Bank cutback on lending could sideswipe the needy
Shift to lower-risk borrowers comes amid a weak credit market, while even non-bank lenders are cautious
SA banks are scaling back on lending to subprime consumers as they shift their focus to those with higher credit scores, a move that may leave the needy out in the cold.
The TransUnion credit market report released on Wednesday showed that lenders opened fewer new unsecured credit accounts, such as credit cards and personal loans, in the fourth quarter of 2018. They cut back mostly on those with credit scores of 730 and below.
This comes at a time when many SA banks are competing to increase their transactional income coming from the entry-level market, which comprises mostly people with limited credit records. “The move that we are seeing is that lenders are shifting to lower-risk borrowers who are prime, prime plus and super prime. It is becoming harder for most consumers to get credit,” said Carmen Williams, director of research and consulting for TransUnion Africa.
TransUnion’s data showed that clothing accounts and home loans were the only credit products that grew year on year, with the latter recording a 9.2% increase. However, the average loan amount to new customers fell 3.1%.
Data from the SA Reserve Bank’s BA900s economic returns, on the other hand, shows an uptick in overdrafts, loans and advances to the private sector from R3.5bn in the fourth quarter of 2017 to R3.8bn in 2018. However, the Bank’s data looks at overall advances and not only new accounts.
Wessel Badenhorst, banking analyst at 36ONE Asset Management, said banks were looking at new areas to grow their loan books. Many were extending unsecured credit to new customer segments because they saw this as a growth area.
“Of course, if banks focus on lower-risk clients, this leads to lower net interest income as the risk margin is lower for these clients. On the flipside, credit losses should also be lower for these clients,” he said.
The TransUnion report showed an uptick in credit accounts not paid on time. Even secured credit, which is predominantly advanced to lower-risk borrowers, saw a rise in late payments. Home loans that were three or more months in arrears increased by 40 basis points to 3.7% and similar late payment on vehicle and asset finance went up to 5%. TransUnion said the trend of extended payments on motor vehicle accounts in particular needed close attention since it had been rising for the past two years.
Badenhorst said there has been an expectation for some time now that credit losses will start increasing for banks, given the difficult economic environment. He said it was actually a surprise that a significant deterioration has not yet materialised. He said it was critical for SA’s economic situation to turn around for the credit market to become healthy again.
“If the current weak economic conditions continue for a long period, consumers and businesses will borrow less, existing loan books are more likely to show significant credit losses as it becomes more difficult to repay debt, and banks will find it increasingly difficult to use fee-driven income to paper over weak results from lending activities.”
The TransUnion report showed that issuing new bank credit cards decreased 15% year on year, while new bank-issued personal loans fell 0.5%. Even non-bank lenders are cautious. Their new credit advances dropped 35.8% year on year. It also showed that 94% of new credit cards and 92% of new home loans in the last quarter of 2018 were issued to borrowers with prime or higher scores. The picture is similar for nonbank lenders; 35% of all their personal loans went to borrowers with prime or better risk scores.
Although TransUnion did not indicate in its report how many of SA’s credit active consumers have this prime score of 730 or higher, Williams said of the 1.8-million active home loan accounts in quarter four 2018, 1.6-million were held by individuals with super prime status.