The increase in your retail debt counseling portfolio means potentially higher delinquency rates that could hurt your credit loss ratio.
Banking giant FirstRand has expressed concern that debt review service providers have become more active, targeting customers with higher incomes who are not in debt distress.
During the full-year results presentation on Thursday, group chief executive Markos Davias said FirstRand has seen debt advice inflows manifest itself in higher value loans, particularly in the private segment , with a focus on home loan and unsecured portfolios.
“In many cases, clients are entering debt counseling agreements without any delay. We are monitoring this closely and implementing response strategies and education programs aimed at ensuring better outcomes for clients,” he noted.
Mr Davias’ comments echo concerns raised by other major lenders, who told Moneyweb in June they had also seen higher incidences of debt advice, particularly among the middle and higher income segments.
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More defaults, higher credit loss ratio
Davias says FirstRand’s increased retail debt advisory portfolio means potentially higher default rates for clients and less “loss given default” (LGD) experience in the medium term, which in turn could hurt your credit loss ratio.
(A loss on default refers to the amount of money a bank or other financial institution loses when a borrower defaults on a loan.)
FirstRand’s credit loss ratio rose slightly to 0.81% due to consumer strain on residential mortgages and personal loans.
According to Davias, the strain that the “higher for longer” interest rate cycle has put on consumers, along with debt counseling inflows, has also led to more bad loan formation, meaning that debtors do not make scheduled payments on time or in full.
“Debt advice inflows have been more relevant in the second half of the year and increased by 17%,” he adds.
READ ALSO: Don’t fall for calls to help you with your debt – it could be debt advice
Consequences of going into debt review
In June, FNB, which is part of FirstRand, told Moneyweb in an email that it had seen an increase in predominantly middle-income wealthy South Africans entering debt counselling.
“Often customers don’t fully understand the consequences of going into debt review, only realizing later that they won’t be able to use any of their credit facilities or that it would affect their credit bureau listings” , the bank said at the time.
Another concern is that those entering debt review are often unaware of the costs associated with the process.
Capitec, also among the lenders concerned, previously noted that around 20% of consumers exit debt advice after 12 months, paying at least R9,000 in fees, with no change in their debt levels.
Nedbank this week sent a WhatsApp message to its customers, asking them to contact the bank first before making any decisions about the debt review.
Nedbank warns its customers in a WhatsApp about the early debt review. Image: WhatsApp (supplied)
Nozizwe Tshabuse, executive director of retail and business banking and customer debt management at Nedbank, previously told Moneyweb that a lack of financial education often leads to customers taking “ill-advised” premature debt advice deals.
She says that the credit scores of people under debt review are negatively affected because the process is registered with all the credit bureaus.
Once they’ve accepted debt advice, they can’t get any funding until the debt review period ends.
“Being under debt review could also negatively impact all future financing,” according to Thabuse.
This article was republished from Moneyweb. Read the original here.