- South Africa’s major banks have increased their provisions for bad debt, signaling the challenging effects of higher interest rates on consumers and the start of a terrible phase of the credit cycle.
- The repo rate has risen by a cumulative 425 basis points, making it more expensive for consumers to finance their debt, particularly those with long-term loans such as mortgages and vehicle loans.
- This ongoing burden of debt is a significant source of stress for families, with 51 percent of South African parents experiencing financial strain affecting their family life.
South Africa’s major banks increased their provisions for bad debt, underscoring the challenging effects of higher interest rates on consumers and the start of a more difficult phase of the credit cycle.
Despite the banks’ profitable lending activities and the impact of higher interest rates, consumers have been struggling to cope with the cumulative repo rate hikes since November 2021, when the South African Reserve Bank (Sarb) became hawkish to control escalating inflation.
The repo rate has risen by a cumulative 425 basis points since then, making it more expensive for consumers to finance their debt, particularly those with long-term debt such as home loans and vehicle finance.
According to Harry Botha, a banking sector research analyst at Anchor Stockbrokers, consumers are under more pressure than corporates, and the concern going into this year is the development of affordability pressures for consumers.
South Africa’s Nedbank reported a 13 percent increase in impairment charges in its most recent financial results for FY2022. Although the bank does not expect the impact of higher interest rates to be severe, it has observed early signs of consumers struggling to make repayments on their home loans.
Capitec, the latest bank to raise its impairment charges, recorded an 80 percent surge to US$47,678,471.70 (R6.3 billion). The bank attributed this increase to the impact of higher interest rates, resulting in a 20 percent increase in the value of its average home loan debit orders and a rise in customers rolling into arrears and going into debt review.
For FNB, inflationary pressures have resulted in the bank focusing on low- and medium-risk customers with the capacity to take up credit. FNB’s parent raised provisions by 13 percent to US$215,211,477 (R3.9 billion). Absa reported US$37,952,783 (R688 million) in home loan impairment charges and is working with consumers to help them keep their homes.
The recent surprise inflation reading, showing that CPI increased for the second month in a row to 7.1 percent, is likely to prevent a pause in interest rate hikes.
Gryphon Asset Management portfolio manager Casparus Treurnicht suggests that the Sarb may need to continue raising rates, and while consumer spending has slowed, there has been a rise in consumers using unsecured lending. Standard Bank increased its overall impairments by 22 percent, with impairments for home services slightly rising to US$849,524,522 (R15.4 billion).
Bad debt trap
The recent interest rate hike has brought rates to a 14-year high of 11.25 percent, resulting in additional debt risks for already indebted South African families.
National Debt Advisors (NDA) CEO, Charnel Collins, warns that debt has become increasingly pervasive due to the South African economy’s perpetual decline, with over half of the households in the country being indebted. Collins explains that the interest rate hike will adversely impact the financial well-being of consumers, affecting all types of debt, including credit card repayments and home loan repayments.
Collins also highlights that the recent rise in inflation rate to 7 percent will cause consumers to spend more on average goods, causing a knock-on effect on their finances.
This ongoing burden of debt is a significant source of stress for families, with 51 percent of South African parents experiencing financial strain affecting their family life.
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The lack of financial education in households is a root cause of the problem, according to financial experts. Therefore, Collins stresses the importance of passing on good money habits to children from an early age to help them avoid debt pitfalls and build a financially secure future.
Credit stress
The latest Eighty20’s Credit Stress Report reveals that the current balance on all loans is up 3.8 percent quarter-on-quarter, with increases across all loan products.
The second-largest percentage increase came from credit card accounts, which were up by 7.2 percent. Collins emphasizes that taking on too much high-interest debt can quickly become unmanageable, leading to a cycle of debt that can be difficult to break.
Collins also emphasizes the significance of understanding the role of money within a family. Setting mutual goals and working together to achieve them can alleviate financial stress and bring families closer together.
She further outlines the key money habits parents should pass on to their children to safeguard their financial future, including saving, budgeting, delayed gratification, comparison shopping, avoiding debt, investing, and giving. Collins concludes by highlighting that setting boundaries around spending, avoiding unnecessary debt, and practicing financial self-discipline can all contribute to a healthy financial situation and a happy family life.
