Consumer debt defaults set to rise

File: There was a significant drop in consumers applying for credit in April, and although this recovered somewhat in May.

File: There was a significant drop in consumers applying for credit in April, and although this recovered somewhat in May.

Pixabay/Chronomarchie

JOHANNESBURG - Debt defaults by consumers are expected to rise as they struggle with the economic impact of COVID-19, according to credit bureau TransUnion.

In its South Africa Industry Insights Report for the first quarter of 2020 released this week, TransUnion highlighted some of its predictions on the economic impact of the pandemic on the consumer credit market.

Carmen Williams, director of research and consulting for TransUnion South Africa, says: “Towards the end of 2019, the credit market had already started to feel the impact of challenging economic conditions.

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"This trend continued into 2020 and began to accelerate as both consumers and lenders started to experience the impacts of COVID-19.

"With lockdown measures taking hold only towards the end of the first quarter, demand for consumer credit remained high. However, lenders had started to adjust their risk appetites accordingly and scale back on [lending].”

Williams says that, compared with pre-pandemic figures, the volume of originations (new accounts) will likely fall across all the major consumer credit categories.

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This is supported by declining credit enquiries -- there was a significant drop in consumers applying for credit in April, and although this recovered somewhat in May, it were still below pre-pandemic levels recorded in March.

Although originations are projected to fall as lenders tighten their criteria, outstanding balances on revolving credit facilities, such as credit cards, were expected to increase.

“Perhaps of greater impact to both households and lenders is the anticipated increase in delinquencies across all categories.

"As consumers struggle with higher unemployment, or in many cases reduced working hours, the knock-on effect on household finances will start to accelerate into the third quarter and beyond,” Williams says.

Source
IRESS