Transcript Cost of Credit - Amazon Web Services

Presentation
on
Unsecured Personal Loan (UPL)
Market
For presentation to Portfolio Committee
3 August 2012
Based on research undertaken by Compliance & Risk Resources
Topics














Project
Overview
Credit market and level of indebtedness
Level of competition
Compliance
Cost of credit
Market practices
Credit life insurance
Risk mitigation
Access to finance
Features of UPLs
Use of credit
Conclusion
Recommendations
2
UPL Project
Terms of reference:
The objective of the research undertaken is to determine the factors
that are causing the increase in unsecured personal loans (from both
the supply and demand side perspectives) and the implications
thereof for consumers, credit providers and the credit industry.
This was designed to assist the NCR to gain an in-depth understanding
of the growth in unsecured personal loans and inform policy on
consumer credit competency, market stability and lending practices.
3
Safety & Soundness vs Consumers
Financial System
Prudential regulation
Primary measure: Banks
Safety and soundness
Asset value

Representations made
- Banks
- BASA
- Banking regulator
 Bank risk management
 UPL as proportion of overall lending
NB: Outside of project scope
Consumer Credit
Consumer protection regulation
Primary measure: Consumers
Reckless lending
Level of indebtedness

Affordability assessment
- At the time loan is made
 Micro factors
 Macro factors
 Economic development
 Consumer credit indicators
Focus on consumer protection
4
Economic Conditions – Local & SA
World outlook
South Africa








Uncertain economic future
Europe
USA
China
Impact of world economy on SA
30 year rate low
Inflation rate and GDP growth
Credit market structural change
Financial stability
Consumer indebtedness concern




 Large number of consumers debt
stressed
 Consumer study
 Consumer education
Not in project scope
Representations by banks
UPL growth rates going forward
Credit provider risk management
5
Overview
Credit Supply








Affordability assessment guidelines
Disclosure of total cost of credit
Corporate governance requirements
Focus on high priority requirements
Monitor and enforce compliance
Market practices review
Credit provider internal controls
Data management review
Credit Demand








Demand for UPL
Macro and micro indicators
Monitor level of overdues
Review 3.6m deeply impaired
Consumer education initiative
Protection from undesirable practices
Access to credit
Credit usage
It is essential that “the basics” are done well
Monitor high priority requirements, compliance, governance.
Address full credit cycle including collections
Guard against over-regulation
Learning and Development
South Africa and leverage of foreign perspectives
6
Credit Market Analysis
Composition of Gross Debtors Book












Monetary policy
Savings incentives
Regulatory requirements
Level of indebtedness
Economic conditions
Impaired consumer
records
Debt review
Credit providers
Consumers
Payment system
UPL book high growth R40.0bn, 49.4% Q1 2012 y-on-y
Higher than growth in mortgages book R26.4bn, 3.4% Q1 2012 y-on-y
7
Unsecured Personal Loans
UPL Book Loan Size Analysis
• Majority size less than R45k - 66.3% - R15.9bn granted
• Strong growth in the >R60K-R100k segment - 14.9% granted
• Appreciable increase in the >R150k-R180 segment - 6.9% granted
8
Unsecured Personal Loans
Analysis of UPL Granted According to Loan Size Across Term Categories
•
•
•
•
Some lengthening of the term
Most notably in respect of the 49 to 60 month category - 29,5%
Majority granted have terms that exceed 30 months - 69,8%
Growth in larger loans
9
Unsecured Personal Loans
UPL Granted According to Income Level of Consumers
• The majority of UPL granted to middle income - >R3.5-R30k
• Most significant category being >R7k-R15k segment - 37.0%
10
Level of Indebtedness





Debt to income ratio – SARB statistics
High but improving debt to income ratio
Dependent on numerous interrelated variables
Future trend in economic conditions
Debt service cost to income ratio
Definition of credit health?
- Current commitments
- Income and expenditure levels
- Current capacity
- Future capacity
- Reserves
- Wellness criteria
11
Household Wellness



Source: Momentum/UNISA household financial wellness index 2011
Majority SA households in “drifting unwell” category
Vulnerable to economic developments
Percentage of
households
Anchored Unwell
Drifting Unwell
Drifting Well
Anchored Well
4.8%
48.5%
30.5%
16.2%
Household financial wellness
• Physical capital
• Asset capital
• Human capital
• Environmental capital
• Social capital
12
Consumer Credit Index




Source: Transunion
Improving credit health of consumers
Household credit impairment records indicate repayments improving
Distressed household borrowing remains a concern
The index comprises four
key components: two
derived from TransUnion
data, which make up 50%
of the index, and two
derived from public domain
data and proprietary data
analytics of public domain
data, comprising the
remaining 50% of the
index.
13
Consumer Vulnerability


Source: Consumer vulnerablity index – UNISA BMR
Improving debt servicing vulnerability: Best performing component of the index
0-1.99
2.0-3.99
4.0-5.99
6.0-7.99
Financially very secure
Financially secure
Somewhat financially vulnerable
Financially very vulnerable
Perceptions
14
Consumer Credit Records



Source: NCR statistics
Increasing impaired records over the period to Q2 2010
Consistent sideways movement at this level thereafter
9.1 million consumers
with impaired records
out of a total credit
active population of 19.5
million
Need to determine level
of debt stress – There
could be some 3.6
million consumers with
deeply impaired records
15
Credit Providers and Consumers
Credit Provider
Informal
Unregistered
Small lender
Retailers
Predominantly unsecured lending banks
Banks (88% of formal market)
Differing organizational structures, governance
needs, regulatory / supervisory requirements,
funding structures, product offerings, as well as
varied business strategies in addressing the credit
demand of consumers
LSM Level
UPL %
LSM 1
LSM 2
LSM 3
LSM 4
LSM 5
LSM 6
LSM 7
LSM 8
LSM 9
LSM 10
1%
2%
3%
11%
17%
33%
14%
6%
8%
6%
UPL consumer profile recognises the need to
categorise the market. Different consumers have
different needs and should be viewed as such
16
Level of Competition

UPL market
- Predominantly unsecured lending banks growth - Success of business models
- Large banks lost market share following crash
- Business plans for growth in UPL

Comparative quotes
- Some consumers do not generally “shop around”
- Quotes and pre-agreement statement from different providers
- Installment focus of consumers

Pricing
- Average interest rate 23.5%
- Differentiated pricing across loan size categories
- Some pricing all at the margin - Could be due to market positioning

Credit life
- Cost not disclosed as part of cost of credit in an integrated manner
17
Compliance

NCR requirements
- There has been time to come to terms with requirements – Since 2006
- Compliance is to a large extent dependent on enforcement – NCR resources
limited

Policies and procedures
- Confirmation from 10 largest providers
- Consideration of governance of credit providers

Credit agreements
-

Significant improvement in disclosure since NCA implementation
Some disclosure recommendations for development
Disclosure of credit life terms and cost recommendations
Affordability assessments vary significantly across credit providers
Affordability guidelines
- Principle based guidelines recommended
18
Cost of Credit

Cost of credit (Q3 2011 granted % of total revenue from UPL)
-

Interest
68.0%
Initiation fees 11.2%
Service fees 9.7%
Credit life
11.2%
Recommend inclusion in cost of credit
Pricing
- Pricing for risk - Higher risk, higher rates
- Largely fixed rate lending
- Static interest rate and fee caps

Further research
- Installment focus
- Tipping point into over-indebtedness
- Lending at the margin
Quote:
“There are 2 types of client •One who cares about the rate (and costs)
•Another who cares about whether they can
afford the instalment”
19
Cost of Credit
-
Rate
Loan amount
Initiation fee (capitalised)
Credit life monthly
Service fee monthly
- 32.1%
Scenario:
- R25,000.
Calculation of average
- R1,140
rate and repayment
- R140 (0.56% of loan amount)
multiple
- R57
Loan term: 60 months
Total cost
Average balance
Average rate
Installments
Repayment multiple
Monthly installment
Capital
16 601,00
0,0%
25 000,00
1,00
Interest
26 644,60
16 601,00
32,1%
26 644,60
1,07
879,74
Credit Life
8 400,00
16 601,00
10,1%
8 400,00
0,34
140,00
Initiation Fee
1 140,00
16 601,00
1,4%
1 140,00
0,05
Service Fee
3 420,00
16 601,00
4,1%
3 420,00
0,14
57
Total
39 604,60
16 601,00
47,7%
64 604,60
2,58
1 076,74
Loan term: 24 months
Total cost
Average balance
Average rate
Installments
Repayment multiple
Monthly installment
Capital
14 983,15
0,0%
25 000,00
1,00
Interest
9 619,18
14 983,15
32,1%
9 619,18
0,38
1 489,97
Credit Life
3 360,00
14 983,15
11,2%
3 360,00
0,13
140,00
Initiation Fee
1 140,00
14 983,15
3,8%
1 140,00
0,05
Service Fee
1 368,00
14 983,15
4,6%
1 368,00
0,05
57
Total
15 487,18
14 983,15
51,7%
40 487,18
1,62
1 686,97
20
Market Practices

Zero % loans
- E.g. R5,000 loan, 9 months. Could become widespread

Payment holidays
- At initiation or during the term of contract
- Can be in consumers interests
- Understanding of implications by consumers is a concern

Advertising
- UPL targeted using various media

Credit bureau enquires
- Batch enquiries very high growth - Could be due to marketing / research purposes

ATM loans
- Loans via ATM – may be repaid during month with no reporting to credit bureau
 Rebate on interest
- Credit provider innovation
21
Credit Life Insurance

Market practices
- Generally a condition of a loan
- Understanding of implications by consumers

Cost of credit life insurance
- Significant component of cost
- Cost 2.8% to 32% of average balance

Security provided by credit life insurance
- With insurance - not fully unsecured
- There is value to consumers with fairly priced credit life insurance
- Benefits from review of value to credit provider and consumer

Disclosure
- Cost of credit and features
- Joint industry initiative advocated
22
Risk Mitigation

Consumer protection
- Credit provider risk management
structures and process

- Credit provider - Credit risk / write off
- Consumer protection - Large number of
people debt stressed
UPL performance
- UPL reported as current
improving trend since Q2 2009
- But deterioration in Q1 2012
- Q1 2012 statistics:
- Value of accounts 72.5%
- Number of accounts 78.2%
- High level of overdues in relation
to secured lending products
- Inherently higher risk profile of
UPLs
23
Access to Finance

NCA requirements
- Affordability
- UPL access product

Access to finance
- Lower income levels
- Use of credit

Consumers at the margin
 High cost
 Vulnerable to economic
conditions

Access across provinces
- Stable
- Gauteng and KZN increase
Province
2008
2009
2010
2011
Total
5,3m
5,9m
4,6m
8,2m
Western Cape
12%
12%
11%
11%
Eastern Cape
15%
10%
14%
12%
Northern Cape
2%
1%
3%
2%
Free State
4%
2%
6%
5%
15%
19%
23%
19%
7%
13%
4%
4%
28%
32%
30%
32%
5%
6%
3%
5%
11%
5%
6%
11%
KwaZulu-Natal
North West
Gauteng
Mpumalanga
Limpopo/Northern Province
Source: FinScope
24
Features of UPLs

Access to Finance





Can obtain credit
Finance assets and expenditure
Stepping stone
Survival credit
Ease of obtaining loan
 Assess afordability
 Quick and reletive ease

Economic development
 Macro considerations

Consumption led economy
 Analysis of credit usage
 Level of indebtedness
 “Hollow economy” consideration
25
Use of Credit
 Use of credit
- Used for wealth creation and consumption
 Building and renovations
- large component - R5.5bn, 23% of Q3 2011
credit granted (claimed usage )
- Smaller balance loans, with over half thereof
with lower than R30K advances
- Perhaps an indication that the loans are
being used for informal housing or that
relatively inexpensive building or renovation
 Debt consolidation (int. & ext.)
- Significant feature of the market
- 27% of credit granted during Q3 2011
 Further research
Claimed credit usage Q3 2011
Analysis of credit granted statistics
- Full analysis of usage of credit by consumers
- Further information needed
26
Recommendations




Consumer behaviour
Credit demand analysis
Credit usage
Monitor level of unsecured lending against consumer
indebtedness
Consumer education
 Encourage healthy consumer credit behaviour
 Implications of credit
Supervisory investigation





Governance focus
On-site review
Compliance review
Supervisory meetings
Principle based affordability guidelines
Credit Supply
Credit Demand
Consumer study
27
Thank You
Compliance & Risk Resources
28