Mass market a safer bet for lenders in tough times

The latest financial results posted by several prominent South African banks and retailers show a massive rise in bad debts, some by more than 100%, as consumers feel the squeeze from high inflation and increased interest rates.

While one would expect micro-financers operating at the lower end of the market to be suffering even higher levels of bad debt amongst their customer base, the reality is that some of these credit providers are showing far healthier debtors books than their more illustrious peers.

For example, micro financer Real People says that while traditionally, its term loan vintages (which measure the rate at which loans deteriorate to three months plus in arrears), peak at 25 to 30%, the group is seeing a clear trend that the recent vintages comprising loans granted over the last 12 months should peak at a 20 to 25% rate. According to Real People MD, Bruce Schenk, this reflects a significantly improved credit quality in the group’s term loan book.

This improvement in credit quality helped Real People report gross revenue of R1.045 billion for the period compared to R643 million declared in the previous year. The company earned profits after tax of R119 million in the latest financial year compared to R112 million during the same period last year. Total assets of the group amounted to R1.55 billion (R866 million last year), with shareholders funds totalling R454 million.

In addition, Schenk says that only 20% of the lower to middle income market have large variable interest rate exposure, such as mortgages and car financing. This means that their ability to meet monthly payments depends more on employment levels than inflation and interest rates.

“The terms on our smaller loans are structured to ensure that we are able to absorb some of the interest rate shock to clients by extending the loan period, instead of putting up their monthly repayments. While this increases the time it takes to repay the loan amount, the client’s cash flow position isn’t as dramatically altered on a monthly basis. The micro-financing financial model therefore becomes an enabler instead of increasing the chances of the repayments on a loan becoming unaffordable.”

Schenk says that during these tough market conditions, credit providers need a combination of the right experience, systems and processes if they want to survive. “Rigorous affordability assessments need to be done to ensure that clients do not over-indebt themselves. We have also always believed that a combination of debt re-scheduling advice together with a sensitive, human approach yields better recovery results rather than going the legal route.

“Our experience in the South African market is that most people want to pay - they just need to be presented with an affordable and convenient payment plan that fits into their budget and reduces the interest rate on the respective debt.”

To support this approach, Real People has a large network of representatives who go out and visit clients, in order to re-schedule defaulted debt in affordable installments.

Schenk says that while Real People has shown itself to be adept at managing its debtors book, like other financial institutions in South Africa, the business has had to master a number of other challenges over the last year. These relate to declining yields on assets as a result of the introduction of the National Credit Act in South Africa, increased pressures on asset quality as a result of the downturn in the economy as well as cost efficiency challenges.

“We have made significant progress on each of these fronts and look forward to show significant growth in group profits in the coming year, despite the expected continued economic downturn in South Africa. In this regard we expect our Distressed Debt acquisition business in South Africa , our rapidly growing lending businesses outside South Africa, specifically in Malawi, Tanzania, Lesotho and Kenya and our expanding inner city residential property investments, to make significant contributions.”