With Reserve Bank governor Lesetja Kganyago pointing to further interest rate hikes in the coming months, new data from the National Credit Regulator (NCR) shows a rising trend in the number of rejections in credit applications as South Africa’s middle-class feels the pinch.
The big interest rate cuts that followed the pandemic shock spurred a sharp rise in demand for credit as the economy gradually reopened, said Absa in a note on Thursday (6 October). However, the pace of the increase is now tapering off as rates continue to rise.
The Reserve Bank announced a second 75 basis point rate hike in September, taking the benchmark rate to 6.25%. While economists have pencilled in at least another 50 basis point hike still to come, the central bank itself has made it quite clear that there is room for more.
In the South African Reserve Bank’s six-month policy review, it noted that at 6.25%, the benchmark matches its January 2020 level – before stop-start coronavirus lockdowns and supply-chain disruptions prompted unprecedented easing – compared with an average rate of 6.64% in the year before the pandemic struck.
However, with inflation still sitting far above the targetted range (4%-6%) at 7.8%, the concern from analysts is that rate hikes are coming harder and faster than even the SARB’s own model has forecast.
To date, the central bank has taken a hawkish view on inflation, and decisions on rate hikes have not been unanimous, with almost all dissenting votes calling for even greater hikes.
These rate hikes are putting pressure on already-embattled consumers – particularly the country’s middle class, who are saddled with debt from home and vehicle loans. And this pressure is now starting to be reflected in credit data.
Quarterly credit data from the NCR’s Consumer Credit Market Report and Credit Bureau Monitor shows that, after hitting a record high in Q1 22, the number of new credit applications was broadly unchanged at 13.1 million in Q2.
While this is about 14% higher than the average quarterly number of new applications in 2019, the supply of credit is still a constraint, Absa noted.
“The rejection rate on new credit applications has risen slightly in recent quarters, reaching 66.7% in Q2 from 66.4% in Q1 and 66.0% in Q4 – again much higher than the 57% average in 2019.
“We suspect that these higher rejection rates reflect lender concern about the creditworthiness of low- to middle-income consumers, where job and income losses due to the pandemic continue to be relatively large,” the bank said.
The value of new loans from banks and other credit providers increased by R146.6 billion on a seasonally adjusted basis, equivalent to q/q growth of just 2.1%. This was mostly driven by mortgage advances (+4.9% q/q seasonally-adjusted), credit facilities (i.e., credit cards, store cards and bank overdrafts, +3.6% q/q) and unsecured credit (+3.5% q/q).
This has more than offset a slight decline in non-mortgage secured credit, the bank said.
Debt is rising
The NCR’s data shows that total outstanding consumer credit balances in June 2022 was R2.19 trillion, representing an increase of 1.13% quarter-on-quarter and of 6.35% year-on-year. The trends for outstanding balances for the quarter ended June 2022 were as follows:
- Mortgages increased by R18.00 billion (1.60%) quarter on quarter and by R82.19 billion (7.75%) year on year.
- Secured credit increased by R1.08 billion (0.23%) quarter on quarter and by R20.31 billion (4.42%) year on year.
- Credit facilities increased by R3.67 billion (1.30%) quarter on quarter and by R20.71 billion (7.79%) year on year.
- Unsecured credit increased by R2.30 billion (1.07%) quarter on quarter and by R6.13 billion (2.92%) year on year.
Positively, consumers classified in good standing increased by 197,993 to 16.63 million consumers, the NCR said. This amounts to 62.73% of the total number of credit-active consumers.
The number of credit-active accounts increased from 84.73 million to 85.49 million in the quarter ended June 2022.
The number of impaired accounts has decreased from 19.59 million (23.12%) to 19.26 million (22.53%) in June 2022, a decrease of 327,075 quarter-on-quarter and 598,021 year-on-year.
Read: South African Reserve Bank sees need to raise interest rates further
