Presentation on Unsecured Personal Loan (UPL) Market

Nomsa Motshegare NCR CEO and John Symington Compliance & Risk Resources (Pty) Ltd

Introduction
Ideal market conditions M Macro market k t id ti considerations Credit market analysis S Credit i l f supply factors Social factors Observations Regulatory and supervisory tools Need for Research
M k th t d Market changes reported Growth in UPL Changes in UPL product Term Value Vl Review of impact on consumers Determine what action to take

The study has focused specifically on unsecured personal loans

t d 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.

Project Overview
NCR workshops Desk top research Interviews with credit providers -10, multiple sessions Consumers Other Regulators 1 workshop Industry associations 3 workshops Focus groups - reliance on other research Referencing of other surveys conducted Analyses of other recognised data

Research

Timeline
Portfolio Committee 2 May Written findings report May 2012

Facilitate understanding of the findings Survey reports

Detailed Summary

Information to follow for report in May 2012

4 Credit Providers batch extracts of the customers credit bureau profiles with the assessments and data held on file FinScope National Surveys 2008 to 2011 analyses Credit agreements analyses Disaggregate factors and drivers

Further study planned Retail and smaller lenders

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Ideal Market Conditions

Condition
Healthy suppliers

Considerations
Credit providers reflecting positive growth, profit and reserves Product mix

Healthy competition, between Variety of suppliers and market niches/segments credit providers and sectors Broad geographical footprint Access to funding for smaller credit providers Scale of operations large vs. small Informed consumers Eff i l i Effective regulation Effective supervision Improving credit health of consumers 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

Cred Portfoli Considerations it o

Credit Produc t
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, 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 reprice for current and changing risk profiles 100% now not generally provided personal loans book

Unsecured

 S t r o n

g 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
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Cred Marke Analysis it t

Mortgages remain the Mortgages growth dominant credit category Unsecured credit growth Business opportunities in UPL UPL can not be reviewed in isolation Structural change in the market

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Cred Marke Analys UPL it t is

Year on Year Growth

Number

3.1%

Rand value

52.1%

0%

20% 40% 60%

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

Compliance & Risk Resources

Cred Marke Analys UPL it t is

s

Number UPL Applications vs Approvals

Millio ns 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mar 10 June 10 Sept 10 Dec 10 Mar 11 June 11 Sept 11

Applications Approved Demand for credit reflected in the applications for UPLs Different profiles according to different organizations Business models / strategy Ratio of approvals to applications made overall increase over the year Loan approval to application trend 55% in Q1 2010 to 57% in Q4 2011

 Some credit providers increasing others decreasing Note: not all approvals are taken-up
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Cred Marke Analys UPL it t is

in < R15k category Majority of UPL still R100k 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

Compliance & Risk Resources

Cred Marke Analysis UPL it t

Billio ns 2. 5 2.0 1.5 1.0 0.5 0. 0

Analysis of UPL Granted According to Loan Size Across Term Categories

<6

712

1318

1924

2530

3136

3748

4960

>60

R0R15 R16KR30 R31R45 R46KR60 R70K R100 R101K R150 R151K R180 > R180K

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

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Cred Marke Analys UPL it t is

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
0.0% 30.0 % 25.0 % 20.0 % 15.0 % 10.0 % 5.0 %

I n t e r e s t

R a t e s p e r

Loan Size
25.7% 26.2% 23.1% 21.7% 19.7% 16.1% 15.8%

23.5% 13.7%

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flow s maj orit y Rev fro enu m inte e rest

Significant contributions from Initiation fees Service fees Significant contribution from credit life Cross subsidization Consolidation

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Cred Marke Analys UPL it t is

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

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UP Performanc Book L e
Unsecured credit book 90% 80% 70% 60% 50% 40% 30%
75.7% 76.1% 76.2%

90% 80% 70% 60% 40% 50% 40% 30%

75.4%

20% 10% 0%

20% 10% 0%

72.6%

74.8%

74.8%

71.2%

73.4%

76.9%

75.2%

73.9%

74.9%

Rand Value

73.3%

Number

75.9%

70.6%

UPL Book Reported as Current

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78.7%

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UP Performanc Book L e
Billio ns s Overdue >120 dayss Overdue >120 days R 30 R 25 R 20 R 15 R 10 R 5 days R 0 0

Age Analysis per Agreement Size

Overdue >120 days Overdue 120 days Overdue 90 days Overdue 60 days 15 Overdue 30

R 40 R 35 R 30 R 25 R 20

Age Analysis per Income of Clients

Overdue >120 days Overdue 120 days Overdue 90 days Overdue 60 days

Billio ns

R R 10 R 5 R

Overdue 30 days Current

R16k

Current

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
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Cred Suppl Factors it y

Factors
Compliance

Considerations
Structure and operational culture Agreements, disclosures, affordability assessment Scale Access to funding Risk management frameworks and processes and sophistication to consumers

Credit Provider Categories Traditional Bank Micro-Lending Bank Footprint Return on investment / equity, foreign funding sources Business model bank, micro lending bank, microlender, other Advent of NCA and trend setting led the way to further business re

Infrastructu re and resources

Busine ss motive

Payme nt system Marketing

UPL Distinction between poverty and affordabilit y is required Categories of credit Credit assessmen t and extension

provider affected differently by payments system Pin and card practice Implications of debt review process with payments via PDAs Marketing activity on unsecured lending Volume of credit bureau enquiries

Micro-Lender Retail Lender Small Lender Unregistered Informal

Risk management frameworks and Comprehensive current credit information at credit bureaus Validation of consumer income and expenses Ability of credit providers to provide information to credit bureaua
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Level playing field considerations require attention

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Interi Findings m
Findings to Date
Credit growth: Overall gross debtors book reflects steady growth 9% yony, 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: integrated Complex market drivers The responsibilities of regulatory / supervisory authorities overlap Reactive and disparate response to changing market Savings versus credit use

Commentary
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 approach to understanding and addressing appropriate response Integrated regulatory / supervisory response framework will promote holelistic view of the market Review of savings incentives is required

Credit supply: Different organizations, 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

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

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Compliance & Risk Resources

Restrained growth in secured lending due to structural understand category determinants

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i tit ti

Findings to Date

Interi Findings m Commentary

Further analysis required, including execution of full credit survey to determine consumer 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 credit at the margin should be monitored Credit performance, write offs, ageing

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 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

Limited review of credit agreements indicates that the credit providers that participated in the study applied procedures to assess A study into the overall level of consumer indebtedness would provide the macro view affordability, but these are not consistent across credit needed 17 providers Rules based guidelines are not recommended A Compliance & Risk Resources best practice approach should be developed

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Interi Findings m
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

Commentary
Disclosure of cost of credit requires attention Where consumer behaviours is purely driven by the amount of the instalment on a loan, this is not optimal Integrated efforts across regulators / supervisors and industry would be needed to change consumer behaviour Further research is needed to establish the factors contributing to the

tipping point into over indebtedness 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

 Analysis and monitoring, combined with comprehensive consumer education Consider developing method to address ensuring sufficient buffer Revenue streams from credit life products increase access to credit in that credit providers 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

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Compliance & Risk Resources

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NCA

NC Regulatory/Supervi Tools R sory

Laws Regulations Directives and guidelines Supervisory requirements Compliance reports Assurance engagements Corporate governance requirements Treating Customers Fairly initiative Investigations and inspections Enforcement Moral suasion Market surveys Stakeholder Build on NCA mandate Enhanced supervisory approach Address loopholes iron reckless lending Risk based framework Cooperation with other stakeholders

Review regulatory framework engagements Consumer communication and education

 Priorities consumer surveys Enhanced consumer education National conversation regarding lifestyle spending and consequences of overindebtedness l i
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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

Thank You.
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