Advanced short-term loans are on the decline, according to a study.
- A decline in the extension of short-term credit has had negative impacts on the economy such as reduced sales, fewer employment opportunities and less tax revenue collected, according to recent research.
- A new index points out that the value and number of short-term loans granted is on a downward trend.
- In addition, a decrease in the number of creditworthy applicants reflects a decrease in employment and a decrease in average real incomes.
A decline in the extension of short-term credit has had negative impacts on the economy, including reduced sales, fewer employment opportunities and less tax revenue collected, according to recent research.
Payment solutions provider Altron Fintech launched its Short-Term Credit Impact Index on Thursday, 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 a better understanding of the role of credit in the South African economy.
Short-term credit includes loans of less than Rand 8,000 and is repayable within six months.
The index shows that on a year-over-year basis, short-term credit extensions contracted 12.3% in the first quarter of 2021. Short-term credit extensions fell 1.4% from the previous quarter (or the fourth quarter of 2020).
The decline in short-term credit extensions also coincided with lower sales, employment and taxes across the economy. Year over year, sales fell from R790 million to R5.6 billion. Compared to the fourth quarter of 2015, short-term credit extensions contributed nearly R11 billion in revenue.
When it comes to employment opportunities, nearly 1,400 fewer jobs were supported and R96 million less taxes were collected in the first quarter of 2021, compared to the same quarter last year.
“Just as net additions to the extension of credit can generate positive economy-wide economic impacts that are a multiple of the value of the credit granted, the contraction of the net extension of credit generates multiplier effects. negatives throughout the economy. Businesses that received additional sales as a result of credit made available to their customers will experience lower sales, ”Lockwood said.
A drop in sales results in companies using fewer factors of production such as labor and placing lower value orders with suppliers, Lockwood added.
“Credit is an important cog in the engine that fuels economic growth. An increase in credit extension re-injects money that was previously out of circulation into the economy and thereby generates a flow of economic activity and income, ”said Johan Gellatly, Managing Director of Altron Fintech.
Data from the National Credit Regulator shows that at the end of the first quarter of 2021, short-term credit was only 0.1% of the total outstanding of R 2.04 trillion. By comparison, mortgages accounted for just over half, at 51%.
Since 2015, the value of outstanding short-term loans has trended downward from a peak of 3.6 billion rand to less than 1.8 billion rand in the second quarter of 2020, when restrictions of Level 5 lockdowns were in place, according to the report. . The decrease is attributable 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 R 27 million more than the value of new advanced short-term loans,” the report said.
In the first quarter of 2021, short-term loans represented 1.4% of advances and mortgage loans 39.1%. However, the share of short-term credit advances was 15 times greater than its share of outstanding debt.
The share of short-term credit advances was 15 times greater than its share of outstanding debt.
“In the first quarter of 2021, Rand 1.97 billion of short-term credit was advanced via 715,000 loans with an average value of Rand 2,758,” Altron Fintech said in a statement.
Overall, there has been a downward trend in the value and number of short-term loans advanced, the report noted. Where 2.2 million loans were made in the fourth quarter of 2015, that number fell to around 431,000 in the second quarter of 2020. But loans rose to 762,000 in the fourth quarter of 2020, before falling back to a bit. over 715,000 per quarter.
Changes were also made to the conditions of the loans granted. In the first quarter of 2015, one-month loans represented 74% of short-term loan advances. But in the first quarter of 2021, it was around 37%. At the same time, the share of loans granted for a term of four to six months rose from 19% to 50%. Loans with terms of two to three months increased their share of advanced short-term loans from 7% to 13%.
Trends can be explained by declining per capita incomes, declining employment levels, increased competition from other credit providers – mainly for higher value, longer term unsecured loans.
The number of solvent applicants has also decreased. For example, in 2015, just over half (53%) of applicants were rejected. But in the first quarter of 2021, around 62% of applicants were rejected. Around two-thirds of the applicants were rejected in the second quarter of 2020, amid higher foreclosure restrictions. The decline in the number of creditworthy applicants is reflected in the 1.4 million job decline during the pandemic as well as a drop in average real incomes, Lockwood noted.