Debt trap widens despite low rates

2011-06-04 11:23

Nearly half of the country’s credit-active population is drowning in debt even though interest rates are at their lowest in 29 years.

Grim figures released this week by the Credit Bureau Monitor of the National Credit Regulator (NCR) show that in last year’s fourth quarter, 47% of the 19 million credit-active consumers had impaired records.

The country’s debt-to-income ratio currently stands at 78.5%. This means that for every R100 each household earns, R78.50 goes towards servicing debt.

The figures look grim, especially since speculation is rife that the Reserve Bank could start raising interest rates later this year or early next year.

Hiking interest rates is set to erode the spending power of consumers, meaning that businesses are set for tough times ahead.

Darrell Beghin, a manager for credit information and research at the NCR, said the figures showed that consumers were still under pressure.

He said: “The fact that the number remains high even with the current low interest rate is evidence of the pressure consumers are experiencing in repaying their debt.

“However, it is important to note that the rate at which consumers fall into the arrears categories has slowed.”

Beghin said consumers would be placed under more pressure if rates were upped.

Higher interest rates would translate into higher instalments and consumers would be required to fork out more to service their debt.

Beghin advised consumers to cut expenditure on alcohol, tobacco, entertainment, club membership, subscriber TV and gambling.

Economist Lumkile Mondi said consumers would start getting into trouble with banks if the central bank raised interest rates by more than 200 basis points.

He said: “The Credit Bureau figures mean that more people will default on the debt should the Reserve Bank start raising interest rates.

“However, the banks would start repossessing many houses and cars if interest rates are increased by more than 200 basis points.”

Kay Geldenhuys, a property finance processing manager at bond originator ooba, said: “Though interest rates are at their lowest level in more than almost 30 years, a relatively high household debt-to-income ratio of 78.5% continues to place pressure on households.”

The number of consumers with impaired records increased to 8.6 million in last year’s fourth quarter from 8.5 million in the third quarter.

Geldenhuys said: “The high percentage of consumers with impaired records is reflective of the slower growth in the economy, job losses and inflationary pressures from the recent series of high electricity and fuel price increases, and stagnant consumer confidence.”

She said over an extended period in households where excessive debt-to-income ratios remained high, they became susceptible to impaired credit records.

Geldenhuys said the increase in impaired credit records is likely to have a knock-on effect in terms of credit extension in the short term.

She advised consumers to focus on paying off their debts and clearing their credit records.

“When applying for a bond, banks are going to scrutinise your credit rating. A bad credit rating or an adverse listing on your name can seriously hinder your ability to secure home loan finance,” said Geldenhuys.

Economist Tony Twine said: “Low interest rates would normally translate into easy access to credit because of the servicing costs being low.”

Twine said businesses were going to be hit hard by high interest rates as they would make it more expensive to
do business.

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