The Experian Consumer Default Index (CDIx) for Q4 of 2023, has revealed a deterioration from 3.97 to 4.68 – a relative change of 18%.
The CDIx, which measures the rolling default behaviour of South African consumers with Home Loans, Vehicle Loan, Personal Loan, Credit Card and Retail Loan accounts, also highlights that all product-specific CDIx metrics changed for the worse year-on-year, with home loans and credit cards showing the most significant deterioration.
This trend implies that consumers in the mid-to-high income brackets, typically eligible for these premium credit products, are encountering heightened challenges in meeting debt obligations and are increasingly reliant on their credit cards.
Moreover, the report highlights mounting pressure on affluent consumer segments to fulfil their debt obligations, resulting in a surge in applications for Debt Review. This uptick signals a growing need for financial advisory and debt management services.
“These findings have significant implications for financial institutions operating in South Africa. With an increased risk of defaults, particularly in home loans and credit cards, banks and other lenders may need to reassess their risk management strategies and lending criteria,” said Jaco van Jaarsveldt, Experian’s head of Commercial Strategy and Innovation.
CPI remains under 6% threshold
The Consumer Price Inflation (CPI) has remained within the South African Reserve Bank (SARB)’s target band of 3% - 6%, since June 2023 following the 13 preceding months where the CPI exceeded this target band.
During this period, CPI reached a peak of 7.8% in July 2022. The December 2023 decrease in the CPI coincided with a drop in food inflation, which was good news for the cash-strapped South African consumer base, it said.
“One of the significant points regarding the cost of living has been the costs associated with electricity – both from an Eskom tariff perspective and an alternative electricity perspective like generators and solar – which are becoming increasingly prevalent in the face of continued loadshedding," said Van Jaarsveldt.
Extended periods of elevated interest rates are taking a heavy toll on consumers active in credit markets.
Since April 1, 2023, the prime lending rate has remained steady.
The South African Reserve Bank's objective, through this sustained high-interest rate environment, is to bring the Consumer Price Index (CPI) back to 4.5%. This prolonged period of rising interest rates, now spanning ten months, is exerting significant pressure on credit-active consumers.
This strain is particularly acute for individuals with exposure to secured credit, such as mortgages and vehicle loans. Additionally, younger consumers who are relatively new to managing credit are finding themselves navigating through unfamiliar territory during these sustained periods of high interest rates.
Meanwhile, there is a robust appetite for consumer credit in the market, as evidenced by an increase in applications during the third quarter of 2023, according to data compiled by the National Credit Regulator.
The sustained high levels of application activity suggest that consumers are seeking credit to address shortfalls in their living expenses. However, approval rates remain low, with the latest data indicating only a 31.1% approval rate.
This means that more than two-thirds of credit applications are being turned down. The low approval rates are partially attributed to consumers' inability to take on additional credit commitments, given the financial pressures they are facing due to the rising cost of living.
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