Climbing the debt mountain
If you thought you were the only person struggling with debt then you need to think again. When you multiply your debt across a large customer base you soon end up with an absolute sea of debt which threatens to drown much of corporate South Africa. Of course it’s difficult to feel sympathy for some of these companies… Banks, fashion outlets and credit retailers were only too happy to fob their expensive credit cards and hire purchase agreements on us when times were good… You can be excused for feeling that the resulting bad debt crisis is a bit like payback!
Fashion retailers are feeling the pinch
Very few of us are without some form of store-backed credit card. Almost every fashion retailer offers a branded card to facilitate the purchase of its goods… And these cards usually extend to other shops in the chain… The high interest rates charged on these cards offer the fashion retailer an opportunity to generate additional revenue as money lenders. And companies pulled out all the stops to ensure they signed on as many credit customers as possible in the run-up to the National Credit Act. Truworths is one such company – boasting 1.8m active accounts
The problem is that cash-strapped consumers are happy to swipe their cards whether the money is available or not. Truworths is learning this lesson the hard way as the company’s net bad debt as a percentage of its debtor book hit 11.3% recently. That means R226m has gone up in smoke in the year to June 2008. Management seemed nonplussed by this increase – pointing to the rise in interest earned on good accounts. And that should be a lesson to each of us...
While we might think rising bad debts is a payback for poor lending practices the reality is that cash buyers (and those of us who pay our accounts in full and on time) are the real victims. The company has to squeeze additional money from us to cover the bad debt losses! The situation is similar at banks.
Bank credit card divisions looking shaky
One of the better gauges of the health of the South African consumer is to look at the major bank’s bad-debt situation. And right now things are about as bad as they can get. Rob Rose writes in the Financial Mail: “If there was any doubt that banks responded to the heady low-interest rate environment of 2004 and 2005 by dishing out credit cards like Jelly Tots to diabetics, the bad debt numbers reveal the gory details.” Banks simply extended too much plastic; and we lived it up as the easy money flowed...
Right now banks are reflecting on a strategy gone wrong. Nedbank’s latest numbers show an overall bad debt ratio of 0.96%. In other words, just less than 1% of all the money lent is written off as ‘bad’. Doesn’t sound too bad, does it? But when we look at the credit card division things get pretty scary. The bad debt ratio at the group’s credit card division rose to 10.5% in the last reporting period. It’s at levels worse than in the company’s high-risk micro-lending division. Absa performed markedly better, with a bad debt ratio of 4.4%, though this amount is almost double the 2.8% achieved the year before. Why are bad debts at these banks so different?
It comes down to differences in operational strategy. Nedbank has been on the prowl to expand its customer base in recent years. This means it has been taking calculated risks to grow market share. As economic conditions tighten these ‘new’ customers are probably the first to run into debt problems. Absa, on the other hand, closed their credit tap quite some time ago… And this has saved it from the major fallout in the market.
Avoid costly credit
The best advice for consumers is to avoid costly credit. The interest rates charged by our big four banks (and fashion outlets) on their cards are ludicrous. Your best strategy is to ensure that you pay the total outstanding balance each month before interest is charged. In our opinion, taking tight control of your credit card expenditure is a great step toward personal financial health. Not only will you save money; but you’ll appreciate that spending more than you have (particularly on credit) is a sure recipe for financial disaster.
Editor’s thoughts:
Credit cards are extremely convenient when used correctly. Provided you pay all your purchases on the due date you can get up to 55 days of interest free credit. We’d love to hear your views on the interest rates charged on credit cards and micro-loans… Do you think it’s worth it – or would you rather handle your monthly purchases on a cash-only basis? Add you comments below, or send them to [email protected]
