Project Overview. Introduction. Perspectives on UPL. Presentation on Unsecured Personal Loan (UPL) Market

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1 Introduction Presentation on Unsecured Personal Loan (UPL) Market Nomsa Motshegare NCR CEO and John Symington (Pty) Ltd Ideal market conditions Macro market considerations Credit market analysis Credit supply factors Social factors Observations Regulatory and supervisory tools Need for Research Market changes reported Growth in UPL Changes in UPL product Term Value Review of impact on consumers Determine what action to take The study has focused specifically on unsecured personal loans Unsecured personal loans (UPL) - This refers to loans which are repayable over a period of time in installments, where there is no security that the credit provider can rely on to recover their debt if repayments are not made. For the purposes of this study, other forms of unsecured credit (such as credit cards or overdrafts) have not been considered. Media Press releases and articles Advertorial Radio Coverage Perspectives on UPL Credit market activity suggests the need for caution Lucid Living (web service) 22 April 2012 Spotlight on bad loan practices Personal Finance 22 April 2012 The NCR calls for caution in the provision of unsecured credit Sunday Times and City Press 22 April 2012 The NCR calls for caution in the provision of unsecured credit City Press and Sunday Times 22 April 2012 SAFM Discussion panel with SARB Deputy Governor, SACP representative and NCR CI & Research Manager 25 April 2012 TV SABC Morning Live interview NCR CEO 10 April 2012 Project Overview Timeline Portfolio Committee 2 May Written interim findings report May 2012 Facilitate understanding of the findings Survey reports Detailed Summary Information to follow for report in May Credit Providers batch extracts of the customers credit bureau profiles with the assessments and data held on file FinScope National Surveys 2008 to 2011 analysis Credit agreements analysis Disaggregate factors and drivers Further study planned Retail and smaller lenders 4

2 Ideal Market Conditions Credit Portfolio Considerations Condition Healthy suppliers Healthy competition, between credit providers and sectors Informed consumers Effective regulation Effective supervision Improving credit health of consumers Considerations Credit providers reflecting positive growth, profit and reserves Product mix Variety of suppliers and market niches/segments Broad geographical footprint Access to funding for smaller credit providers Scale of operations large vs. small Numerous information and education initiatives Challenges in achieving real changes in consumer behaviours NCA in place Some gaps in regulations being addressed NCR in place and consumer protection mandate established Gearing of NCR to next phase of development Increased employment and improving household income to debt ratios Substantial level of impaired performance reflected at credit bureaus not only a function of debt servicing Credit Product Overall gross lending book Considerations Steady increase over the last year to Dec 2011 = 9.0% (NCR statistics) Higher than inflation growth Structural change with growth in unsecured lending Mortgages book Constrained growth over the last year to Dec 2011 = 4.0% (NCR statistics) Mortgage lending less attractive to credit providers Legal uncertainty in terms of risk mitigation options Debt review process challenges Housing market demand, no title deeds in informal sector, prices Loan to value ratios risk of equity less than outstanding mortgage balances Basel III Capital and liquidity considerations Contracting for long terms 20 years, at fixed, invariable price with limited scope to reassess and re price for current and changing risk profiles 100% now not generally provided Unsecured personal loans book Strong growth over the last year to Dec 2011 = 53.1% (NCR statistics, includes credit providers not previously reported) Growth off a small base Higher margin than secured products Effective pricing for risk, shorter terms Ease of loan advance 6 Credit Market Analysis Mortgages remain the dominant credit category Business opportunities in UPL Mortgages growth Unsecured credit growth UPL can not be reviewed in isolation Structural change in the market Strong growth in loan values granted Growth in number of accounts relatively low Indication of average balance of loans granted increasing Consolidation of loans impact not quantified as yet 7 8

3 Demand for credit reflected in the applications for UPLs Different profiles according to different organisations Business models / strategy Ratio of approvals to applications made overall increase over the year Loan approval to application trend 55% in Q to 57% in Q Some credit providers increasing others decreasing Note: not all approvals are taken-up 9 Majority of UPL still in < R15k category Steady decline in < R15k category as a proportion of overall UPL book - Growth in other categories Spike in R60k R100k Recent relatively strong growth Lending in > R150k not significant 10 Credit Market Analysis UPL Rates reflect gross income without cost allocation Range of prices offered by credit providers Low end average Upper end average Pricing for risk Determinants of risk Price insensitive product in some categories Consumer considerations Shorter term made up of smaller loans Longer term made up of larger loans Majority of loans written in R31k to R180k categories Growth in larger loans Installment affordability focus of consumers Revenue flows majority from interest Significant contributions from Initiation fees Service fees Significant contribution from credit life Cross subsidisation Consolidation 11 12

4 UPL Performance Book Caution in relying on the above picture Credit provider statistics on the basis of what consumers indicate at the time of entering into an agreement Range of responses from credit providers Indications are that credit is used for both consumption and wealth creation purposes Usage varies at different levels of the market Consumer level research will be required to determine usage profile Consolidation could be due to positive lower cost alternate as well as debt stress 13 UPL Book Reported as Current 14 UPL Performance Book Findings to Date September 2011 statistics Level of overdues in smaller loan categories < R15k R16k R30k Analysis of income categories Overdues relatively high highest in R3,5k to R15k categories Longer term balances relatively low New credit granted lag effect Education campaign should focus on middle to lower income 15 Credit growth: Overall gross debtors book reflects steady growth 9% y on y, which is higher than inflation Strong growth in UPL off a small base, now represents 8% of overall lending book Restrained growth in secured lending due to structural considerations Increasing level of UPL values reported as current Changing Market: Complex market drivers The responsibilities of regulatory / supervisory authorities overlap Reactive and disparate response to changing market Savings versus credit use Credit supply: Different organisations, business models and delivery platforms UPLs offered have contributed to access to credit Credit supplied from multiple institutions increases the risk of default Commercial credit not suitable for all consumers Information furnished by credit providers has not brought immediate overall industry level lending growth concerns to light The diversified lending portfolios of large banks is a risk mitigant at organisational level Differentiation between categories of credit providers is required to understand category determinants Monitoring of consumer indebtedness where UPLs are advanced at the margin to provide credit market indicators Project has focused attention of stakeholders in an integrated approach to understanding and adressing appropriate response Integrated regulatory / supervisory response framework will promote holistic view of the market Review of savings incentives is required Segmentation of credit providers is needed to assess credit supply from a consumer protection perspective Analysis of supply and demand factors according to strata and recommendations for appropriate access and relevant interventions Consideration should be given to alternate support mechanisms guarantee fund, support, social lending 17

5 Findings to Date Credit usage: Credit is being used for both consumption and asset/wealth building Significant level of consolidation loans Loan term: There has been some lengthening of the term over which UPLs are offered Consumer demand: Knowledge levels and inappropriate consumer decision drivers contribute to unhealthy credit uptake Lack of understanding of the implications of credit commitments by consumers is a concern Don t want to know consumer behaviour is evident Financial burden: Factors beyond credit consumption contribute to financial burden of consumers Reckless lending: Input provided by industry stakeholders indicates that reckless lending is a factor that requires ongoing focus Further analysis required, including execution of full consumer based credit survey to determine cosumer credit usage and the implications thereof Consideration should be given to introducing consumer protection where lending is undertaken at the margin Segmentation of consumers is needed to assess the credit supply and usage thereof Segment appropriate education, starting at school level Monitoring for consumer protection will provide ongoing indication of consumer behaviour Factors that impact consumers that take out out credit at the margin should be monitored Credit performance, write offs, ageing Limited review of credit agreements indicates that the credit providers that participated in the study applied procedures to assess afordability, but these are not consitent across credit providers A study into the overall level of consumer indebtedness would provide the macro view needed Rules based guidelines are not recommended A best practice approach should be developed 18 Findings to Date Cost of credit: Cost of credit positively impacted by low repo rate Installment focus by consumers as opposed to the components of cost of credit Interest, fees, credit life Risk based pricing is offered by credit providers UPL lending at the margin represents a higher risk from a supervisory perspective Market practices: Compliance culture and market practices Consumer complicit in taking on too much credit Some disclosure much improved following NCA Credit life: Credit life insurance generally required in respect of UPL applications Both UPLs and credit life products are provided by the same staff members of credit providers Cost of credit life insurance to consumers a significant component of the overall cost of credit in respect of UPL Credit life cost is disclosed separately from other costs of credit Credit life products are used to mitigate risk by credit providers Disclosure of cost of credit requires attention Where conumer behavious is purely driven by the amount of the installment on a loan, this is not optimal Integrated efforts accross reguators / supervisors and industry would be needed to change consumer behaviour Further research is needed to establish the factors contributing to the tipping point into overindebtedness Analysis and monitoring, combined with comprehensive consumer education Consider developing method to address ensuring sufficint buffer Revenue streams from credit life products increase access to credit Enhanced disclosure of credit life costs would provide consumers with clearer understanding of the overall cost of credit Level of credit life insurance taken up by consumers requires consideration 19 NCR Regulatory/Supervisory Tools Laws Regulations Directives and guidelines Supervisory requirements Compliance reports Assurance engagements Corporate governance requirements Treating Customers Fairly initiative Build on NCA mandate Enhanced supervisory approach Address loopholes iro reckless lending Risk based framework Cooperation with other stakeholders Review regulatory framework Prioritise consumer surveys Enhanced consumer education National conversation regarding lifestyle spending and consequences of overindebtedness Project Journey Review of supply side information has not raised unexpected concerns Report on project work during May 2012 Further review work in progress Further review of consumer related factors is required Investigations and inspections Enforcement Moral suasion Market surveys Questions? Thank You. Stakeholder engagements Consumer communication and education 20 21