South African consumers, including those seeking loans in Cape Town, continue to rely on their credit cards as a financial lifeline, but the runway for accumulating additional debt is rapidly narrowing.
In a recent analysis conducted by Nedbank, assessing South Africa’s broad money supply and credit extension trends, the overall growth in household credit has tapered to 6.5% in June from 6.7% in May, marking its lowest point in a year, as reported by Nedbank.
This deceleration can be primarily attributed to a slowdown in unsecured credit categories, with overdrafts softening to 2.2% year-on-year, down from 4.5% in May. While personal loans maintain some resilience, their growth rate has eased to 7.3% year-on-year in June, following an 8% upswing in the previous month. Home loans exhibited a milder increase at 5.8%, while installment sales and leasing finance remained steady at 7.6%.
These statistics indicate a shift in consumer borrowing habits, suggesting increased financial prudence and a more cautious approach, even among those seeking loans in Cape Town. However, the demand for credit remains strong, revealing an intriguing paradox in the economic landscape
A surprising exception to this trend is credit card usage, the sole household credit category that is experiencing growth. Credit card utilization surged to 9.2% in June, up from 8.9% in May. This anomaly has raised concerns among South Africa’s leading banks, echoing the cautionary notes sounded in the South African Reserve Bank’s Financial Stability Review (FSR) published in late May.
The FSR highlighted that despite stricter financial conditions, credit growth, especially in the unsecured credit sector, remains elevated for both households and businesses in South Africa, including those seeking loans in Cape Town. Unsecured credit registered its fastest growth pace since 2019 during the fourth quarter of the previous year, with a 9% year-on-year increase, which may signal financial distress.
The banking sector’s non-performing loan ratios, an indicator of loan quality, have been on the rise, prompting closer scrutiny as noted by the FSR. Additionally, organizations specializing in debt counseling have reported a significant increase in households defaulting on their debts, and have cautioned that lenders, including banks, are likely to tighten their lending criteria.
In its latest report, Absa anticipates a surge in credit impairments as consumers grapple with mounting economic pressures, exacerbated by the already high interest rates, which are currently at a 14-year peak. The bank projects a substantial increase in its credit loss ratio, estimated to range between 1.25% to 1.3% in the first half of the year. Importantly, similar concerns have been voiced by rival banks, including Nedbank and Standard Bank.
Nedbank, while acknowledging that households still rely on credit cards, anticipates that the overall demand for credit will continue to moderate throughout the remainder of 2023, impacting those seeking loans in Cape Town. The cumulative interest rate hikes since November 2021 have constrained households’ capacity to manage both new and existing debts. Furthermore, subdued economic growth prospects and a sluggish labor market are likely to hinder income growth and depress consumer confidence, underlining the evolving financial landscape in South Africa.