Presentation on Unsecured Personal Loan (UPL) Market

1. Presentation on Unsecured Personal Loan (UPL) Market For presentation to Portfolio Committee 3 August 2012 Based on research undertaken by Compliance & Risk Resources

2. Topics • 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 2

3. UPL Project 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. 3

4. Safety & Soundness vs Consumers Financial System Prudential regulation Primary measure: Banks Safety and soundness Asset value Consumer Credit Consumer protection regulation Primary measure: Consumers Reckless lending Level of indebtedness • Representations made • Banks • BASA • Banking regulator • Bank risk management • UPL as proportion of overall lending NB: Outside of project scope • Affordability assessment • At the time loan is made • Micro factors • Macro factors • Economic development • Consumer credit indicators Focus on consumer protection 4

5. Economic Conditions – Local & SA World outlook • Uncertain economic future • Europe • USA • China South Africa • Impact of world economy on SA • 30 year rate low • Inflation rate and GDP growth • Credit market structural change Financial stability • Not in project scope • Representations by banks • UPL growth rates going forward • Credit provider risk management Consumer indebtedness concern • Large number of consumers debt stressed • Consumer study • Consumer education 5

6. Overview • Credit Supply • Affordability assessment guidelines • Disclosure of total cost of credit • Corporate governance requirements • Focus on high priority requirements • Monitor and enforce compliance • Market practices review • Credit provider internal controls • Data management review • Credit Demand • Demand for UPL • Macro and micro indicators • Monitor level of overdues • Review 3.6m deeply impaired • Consumer education initiative • Protection from undesirable practices • Access to credit • Credit usage It is essential that “the basics” are done well Monitor high priority requirements, compliance, governance. Address full credit cycle including collections Guard against over-regulation 6 Learning and Development South Africa and leverage of foreign perspectives

7. Credit Market Analysis Composition of Gross Debtors Book • Monetary policy • Savings incentives • Regulatory requirements • Level of indebtedness • Economic conditions • Impaired consumer records • Debt review • Credit providers • Consumers • Payment system • 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 7

8. Unsecured Personal Loans UPL Book Loan Size Analysis • 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 8

9. Unsecured Personal Loans Analysis of UPL Granted According to Loan Size Across Term Categories • 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 9

10. 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

11. Level of Indebtedness Definition of credit health? - Current commitments - Income and expenditure levels - Current capacity - Future capacity - Reserves - Wellness criteria • 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 11

12. Household Wellness • Source: Momentum/UNISA household financial wellness index 2011 • Majority SA households in “drifting unwell” category • Vulnerable to economic developments • Household financial wellness • Physical capital • Asset capital • Human capital • Environmental capital • Social capital 12

13. Consumer Credit Index • Source: Transunion • Improving credit health of consumers • Household credit impairment records indicate repayments improving • Distressed household borrowing remains a concern 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. 13

14. Consumer Vulnerability • Source: Consumer vulnerablity index – UNISA BMR • Improving debt servicing vulnerability: Best performing component of the index 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 14

15. Consumer Credit Records • Source: NCR statistics • Increasing impaired records over the period to Q2 2010 • Consistent sideways movement at this level thereafter 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 15

16. Credit Providers and Consumers 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 UPL consumer profile recognises the need to categorise the market. Different consumers have different needs and should be viewed as such 16

17. 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 17

18. 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

19. 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 • 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” 19

20. Cost of Credit Scenario: Calculation of average rate and repayment multiple • 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 20

21. 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 21

22. 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 22

23. Risk Mitigation • Credit provider - Credit risk / write off • Consumer protection - Large number of people debt stressed • 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 23

24. 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 increase • Source: FinScope 24

25. Features of UPLs • 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 25

26. Use of Credit • 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 Claimed credit usage Q3 2011 Analysis of credit granted statistics 26

27. Recommendations Credit Demand Credit Supply 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 27

28. Thank You