Presentation on Unsecured Personal Loan (UPL) Market For presentation to the Trade and Industry Portfolio Committee 27 February 2013

Topics UPL Project Safety and Soundness vs Consumers Overview Credit market Analysis Unsecured Personal Loans Consumer Credit Index Consumer Credit Records Debt Counselling Statistics Level of Competition Compliance Conclusion Recommendations

UPL Project OBJECTIVE   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. The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 1

Safety and Soundness vs Consumers Financial System Prudential regulation Primary measure: Banks Safety and soundness Consumer Credit Consumer protection regulation Primary measure: Level of indebtedness; Reckless lending The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers Representations made Banks BASA Banking regulator NB: Outside of project scope 2

Overview Credit Supply Credit Demand Affordability assessment guidelines Disclosure of total cost of credit Monitor and enforce compliance Market practices review Credit provider internal controls Demand for UPL Monitor level of “overdues” Consumer education initiatives Protection from undesirable practices Access to credit Credit usage The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 3

Credit Market Analysis UPL book growth R43.3bn, 49.3% Q2 2012 y-on-y UPL book growth R38.9bn, 38.5% Q3 2012 y-on-y Mortgages book R41.3bn, 5.3% Q2 2012 y-on-y Mortgages book R33.7bn, 4.3% Q3 2012 y-on-y The following issues informed the initiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 4

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% 5

Consumer Credit Index Source: TransUnion Consumer Credit Index, Q4, 2012 Improving Credit health until quarter 2 Deteriorating credit health in quarter 3 and 4 with some improvement in quarter 4 6

Consumer Credit Records Source: NCR statistics Increasing impaired records over the period to Q1 2010 Consistent sideways movement at this level thereafter with uptick in Q3 2012 9.2 million consumers with impaired records out of a total credit active population of 19.7 million The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 7

Debt Counselling Statistics The overall amount distributed to date since inception is over R9 billion; The number of applications to date(end of Jan 2013) is 374 379; As at Dec 2012, the number of consumers loaded on the PDAs was 103 720 and of this number 80 801 made payments which represents 77% of consumers loaded. Payment Distributions for 2012/13 R729 m R734 m R749 m 8

Level of Competition Comparative quotes Pricing Credit life 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 at the margin. Credit life Cost not disclosed as part of cost of credit in an integrated manner. The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 9

Compliance Policies and procedures Credit agreements Confirmation from 10 largest providers Credit agreements Some disclosure recommendations for development Affordability assessments vary significantly across credit providers Affordability guidelines Principle based guidelines recommended The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 10

Conclusion Differentiate between financial system and consumer protection Consumers remain vulnerable to economic conditions Level of consumers with impaired credit records UPL current growth level sustainability Credit life disclosure Further consumer research needed The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 11

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 Principle based affordability guidelines Credit Demand Credit Supply The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers 12

Thank You The following issues informed the iitiation of the project Growth in unsecured credit Changing market structure and performance Extent of consolidation of existing credit versus real new growth Personal loans only, but in context of total credit product mix Credit pricing The extent to which cross- subsidisation is occurring between various transactional and credit products offered Affordability issues Drivers of uptake in personal loans Use of funds - productive or consumption The extent of underpinning assets purchased with secured credit products Dti and NCR – measures for mitigation of risks inherent in the changed unsecured credit growth Appropriate response and informed opinion Communication with relevant stakeholders Relevant interventions from the NCR Stakeholder definition NCR registrants, media, other regulators, Government, industry associations, consumers