Debt Review Trends and Consumer Affluence in South Africa

by | Jun 23, 2023 | Personal Finance

Debt review is a mechanism available to consumers in South Africa who are struggling to meet their debt repayments. It allows them to negotiate new arrangements with their creditors to settle their debt. The National Credit Regulator (NCR) regulates this process, collecting and disseminating data on debt review applications from Debt Counselling agencies to credit bureaus. Recent data indicates significant changes in debt review trends and consumer affluence in the country.


Debt Review Applications:

Over the past two years, there has been a noticeable increase in the number of debt review applications, as evidenced by a stacked bar chart. Among the various credit products, Credit Cards, Vehicle Loans, and Home Loans have seen a rise in representation, while Retail and Personal Loans have experienced a relative reduction.


Consumer Affluence and Debt Review:

Interestingly, high-affluence consumers, particularly those falling under FAS Group 2, have shown a significant increase in debt review representation. This trend aligns with the observed patterns of arrears, vintages, and the Composite CDI (Consumer Default Index) for these affluent consumers. It suggests that even individuals in higher income brackets are seeking debt review as a means to address the challenges of rising living costs.


Financial Distress and Affordability:

Consumers across all FAS (Financial Affluence Segmentation) groups, including FAS Groups 1, 2, 3, and 4, have experienced a substantial increase in exposure from a debt review perspective. FAS Groups 1 and 2, in particular, have shown a higher rate of growth over the past year, indicating their growing reliance on debt review to cope with the affordability challenges associated with the rising cost of living.


Challenges and Impact:

Several factors contribute to the increasing financial distress of consumers in South Africa. The Consumer Price Index (CPI) remains at high levels due to fuel cost increases and food price hikes, which are still above the target band set by the South African Reserve Bank (SARB). This has led to an upward trend in the overall cost of living, making it more difficult for consumers to meet their financial obligations. Consequently, the qualification for new credit has also been impacted, as affordability decreases and the ability to repay debt declines. Furthermore, the qualification criteria for credit have not yet returned to pre-COVID levels.


CDI and Vintages:

The Composite CDI, designed to measure the rolling default behavior of South African consumers across various credit products, has shown a significant deterioration year-on-year. This deterioration is observed across all product categories, with Home Loans and Retail Loans being particularly affected. Moreover, all FAS groups, especially those at the extreme ends of the affluence scale (FAS Groups 1, 2, 5, and 6), have experienced a decline in creditworthiness. Vintages in the Retail Credit portfolios have displayed a long-term deteriorating trend, emphasizing the reliance of FAS Groups 1-3 on credit to bridge the affordability gap.

The recent trends in debt review applications and consumer affluence in South Africa shed light on the challenges faced by individuals in managing their debt obligations. The increasing financial distress and reduced affordability among consumers indicate the need for comprehensive measures to address these issues. It is crucial for policymakers, financial institutions, and consumers themselves to work together to promote responsible financial practices, improve financial literacy, and explore viable solutions to ease the burden of debt for the benefit of individuals and the overall economy.

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