850,000 new consumers received an impaired
credit record in the past 12 months totalling 7.3 million consumers as at 31
December 2008. This was as a result of defaulting on part or all of their debt
obligations. With an average of 3 accounts per consumer it can be estimated
that this translates into an additional 2.55 million accounts are held by
financially unhealthy consumers. A mere 2.75 million of these consumers are in
arrears of three or more months. Therefore credit providers are certainly
relying on over indebted consumers to meet their monthly obligations.
The 7.3 million consumers with impaired
records are represented by only 13.73 million impaired accounts. We believe
that the challenge for credit providers is that the consumers approaching Summit, who are over
indebted, have on average ten accounts due and not the populations average of 3
accounts. The reason for this is that most over indebted consumers accessed
additional debt to fund shortfalls as a short term solution. That was until now,
where credit is no longer easily accessible and over indebted consumers are
finally hitting a dead end. The borrowing from “Peter to pay Paul” party has
come to an end and the result will be that credit providers’ will now only
start to feel the true consequences of their reckless lending or ineffective
credit granting rules of the past three years. The 7.33 million consumers will
start defaulting on their remaining accounts with no additional funds for the
credit providers to tap into and many new defaulters will enter the fray.
Already we note that the average number of accounts in three or more months
arrears per consumer has increased by 16.3% in the 12 months between December
2007 and December 2008 (see table 1) from 2.45 accounts to 2.85 accounts. This
will continue to increase whilst new entrants who were funding shortfalls with
debt will start to default and add to these numbers. The disparity between
household debt extended and change in disposable income (see graph 1) was extreme
over the past 5 years and the consequence has yet to hit home whilst consumers
accessed additional debt to fund shortfalls and credit providers consolidated
defaulting accounts which hide accounts in arrears. The worst is yet to come
especially owing to the fact that no workable solution currently is accessible
to the over indebted consumer. What do you do if your income less living costs
is less than your debt instalments?
Debt counselling is being resisted and
opposed by most credit providers who seem to prefer the capital reductions
after a forced sale than an agreed upon repayment plan. Approximately 1% of
debt counselling applications has been resolved through an order mainly owing
to the credit providers unwillingness or inability to execute a plan to come to
an agreement.
Even the agreed upon formula set up by the
credit providers through the National Debt Mediation Association (NDMA) is
being rejected or processes breached by its very creators.
Negotiating with your credit providers
always results in one or two rejecting your offer causing a cash flow shortage
making all proposals ineffective.
Debt is no longer as easily accessible to
fund shortfalls which was a time bomb in any event
The result is a significant portion of
credit active consumers not able make ends meet and have no real solution to
access except to default and await the collectors. The issue we find on the
ground is the extent to which these consumers are already over indebted. The
average disposable income available to pay debt instalments accounts for 35% of
their monthly debt obligations.
The conclusion we believe is that although
the multiplier effect is not present in South Africa in the form of CDI’s, we
certainly have a significant portion of our consumers who are over indebted and
only starting to default on their debt obligations. The result is that the
effect of the consumers over indebtedness is yet to peak and therefore to
expect more pain being disclosed at credit providers in the future.
