Consumer credit health deteriorating

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Johannesburg - TransUnion, a global leader in credit and information management, on Tuesday released data reflecting a sustained deterioration in consumer credit health.

The TransUnion Consumer Credit Index (CCI) declined to 43.6 in the second quarter of 2013 from 43.8 in the first quarter of the year.

According to TransUnion, the fall in the CCI reflects escalating consumer loan impairments and sustained growth in distressed borrowing, both indicators of rising household financial stress.

The CCI has fallen sharply in the first two quarters of 2013, averaging 43.7, close to the average of 42.3 during the four quarters from Q4 2007 to Q3 2008, a period of significant deterioration in consumer credit due to over-indebtedness and the global financial crisis.  

The CCI is a unique indicator of consumer credit health based on a 100-point scale.

An index above 50.0 indicates improving credit health, below 50.0 represents deterioration. 

Credit health refers to the ability of consumers to service existing credit obligations within the constraints of monthly household budgets.

TransUnion Africa President, Geoff Miller, said that consumer credit health was declining and that consumer markets were becoming more vulnerable.

Trend

“Consumer credit health has now been deteriorating for four straight quarters and the risk of deterioration in the credit cycle has risen materially.

"Impairments are up 13% year-on-year, the highest growth since January 2007.

"Credit-sensitive retail sectors need to become increasingly vigilant to the risks this trend poses to their business.”

The CCI also shows that household cash flow remains weak.

“Price inflation resulting from Rand weakness continues to offset the positive effect of income growth.

"Given the trends in impairments and distressed borrowing, many households are likely experiencing negative cash flow,” said Miller.

These trends may have a material impact on consumer spending patterns for the remainder of 2013 and into 2014.

Miller pointed out that the retail sector was already experiencing slower growth in sales volumes, and in some segments of the market, sales volumes appear to be falling. 

Low interest rates

“The trend in loan impairments suggests retail markets may come under increasing pressure in the months ahead. 

"To the extent that households are able to make monthly repayments, we anticipate that in many instances this will only be made possible by curtailing non-essential purchases.”

Miller added that prolonged historically low interest rates had been both a positive and a potential negative.

“On the one hand existing debt servicing costs have been kept low, allowing many previously indebted households to reduce their debt to more sustainable levels.

"The other consequence, however, is that low interest rates can encourage unsustainable borrowing habits and also create consumer price inflation risks, raising the cost of living.”

Released on a quarterly basis to the public, the TransUnion CCI measures aggregate consumer loan repayment records; tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing; estimates household cash flow as a means of determining financial pressure/relief; and quantifies the relative cost of servicing outstanding debt. 

These aspects are then combined into a single numeric score of consumer credit health. 

The index is compiled by TransUnion Credit Bureau, with technical support from market intelligence firm ETM Analytics.

Unlike other indices in the market, the CCI is driven by objective market data rather than consumer surveys or questionnaire responses.

“The TransUnion indicator combines actual consumer borrowing and repayment behaviour obtained from the extensive TransUnion credit database with key, publically available macroeconomic variables impacting household finances,” said Miller.

Analysis suggests that the CCI may be a good leading indicator for business activity in certain economic sectors, particularly those more closely related to consumer spending.

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