- A decline in short-term credit extension has had negative impacts on the economy such as a reduction in sales, fewer job opportunities and less tax revenue collected, according to recent research.
- A new index highlights that the value and number of short-term loans extended has been on a declining trend.
- Furthermore, a decline in creditworthy applicants is a reflection of lower employment and a decline in average real incomes.
A decline in short-term credit extension has had negative impacts on the economy including a reduction in sales, fewer job opportunities and less tax revenue collected, according to recent research.
Payment solutions provider, Altron Fintech, on Thursday launched its Short-term Credit Impact Index, in partnership with independent economic consultant Keith Lockwood. The index was commissioned to assist credit providers in the short-term market as well as to create greater understanding on the role of credit in the SA economy.
Short-term credit includes loans with values of less than R8 000 and are repayable within six months.
The index shows that on a year-on-year basis, short-term credit extensions contracted by 12.3% in the first quarter of 2021. Short-term credit extensions were down 1.4% since the previous quarter (or the fourth quarter of 2020).
The decline in short-term credit extensions also coincided with a decline in economy-wide sales, employment and taxes. On a year-on-year basis, sales were down by R790 million to R5.6 billion. Compared to the fourth quarter of 2015 - short-term credit extensions contributed to close to R11 billion in sales.
"Just as net additions to credit extension can generate positive economy-wide economic impacts that are a multiple of the value of the credit extended, so does the contraction of net credit extension generate negative multiplier effects throughout the economy. Businesses that were receiving additional sales as a consequence of the credit made available to their customers will experience a decline in sales," said Lockwood.
A decline in sales results in businesses making use of fewer factors of production such as labour and placing orders of less value with suppliers, Lockwood added.
"Credit is an important cog in the engine which fuels economic growth. An increase in credit extension injects money that was previously out of circulation back into the economy, and thereby generates a stream of economic activity and incomes," said Johan Gellatly, MD of Altron Fintech.
Data from the National Credit Regulator shows that at the end of the first quarter of 2021, short-term credit just accounted for 0.1% of total outstanding credit of R2.04 trillion. By comparison, mortgages accounted for just over half, at 51%.
Since 2015, the value of outstanding short-term loans has been trending lower, from a peak of R3.6 billion to less than R1.8 billion during the second quarter of 2020, when lockdown level 5 restrictions were in place, the report noted. The decline is attributed to lower new credit advances as well as the value of loan repayments and write-offs exceeding that of new advances.
"In the first quarter of 2021, the value of short-term loans repaid or written-off was R27 million more than the value of new short-term credit advanced," the report read.
In the first quarter of 2021, short-term credit accounted for 1.4% of advances, with mortgages accounting for 39.1%. The share of short-term credit advances however was 15 times greater than its share of outstanding debt.
"In the first quarter of 2021, R1.97 billion of short-term credit was advanced via 715 000 loans with an average value of R2 758," Altron Fintech said in a statement.
Generally, there has been a declining trend in the value and number of short-term loans advanced, the report highlighted. Where 2.2 million loans were advanced in the fourth quarter of 2015, this fell to about 431 000 during the second quarter of 2020. But loans picked up to 762 000 by the fourth quarter of 2020, before dropping to just over 715 000 in the following quarter.
There have also been changes to the terms of loans extended. During the first quarter of 2015, loans with a term of one month accounted for 74% of short-term loan advances. But the first quarter of 2021, this was around 37%. Meanwhile, the share of loans advanced with a term of four to six months increased from 19% to 50%. Loans of a term between two to three months increased their share of short-term loans advanced from 7% to 13%.
The trends can be explained by declining per capita incomes, lower employment levels, increased competition from other credit providers - mainly for higher value and longer-term unsecured loans.
The number of creditworthy applicants has also declined. For example, in 2015, just over half (53%) of applicants were rejected. But the first quarter of 2021, about 62% of applicants were rejected. About two-thirds of applicants were rejected during the second quarter of 2020, amid higher lockdown restrictions. The drop in creditworthy applicants is a reflection in the 1.4 million drop in employment during the pandemic as well as a decline in average real incomes, noted Lockwood.