8 BusinessDay www.businessday.co.

za Thursday 25 February 2021

INSIGHTS CREDIT
MANAGEMENT Powering opportunities to create a better tomorrow

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Consumers, households under pressure

•lenders
Credit demand is improving, but
will continue to tighten loan
trend to “a reduced appetite for
new credit reflecting increased
unemployment and high levels
of the pandemic’s economic
impact remains largely
unknown and difficult to
showed an improvement after
reaching an all-time high of
5.93% in July 2020. The index
supply-side factors will take
longer to normalise.
“The crisis has forced
criteria, writes Pedro van Gaalen of financial hardship”, as well as
low consumer confidence,
quantify as the country remains
in lockdown, consumer credit
improved from the 4.67%
registered in Q3 to 4.07% in
lenders to take more considered
and differentiated views in their

T
despite eased lockdown demand has already shown Q4 2020. exposures,” says Mauro
he Covid-19 payments past due) increased restrictions and a rise in signs of recovery in 2021. “The improvement can Longano, Head of Fixed Income
pandemic’s across all major consumer economic activity. “Through tracking and primarily be attributed to a Research & Portfolio Manager at
economic impact credit categories as consumers The report also cited level 5 analysis of the emerging combination of the impact of Coronation Fund Managers.
unleashed the continued to experience and 4 lockdown regulations, patterns in the credit and related payment holidays applied by Lenders will continue to
perfect credit storm, financial stress. And concern which restricted physical access industries, we see early most lenders, especially on tighten their loan criteria,
affecting consumer among impacted consumers to locations to apply for credit, indicators of what is to come never before delinquent despite the South African
creditworthiness, affordability, about their ability to pay their particularly retail stores, as an over the next few months,” accounts, as well as the Reserve Bank’s and National
demand and access. bills and loans remains high at additional factor. continues Van Jaarsveldt. significant reduction in the Treasury’s concerted efforts to
“The continued impact of a 84%, according to the survey. Supply-side constraints have “Overall, we have seen the volume of new accounts ensure there is sufficient
worsening general economic Credit products remain the also added to the Covid-related number of consumer enquiries opened since the onset of the liquidity in the monetary system
environment in SA, along with bills and loans consumers most Carmen Williams … dynamics. credit crunch, despite ample Jaco van Jaarsveldt … indicators. for additional credit has Covid-19 pandemic with the to support credit extension.
the pandemic’s impact and often indicate they will be market liquidity. Prevailing recovered to pre-lockdown majority of lenders tightening “Unfortunately, lending still
additional macro forces, such as unable to pay, with personal Van Jaarsveldt. economic conditions have affected (-23.1%), primarily due levels, even slightly exceeding their lending criteria and requires confidence, and this
rising unemployment and a lack loans (37%), retail/clothing “This could be a factor of weighed on credit origination as to their utility during the the levels observed over the new credit exposure,” explains will take longer to filter through
of economic growth, has store accounts (32%) and credit consumers being able to repay lenders continue to adjust their lockdown. Consumers relied on same period in 2020.” Van Jaarsveldt. as growth improves and a
significantly impacted card bills (32%) ranked in the smaller credit commitments risk appetite, modify their cards as a payment and Experian’s Consumer However, while demand- vaccine deployment strategy is
consumers’ ability to repay top three. and not larger commitments, underwriting models and purchase mechanism to Default Index for Q4 2020 also side drivers stage a recovery, formulated,” says Longano.
debt,” says Jaco van Jaarsveldt, Experian data reveals other such as home loans or vehicle retain a cautious approach to complete online transactions,
Chief Decision Analytics Officer changes to credit repayment asset finance. Consumers credit extension. says the report, which

Credit challenges loom

at Experian Africa. trends where, before Covid-19, started to prioritise secured As a consequence, correlates with the e-commerce
The latest TransUnion consumers prioritised their lending payments again after originations (measured by new boom experienced in lockdown.
Financial Hardship Survey in secured payments over July 2020 as many payment accounts opened) fell by double “These results show the
South Africa showed that 82% unsecured payments. holidays matured and deferred digits year on year for all major changing dynamics of both the
of South African consumers “However, a change is payments ended.” consumer credit categories, demand and supply sides of
reported their household evident after April 2020, when Demand for credit also according to the TransUnion credit,” affirms Carmen
income was negatively consumers started missing declined by double-digits across report. The decline in Q2 2020 Williams, director of research Salary cuts and job losses due to any form of financial relief. response to a greater potential
impacted by Covid-19. payments on their secured all the major consumer lending volume was most pronounced and consulting for TransUnion the struggling economy and “Many bank clients benefited for defaults.
Serious-level delinquencies products and began to repay categories in Q3 2020. for clothing accounts — down South Africa. lockdown restrictions that from multiple payment relief “This creates a space for
(accounts three or more their unsecured products,” says TransUnion attributes this 69.4%. Credit cards were least While predicting the extent continue to curtail trade have measures running across credible reputable, alternative
stretched consumer finances. different products, all activated lenders to enter the market to
In response, the government at different times and potentially offer innovative financing
provided consumers with all with varying terms and solutions,” asserts Palmer.
financial assistance through conditions,” explains Levinsohn. “However, the concern is
unemployment benefit Consumers will likely rely that vulnerable and desperate
programmes, while lenders on a mixture of traditional and consumers will turn to micro-
offered repayment holidays alternative secured and financiers and alternative
and deferrals. unsecured credit to meet any lenders in the unsecured
“South African banks financial shortfalls, which could lending space that are not
responded to the crisis by lead to greater registered with the National
approving more than R30.6bn overindebtedness. Credit Regulator and apply
in relief to affected individuals “For good, creditworthy reckless lending criteria.”
and businesses as at July 7 clients with low loan-to-value Lenders could also
2020, according to the Banking ratios, banks can re-advance experience potential challenges
Association of SA,” says Gareth their facilities,” suggests Gary related to collections on
Levinsohn, Commercial Palmer, CEO at Paragon deferred debts or new loans
Director at specialist collections Lending Solutions. amid the ongoing financial strife.
agency Shapiro Shaik Defries “But with properties losing “For at least the next 12 to 18
and Associates. value in real terms, banks months, the financial services
And these efforts had a remain conservative. And sector will need to implement a
measurable impact, according without sufficient equity in a more considered and
to market research conducted house or vehicle, a bank may customer-centric collections
by short-term loan provider decide to exit that deal.” and recovery approach,”
Wonga. By analysing data Banks willing to extend explains Levinsohn.
gathered during loan unsecured and personal loans The landscape for
applications, Wonga identified a may add a risk premium in traditional collection practices
drop in loan dependency during has also changed dramatically,
lockdown. with factors to consider from
“Since July 2020, we have both a legislative and an
noted an 18% decrease in ethical perspective.
customers who applied for a “Financial services
Wonga loan with more than one providers and their outsourced
other payday loan active on collections partners will likely
their bureau record,” explains need to adapt their relationships
Bryan Smith, Content Manager to the new landscape and strike
at Wonga. the right balance by acting in
“There was also a 32% the customers’ best interests
reduction in applicants who given their individual
held more than one short-term circumstances, while also
loan with another lender.” collecting outstanding debts to
However, as these initiatives protect financial services
end, numerous South Africans providers and the sector’s
will find themselves without Gareth Levinsohn … adapt. integrity,” says Levinsohn.

Helping clients Working capital is critical

Extended lockdown support local corporate clients. can generate adequate future
restrictions, reduced consumer However, accessing credit cash flows to service

understand their spending and rising input costs

have negatively impacted
business cash flows. The ability
to access credit has become
and funding to address cash
flow constraints is proving
more challenging for new
clients and small businesses.
repayments over the long term,”
continues Moritz.
Says Hazel Banach, Product
Head at Investec for Business:
critical to sustaining companies Many lenders continue to take a “A multifaceted assessment of

customers in through this economic crisis.

“When the crisis began, most
institutional lenders increased
their liquidity buffers to protect
against future uncertainty and
cautious approach in the
prevailing high-risk
environment, despite
historically low interest rates.
“Credit providers have to
the company is necessary to
understand the business
operation before, during and
after the lockdown. Lenders
must also work with owners
adopted a wait-and-see adapt their credit and risk and management to

times of disruption. approach. These factors had a

significant impact on access to
credit for corporates,” says
Trevor Rolfe, Head of Debt
Solutions at Addendum
models in response to these
unprecedented times,” explains
Daniel Moritz, chief financial
officer at Merchant Capital.
“Applying historic lending
understand forecasts and
growth prospects.
“When assessing risk in this
environment, lenders need to
differentiate between an interim
Financial Technologies. criteria in this environment financial impact and a
www.experian.co.za “However, almost all large would preclude many fundamental deterioration in the
institutional lenders recognised businesses from accessing financial health of a business,”
the important role they play in capital due to the short-term suggests Banach.
the economy and have shown a disruptions to their cash flows.” “Tailored lending solutions
willingness to support Moritz believes legacy credit should serve as business
corporate SA in these difficult risk models need to be re- enablers by allowing companies
times, even more so among assessed in these times to to access the right type of
corporates that had a pre- address the needs of good funding at the right stages in
existing funding relationship.” businesses experiencing short- their business cycle. This will
This was evidenced by the term pressure. help them weather the current
volumes facilitated through the “While it is important to challenging operating
Addendum Funding Solutions provide struggling businesses environment and provide
Platform, with more than R4bn with access to working capital ‘headroom’ to grow in step with
raised from institutional funders to sustain them through the the economic recovery and
over the past nine months to crisis, lenders must ensure they beyond,” she says.
BusinessDay www.businessday.co.za Thursday 25 February 2021 9

INSIGHTS: CREDIT MANAGEMENT

Tech is vital for recovery Trade credit providers

caught in perfect storm
•growth
Rebound and
hinge on
However, the pandemic has
highlighted critical gaps in the
sector’s ability to deliver
maintaining the ability to grow
their books responsibly,” says
TransUnion Africa’s
Trade credit providers are
feeling pressure from multiple
every 400-500 B2B credit
applications is fraudulent, which
investment in effective digital journeys.
“Despite past investments,
CreditVision Product Manager
Christelle Rall.
fronts amid an economic
downturn, increased fraud and
means companies must invest
additional resources to verify
digital innovation many decision-makers admit “The Covid-19 crisis requires a lack of cover from credit new account applications.
their effectiveness at engaging lenders to reconsider how they insurers due to the pandemic.
and automation online customers has not assess credit risk. Including Trade credit facilitates PREMIUM ESCALATIONS

A
improved sufficiently during the nontraditional variables, new billions of rands in transactional And a hard market in trade
s SA navigates its past two years and is not policies and alternative data will value annually as businesses credit insurance is yet another
way through the keeping pace with customer support their risk assessment extend credit to their element in the credit storm.
pandemic- expectations,” says Pieterse. processes and enrich decisions customers, usually on a short- Trade credit insurance
induced “The pandemic exposed the across the entire credit life term basis, to support trade. providers implemented
economic crisis, need for lenders to enhance cycle,” says Jaco van Jaarsveldt, “The average business-to- significant premium
technology will play an Ferdie Pieterse … effectiveness. digital channels and re-engineer Christelle Rall … create a path. Chief Decision Analytics Officer business (B2B) credit escalations over the past 18
important role in the recovery. customer journeys, both for at Experian Africa. transaction is almost R1m,” months to cover business’
For instance, financial of research and consulting for general account servicing and detection and prevention “Ultimately, this data-centric explains Frank Knight, CEO of credit transactions.
services providers rely on data TransUnion South Africa. applications,” adds Williams. solutions tend to negatively approach will drive greater Debtsource. “Some clients have seen
analytics and business “By taking action early, Embracing advanced digital impact that experience,” says access to credit for consumers, “As such, a default by a insurance costs increase by as
intelligence solutions to gain lenders can give consumers the front-end and onboarding Keith Wardell, director for alongside profitable growth for debtor poses a significant much as 40% compared to
insights into the current market. support they need while also solutions would simultaneously product at TransUnion Africa. lenders through more informed business risk and would early- to mid-2019. In certain
According to Experian effectively managing the risk in address the challenges of rising “Finding the balance requires lending decisions.” negatively impact cash flow and Frank Knight … remain cautious. higher-risk industries with high
research, 43% of decision- their portfolio.” online fraud targeting a digital onboarding process that Decision makers also plan to profitability.” claim ratios, insurance policies
makers currently struggle to get Based on Experian’s consumers. TransUnion’s latest delivers a friction-right invest in industry 4.0 The tough trading conditions credit.” However, every have been cancelled altogether.”
a complete picture of research, a significant Consumer Financial Hardship experience, while increasing technologies to drive additional experienced in 2020 raised the declined credit transaction Insurers have also become
indebtedness or identify proportion of lenders also surveys found that digital conversions and loyalty, growth, reveals Experian’s spectre of rising defaults as affects turnover and constrains significantly more risk averse,
financially at-risk customers. understand that going back to Covid-19-related fraud schemes reducing fraud and improving research. More than half of businesses grapple with business growth. with most of SA’s trade credit
Faced with the potential for a pre-pandemic operating models targeting local consumers operational efficiencies.” respondents are proactively significant losses in revenue “Based on research insurers substantially tightening
spike in nonperforming loans, will constrain growth as the increased 17 percentage points Technology will also play a planning to “markedly increase” and turnover. Numerous conducted on 50,000 B2B their underwriting criteria.
financial overcommitment and economy recovers. between April and October pivotal role in rebuilding SA’s their investment in artificial businesses have already credit transactions over the past
defaults, more than four out of “Commercial resilience, 2020 — 42% of respondents credit-active consumer market. intelligence and machine ceased trading. 12 months, the average decline TAKE ON MORE RISK
five CEOs reported increasing rebound and growth hinge on reported being targeted. For example, consumers learning within the next three “As these market risks ratio spiked to 33%, which is “The overall effect is less
or retaining their technology investment in digital innovation, However, while businesses who don’t have an established years to help drive growth. persist, businesses must remain almost double the ratio seen in coverage and higher costs. That
investments aimed at improving insight and automation,” says must protect their customers credit history often don’t qualify “Automation across all cautious when extending trade 2019,” says Knight. means companies have to take
customer insights. Ferdie Pieterse, CEO at and themselves, technological for credit. TransUnion estimates commercial functions emerged The rise in fraudulent trade on more risk to continue
“The crisis has emphasised Experian Africa. solutions should not create nearly 26% of South African as another critical challenge that credit applications, known as providing trade credit to new or
the importance of using trended Unsurprisingly, 78% of friction within the customer adults cannot access credit will likely receive additional THE TOUGH TRADING commercial identity theft, is an existing customers.”
data and advanced analytics to decision-makers surveyed in experience or create barriers because they have never built a focus as the sector’s recovery CONDITIONS OF 2020 additional concern that Ultimately, businesses that
anticipate when a customer is the Experian research ranked to entry. credit history by leveraging a gathers steam,” says Pieterse. RAISED THE SPECTRE constrains business growth. can’t grant credit facilities to
going to face difficulty in accelerating digitisation “Despite consumer demand financial product. “We need every tool at our “When fraudsters receive the their clients experience reduced
meeting payment obligations,” strategies and broader online for a smooth user experience on “Leveraging alternative data disposal to contribute to lifting OF RISING DEFAULTS goods, it becomes impossible to turnover, increased costs, more
says Carmen Williams, director channel adoption as priorities. digital channels, traditional fraud to open the door to ‘thin file’ and South Africans out of financial AS BUSINESSES recover the debt due to falsified risk and cash flow pressure.
‘credit invisible’ consumers has hardship and creating a path GRAPPLE WITH identify and contact information “Without redress, this could
become an essential growth toward an economically obtained during the research lead to more business closures,
strategy for creditors in a prosperous future for the LOSSES IN REVENUE process,” explains Knight. job losses and further credit

Lenders keep taps open stagnant market, while country,” says Rall. AND TURNOVER It is estimated that one in market strain,” says Knight.

The Covid-19 pandemic hit SA conservative in its approach to Fitch believes the banks have
as the country was grappling borrowing. significant headroom to
with ballooning debt, low “This pace of debt withstand current pressures on
economic growth and accumulation and servicing is the operating environment.”
numerous structural issues. unsustainable and puts SA on This fiscal prudence
According to Nishan the precipice of a debt trap. positions banks favourably to
Maharaj, Head of Fixed Income More importantly, government assist consumers, businesses
at Coronation Fund Managers, must redirect expenditure and the government and keep
the government’s public sector towards areas that boost capital flowing through a
borrowing requirement growth, otherwise tax revenue distressed economy.
doubled in 2020 and will will remain subdued, which will “Also, banks and nonbank
remain high over the next few push the country into a debt lenders are in the business of
years. spiral,” adds Maharaj. lending. If their margin and top
“Current estimates suggest Conversely, lenders will line stops growing, lenders will
SA’s debt burden will border on need to balance risk without be forced to cut bottom-line
100% of GDP in the next five constraining access to vital expenses, which means people.
years. Debt servicing costs will funding lines. Banks and nonbank lenders
account for almost 6% of GDP “Fortunately, banks have put also can’t afford to start putting
and will be the fastest growing away provisions for a rainy day everybody into default and
line item in government and are well capitalised. This is selling assets to claw back bad
expenditure, using up about a reflected in Fitch’s decision in debt. The economy and the
quarter of collected tax December to upgrade South country’s citizens are already on
revenue,” he explains. African banks’ national ratings their knees,” continues Palmer.
However, SA needs access to ‘AA+’ with a stable outlook As such, financiers will likely
to capital to support productive based on an improvement in keep the lending taps open.
government expenditure, as we their creditworthiness,” explains “However, they will be more
navigate through this crisis. Paragon Lending Solutions CEO careful about who they lend to
While debt funding is necessary, Gary Palmer. and will ask much tougher
government needs to be more “Aside from sovereign risk, questions,” says Palmer.

26%
of South Bottom line...
African adults
cannot No-one is in business just to be busy
access credit
because they
have never
built a credit
history by
leveraging a
financial
product

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