Abstract
ABSTRACTWhile the increased access to consumer credit has helped many families improve their welfare, the rising repayment burdens upon a background of chronically low saving rates have generated concerns that South African families are becoming ever more financially fragile and less able to meet their consumer debt repayment obligations. Using data from the Cape Area Panel Study, this article investigates whether consumer debt repayment problems are better explained by excessive spending which leaves households financially overstretched or by negative income shocks. The results indicate that households are significantly more likely to be delinquent on their financial obligations when they suffer negative events beyond their control rather than due to the size of the expenditure burden. This suggests that consumer repayment problems are likely to endure even when consumers borrow within their means. Thus, regulatory efforts to improve mechanisms for debt relief might be more meaningful than restrictions on lending.
Highlights
The rising cost of living upon a background of increasing dependencies has meant that disproportionately large amounts household incomes are being commitment to consumption expenditure rather than saving
While the increased access to credit means that families can supplement this consumption expenditure, the rising consumer debt burdens have brought forth concerns that families are becoming more financially fragile and less able to meet debt repayment obligation when due
In spite of this, based on the National Credit Regulator (NCR) data1, the average credit standing of consumers has only continued to deteriorate in tandem with rising incidences of litigation judgements and administration orders since the National Credit Act (NCA) came into full force in June 2007 (Figure 1)
Summary
The rising cost of living upon a background of increasing dependencies has meant that disproportionately large amounts household incomes are being commitment to consumption expenditure rather than saving. Consumer debt delinquencies are not strategic, rather, they are a consequence of a genuine inability to pay when household resources become too strained to support the household’s ongoing subsistence while meeting scheduled repayments. This is related to the ‘cash flow’ theory of defaults which is based on the assumption that debtors will avoid arrears as long as their income flows are sufficient to cover their debt repayments without undue financial stress (Alfaro et al, 2010; Bhutta et al, 2010). Throughout the paper, the terms ‘delinquency’ and ‘repayment problems’ are mutually interchangeable to refer to the inability to pay financial obligations when due or be in arrears
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