Presentation on

Unsecured Personal Loan (UPL) Market

For presentation to Portfolio Committee3 August 2012

Based on research undertaken by Compliance & Risk Resources

Project Overview Credit market and level of indebtedness Level of competition Compliance Cost of credit Market practices Credit life insurance Risk mitigation Access to finance Features of UPLs Use of credit Conclusion Recommendations

Topics

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Terms of reference:

The objective of the research undertaken is to determine the factors that are causing the increase in unsecured personal loans (from both the supply and demand side perspectives) and the implications thereof for consumers, credit providers and the credit industry. This was designed to assist the NCR to gain an in-depth understanding of the growth in unsecured personal loans and inform policy on consumer credit competency, market stability and lending practices.

UPL Project

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Representations made- Banks- BASA- Banking regulator

Bank risk management UPL as proportion of overall lendingNB: Outside of project scope

Safety & Soundness vs Consumers

Consumer CreditConsumer protection regulationPrimary measure: ConsumersReckless lendingLevel of indebtedness

Financial SystemPrudential regulationPrimary measure: BanksSafety and soundnessAsset value

Affordability assessment- At the time loan is made

Micro factors Macro factors Economic development Consumer credit indicatorsFocus on consumer protection

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Economic Conditions – Local & SA

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World outlookUncertain economic futureEuropeUSAChina

South AfricaImpact of world economy on SA30 year rate lowInflation rate and GDP growthCredit market structural change

Financial stabilityNot in project scopeRepresentations by banksUPL growth rates going forwardCredit provider risk management

Consumer indebtedness concernLarge number of consumers debt stressedConsumer studyConsumer education

Overview

Credit DemandDemand for UPLMacro and micro indicatorsMonitor level of overdues Review 3.6m deeply impairedConsumer education initiativeProtection from undesirable practicesAccess to creditCredit usage

Credit SupplyAffordability assessment guidelinesDisclosure of total cost of creditCorporate governance requirementsFocus on high priority requirementsMonitor and enforce complianceMarket practices reviewCredit provider internal controlsData management review

It is essential that “the basics” are done wellMonitor high priority requirements, compliance, governance.

Address full credit cycle including collectionsGuard against over-regulation

Learning and DevelopmentSouth Africa and leverage of foreign perspectives

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Monetary policy Savings incentives Regulatory requirements Level of indebtedness Economic conditions Impaired consumer

records Debt review Credit providers Consumers Payment system

Credit Market Analysis

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UPL book high growth R40.0bn, 49.4% Q1 2012 y-on-y Higher than growth in mortgages book R26.4bn, 3.4% Q1 2012 y-on-y

Composition of Gross Debtors Book

• Majority size less than R45k - 66.3% - R15.9bn granted• Strong growth in the >R60K-R100k segment - 14.9% granted• Appreciable increase in the >R150k-R180 segment - 6.9% granted

Unsecured Personal Loans

UPL Book Loan Size Analysis

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• Some lengthening of the term• Most notably in respect of the 49 to 60 month category - 29,5% • Majority granted have terms that exceed 30 months - 69,8% • Growth in larger loans

Unsecured Personal Loans

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Analysis of UPL Granted According to Loan Size Across Term Categories

Unsecured Personal Loans

UPL Granted According to Income Level of Consumers

• The majority of UPL granted to middle income - >R3.5-R30k• Most significant category being >R7k-R15k segment - 37.0% 10

Debt to income ratio – SARB statistics High but improving debt to income ratio Dependent on numerous interrelated variables Future trend in economic conditions Debt service cost to income ratio

Level of Indebtedness

Definition of credit health?- Current commitments- Income and expenditure levels- Current capacity- Future capacity - Reserves- Wellness criteria

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Source: Momentum/UNISA household financial wellness index 2011 Majority SA households in “drifting unwell” category Vulnerable to economic developments

Household Wellness

Household financial wellness•Physical capital•Asset capital•Human capital•Environmental capital•Social capital

Anchored Unwell Drifting Unwell Drifting Well Anchored Well

Percentage of households 4.8% 48.5% 30.5% 16.2%

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Source: Transunion Improving credit health of consumers Household credit impairment records indicate repayments improving Distressed household borrowing remains a concern

Consumer Credit Index

The index comprises four key

components: two derived from

TransUnion data, which make

up 50% of the index, and two

derived from public domain

data and proprietary data

analytics of public domain data,

comprising the remaining 50%

of the index.

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Source: Consumer vulnerablity index – UNISA BMR Improving debt servicing vulnerability: Best performing component of the index

Consumer Vulnerability

0-1.99 Financially very secure

2.0-3.99 Financially secure

4.0-5.99 Somewhat financially vulnerable

6.0-7.99 Financially very vulnerable

Perceptions

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Source: NCR statistics Increasing impaired records over the period to Q2 2010 Consistent sideways movement at this level thereafter

Consumer Credit Records

9.1 million consumers with impaired records out of a total credit active population of 19.5 million

Need to determine level of debt stress – There could be some 3.6 million consumers with deeply impaired records

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Credit Providers and Consumers

Credit Provider

Informal

Unregistered

Small lender

Retailers

Predominantly unsecured lending banks

Banks (88% of formal market)

Differing organizational structures, governance needs, regulatory / supervisory requirements, funding structures, product offerings, as well as varied business strategies in addressing the credit demand of consumers

LSM Level UPL %

LSM 1 1%LSM 2 2%LSM 3 3%LSM 4 11%LSM 5 17%LSM 6 33%LSM 7 14%LSM 8 6%LSM 9 8%LSM 10 6%

UPL consumer profile recognises the need to categorise the market. Different consumers have different needs and should be viewed as such

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Level of Competition

UPL market- Predominantly unsecured lending banks growth - Success of business

models- Large banks lost market share following crash- Business plans for growth in UPL

Comparative quotes- Some consumers do not generally “shop around”- Quotes and pre-agreement statement from different providers- Installment focus of consumers

Pricing- Average interest rate 23.5%- Differentiated pricing across loan size categories- Some pricing all at the margin - Could be due to market positioning

Credit life- Cost not disclosed as part of cost of credit in an integrated manner

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Compliance

NCR requirements- There has been time to come to terms with requirements – Since 2006- Compliance is to a large extent dependent on enforcement – NCR

resources limited Policies and procedures

- Confirmation from 10 largest providers- Consideration of governance of credit providers

Credit agreements- Significant improvement in disclosure since NCA implementation- Some disclosure recommendations for development- Disclosure of credit life terms and cost recommendations- Affordability assessments vary significantly across credit providers

Affordability guidelines- Principle based guidelines recommended 18

Cost of Credit

Cost of credit (Q3 2011 granted % of total revenue from UPL)- Interest 68.0%- Initiation fees 11.2%- Service fees 9.7%- Credit life 11.2%Recommend inclusion in cost of credit

Pricing- Pricing for risk - Higher risk, higher rates- Largely fixed rate lending - Static interest rate and fee caps

Further research- Installment focus- Tipping point into over-indebtedness- Lending at the margin 19

Quote:“There are 2 types of client -•One who cares about the rate (and costs)•Another who cares about whether they can afford the instalment”

Cost of Credit

- Rate - 32.1%- Loan amount - R25,000.- Initiation fee (capitalised) - R1,140- Credit life monthly - R140 (0.56% of loan amount)- Service fee monthly - R57

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Scenario:Calculation of average rate and repayment multiple

Loan term: 60 months Capital Interest Credit Life Initiation Fee Service Fee TotalTotal cost - 26 644,60 8 400,00 1 140,00 3 420,00 39 604,60 Average balance 16 601,00 16 601,00 16 601,00 16 601,00 16 601,00 16 601,00 Average rate 0,0% 32,1% 10,1% 1,4% 4,1% 47,7%Installments 25 000,00 26 644,60 8 400,00 1 140,00 3 420,00 64 604,60 Repayment multiple 1,00 1,07 0,34 0,05 0,14 2,58 Monthly installment 879,74 140,00 57 1 076,74

Loan term: 24 months Capital Interest Credit Life Initiation Fee Service Fee TotalTotal cost - 9 619,18 3 360,00 1 140,00 1 368,00 15 487,18 Average balance 14 983,15 14 983,15 14 983,15 14 983,15 14 983,15 14 983,15 Average rate 0,0% 32,1% 11,2% 3,8% 4,6% 51,7%Installments 25 000,00 9 619,18 3 360,00 1 140,00 1 368,00 40 487,18 Repayment multiple 1,00 0,38 0,13 0,05 0,05 1,62 Monthly installment 1 489,97 140,00 57 1 686,97

Market Practices

Zero % loans- E.g. R5,000 loan, 9 months. Could become widespread

Payment holidays- At initiation or during the term of contract- Can be in consumers interests - Understanding of implications by consumers is a concern

Advertising- UPL targeted using various media

Credit bureau enquires- Batch enquiries very high growth - Could be due to marketing / research

purposes ATM loans

- Loans via ATM – may be repaid during month with no reporting to credit bureau

Rebate on interest- Credit provider innovation

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Credit Life Insurance

Market practices- Generally a condition of a loan- Understanding of implications by consumers

Cost of credit life insurance- Significant component of cost- Cost 2.8% to 32% of average balance

Security provided by credit life insurance- With insurance - not fully unsecured- There is value to consumers with fairly priced credit life insurance- Benefits from review of value to credit provider and consumer

Disclosure- Cost of credit and features- Joint industry initiative advocated

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Risk Mitigation

Consumer protection- Credit provider risk

management structures and process

UPL performance- UPL reported as current

improving trend since Q2 2009- But deterioration in Q1 2012- Q1 2012 statistics:

- Value of accounts 72.5% - Number of accounts

78.2% - High level of overdues in

relation to secured lending products

- Inherently higher risk profile of UPLs

- Credit provider - Credit risk / write off- Consumer protection - Large number of

people debt stressed

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Access to Finance

NCA requirements- Affordability- UPL access product

Access to finance- Lower income levels- Use of credit

Consumers at the margin High cost Vulnerable to economic

conditions Access across provinces

- Stable- Gauteng and KZN

increase24

Source: FinScope

Access to Finance Can obtain credit Finance assets and expenditure Stepping stone Survival credit

Ease of obtaining loan Assess afordability Quick and reletive ease

Economic development Macro considerations

Consumption led economy Analysis of credit usage Level of indebtedness “Hollow economy” consideration

Features of UPLs

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Use of Credit

26Claimed credit usage Q3 2011

Analysis of credit granted statistics

Use of credit- Used for wealth creation and

consumption

Building and renovations - large component - R5.5bn, 23% of Q3

2011 credit granted (claimed usage )- Smaller balance loans, with over half

thereof with lower than R30K advances- Perhaps an indication that the loans are

being used for informal housing or that relatively inexpensive building or renovation

Debt consolidation (int. & ext.)- Significant feature of the market- 27% of credit granted during Q3 2011

 Further research- Full analysis of usage of credit by

consumers- Further information needed

Recommendations

Consumer study Consumer behaviour Credit demand analysis Credit usage Monitor level of unsecured lending against consumer

indebtedness

Consumer education Encourage healthy consumer credit behaviour Implications of credit

Supervisory investigation Governance focus On-site review Compliance review Supervisory meetings Principle based affordability guidelines

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28Compliance & Risk Resources

Thank You