the upper crust of South African society, which is highly exposed to secured credit and is typically deemed to be the least risky consumer segment.
Q2 2022 continued to show that the most affluent consumers continue to be under more financial strain – relatively speaking – than their less affluent counterparts.
Experian said that this group’s quarter-on-quarter CDI remained relatively flat, while on a year-on-year basis, the CDI shows a reverse trend with an 18.8% deterioration from 2.12 in Q2 2021 to 2.53 in Q2 2022.
This is mainly because these consumers typically continued to qualify for new credit throughout lockdown periods and are now under pressure due to increased interest rates.
Interestingly, on the opposite side of the consumer segmentation scale, the relative year-on-year improvement in CDI is more pronounced for less affluent groups like group 3 – ‘Stable Spenders’ and group 4 – ‘Money-Conscious Majority’ at -14% and -17%, respectively.
The ‘Money-Conscious Majority’ makes up about 40% of the population and saw the greatest relative CDI improvement from 6.95 in 2021 in Q2 to 5.76 in 2022 Q2 (17% relative CDI change). This group comprises older citizens who are conscious of where and how they spend their money – often seeking financial products to cover basic needs or unforeseen expenses.
However, Experian noted that the cost of living had increased significantly over the last two years, leading to an increased inability of consumers to meet debt obligations with a reduction in qualification for new credit.
Experian expects the CDI trend to continue deteriorating as interest rate increases take effect and advise consumers to manage their budgets carefully through this challenging time.