Altron Fintech has launched a new index to understand the impact of the current economic environment on the availability of credit.

The inaugural Altron Fintech Household Financial Resilience Index (AFHRI), developed on behalf of Altron Fintech by Optimum Investment Group economic adviser Dr Roelof Botha, is the first of two new barometer indices to decipher the level of resilience of those who apply for credit and those that provide it.

The AFHRI provides critical insight into the level of financial resilience among South African households and their ability to repay loans, while the second index, developed by economist Keith Lockwood from the Gordon Institute of Business Science, will be launched in September to unpack the economic impact of short-term credit in South Africa.

The indices, which will be released on a quarterly basis, have been developed with a key purpose of providing the market with critical insights on the level of resilience of those who apply for credit, and those that provide it,” said Altron Fintech MD Johan Gellatly, noting that they have specific relevance to the provision and state of micro-credit, an important segment of the overall credit market, and often the only option for individuals and small businesses.

“The AFHRI is premised on the fact that income is ultimately required to repay debt. Without income of some kind, individuals are not able to qualify for loans that allow for expanded access to the full range of goods and services that comprise private consumption expenditure, as well as the funding of working capital required to sustain or expand small and micro businesses.

“In an attempt to provide clear and quantitative guidance on the disposition of South African households, on average, to engage in viable borrowing activities, it was decided to design a composite index that portrays their financial resilience. Despite the devastating impact of the pandemic and lockdown restrictions on the economy, the results of the AFHRI demonstrate that household income has rebounded, and that borrowers are able to repay loans,” said Gellatly.

While micro-finance in South Africa is generally perceived negatively, this industry is held in high esteem in most of the developing world, said Botha, stating that short-term lending is an advantage to an economy.

Short-term loans and unsecured credit by micro-finance institutions (MFIs) have played a significant role in combating a key element of global inequality, namely the ability of individuals to expedite expenditure on consumption goods, including food, and also to assist with the financing of working capital for small and microenterprises.

Altron cited an econometric modelling exercise conducted in 2019 by University of Johannesburg Professor Ilse Botha which showed that between the first quarter of 2015 and the third quarter of 2018, South Africa’s GDP would have been R191-billion lower in the absence of credit provided by MFIs.

“In South Africa, reports related to household debt are characterised by a lack of objectivity, particularly with regard to the short-term lending industry. Any increase in default values or default ratios regularly feature prominently in the media, but when they decline, hardly any reporting on such trends occurs.”

The first AFHRI has found that average South African households are better able to incur and manage debt than before the Covid-19 pandemic started, an upward trend that is likely to continue into 2022, Botha commented.

“The upshot of the first quarter 2021 reading of the AFHRI is that the average household in South Africa enjoyed a more advantageous disposition towards incurring and managing debt than before the pandemic.”

The index comprises 20 different indicators, weighted according to the demand side of the short-term lending industry and calculated on a quarterly basis, with the first quarter of 2014 as the base period.

Only six of the 20 indicators had a negative trend.

With the exception of two indicators, namely household expenditure and short-term insurance premiums paid, the indicators all have a bearing on income received from various sources or the basis for future income receipts, such as financial or tangible assets. Directly and indirectly, these income sources include salaries, wages, dividends, capital gains, rentals, interest and profits.

Following a sharp economic downturn during the second quarter of 2020, when the worst of the Covid-19 lockdown regulations were in place, there was a swift recovery of most key economic sectors since the third quarter of 2020, with the AFHRI trend line returning to a positive growth trajectory of 3.9% year-on-year.

A V-shaped recovery has been evident in a number of other key economic indicators, especially gross domestic product (GDP), retail trade sales and the Reserve Bank’s composite leading business cycle indicator, the latter of which reached an all-time record high during the first quarter of the year, while the GDP recorded in the fourth quarter of 2020 matched the figure of a year earlier, in real terms.

“Two of the reasons for the AFHRI having outperformed the country’s GDP trend are related to the structural decline in household debt as a percentage of household income and also the decrease in the ratio of household debt costs to household income.

“Total salaries and wages have staged a swift recovery from the negative effect of the lockdown regulations, a trend that is likely to continue into the second quarter of 2021. In contrast to a decline in private sector employment, jobs in the public sector have continued to increase, which has also exerted a positive impact on the AFHRI,” he explained.

Remuneration per worker also returned to growth mode since the fourth quarter of 2020.

As many households earn income from other sources than labour remuneration, the AFHRI also includes indicators related to investment income and rental income. The total value of unit trust assets and the FNB House Price Index have been used as proxies for these indicators.

The index shows a strong recovery and growth of unit trust assets – at 34.9% year-on-year – which generate higher dividends and enhance the ability of prospective borrowers to secure sufficient collateral.

Further, there was a sharp increase in the value of surrenders of long-term insurance policies at 23.3%, which has assisted the cash flow of many such policy holders. However, Botha warned that while this brings in funds, this practice should rather be avoided.

“One of the few indicators that has bucked the upward trend of the AFHRI since the third quarter of 2020 is the value of credit impairments by the banking sector, [with a year-on-year decline of 25.8%].”

The other indicators that have exerted a negative effect on the index over the past year are credit extension to households, which declined 1.5%, the ratio of salaries to GDP, down 1.8%; household consumption expenditure with a contraction of 2%; the ratio of household income to debt which declined 2.5%; and private sector employment, which was down 6.1%.

However, the overall trends analysed in the index confirmed both the recovery of the index and a return to growth mode.