Rising insolvencies create financial hardship

Credit platform reports 60% increase in debt

Rising insolvencies create financial hardship


By Ryan Johnson

While mortgage arrears remain low, Australians are starting to fall behind on other debts as the cost-of-living crisis bites down on household budgets, according to digital credit and collections platform Credit Clear.

Andrew Smith said there has been a “steep change” in the way not only companies but people and consumers in general reacted to the pressure.

“We’ve seen a marked increase in a number of areas… one is the dollar value of debt on average that's getting referred by our clients,” said Smith, whose company deals with 1.2 million debt files in Australia.

“The second is the volume of debt files referred to us which are up 60% year on year. We’ve also seen hardship cases rise 25% over the past quarter and our financial hardship team are flat out.”

For a long time, borrowers were used to rates going down. Between November 2010 and April 2022, the RBA passed 12 decreases to the official cash rate culminating in the historic low of 0.10%.

But now, after the cash rate increased 12 times in 13 months, borrowers are facing a new environment.

Smith said the situation had affected various customer segments, including those who hadn't experienced interest rate rises in years, and particularly those with fixed-term interest rates.

“We anticipate more budget constraints in the coming months, resulting in increased requests for assistance across all credit providers, as individuals find it challenging to meet their payment deadlines."

The new normal

Although it would be logical to expect a substantial increase in the data reflecting financial hardship considering the factors mentioned, you wouldn’t usually expect it after recently emerging from a global pandemic that halted business operations.

However, government support helped keep businesses afloat through a number of incentives and the pandemic period subsequently meant resulted in low business insolvency numbers.

With that support ending and new pressures having, Smith has seen a gradual increase of hardship post-COVID.

"I've been saying that this has been coming for a while. It probably came a little bit later than I thought it would have to be honest,” Smith said.

“I think all that government support has ended and cash buffers have been washed out and we're seeing businesses operating in a new normal environment.”

Smith said many people have larger bills than before because they were allowed to just continue to use throughout the pandemic, whether it was water, gas, or electricity.

“Add in inflation on electricity and it’s supercharged the problem for many.”

Sentiment is now low among consumers and people are borrowing less. The Equifax Quarterly Consumer Credit Insights for July 2023 showed an -8.3% reduction in demand for credit cards, personal loans, and buy-now-pay-later in the June quarter.

The Creditor Watch National Trade Receivables Growth index – a key indicator of business-to-business trade and a critical barometer of the overall health of the Australian economy – has also dropped into negative territory.

"If you couple that together with a lot of insolvencies, which business insolvency percentages have spiked dramatically in the last quarter, company failure rates are, are well and truly back to or above pre COVID levels,” Smith said.

The financial hardship obligations of banks

It’s important to note that Credit Clear doesn’t buy debt and instead assists clients when bills are approaching or already past their due dates.

"We operate in the middle stage of the debt recovery process, offering a unique blend of digitally-driven solutions alongside analogue services,” Smith said.

Employed by major credit providers including banks, Credit Clear also helps these companies comply with regulations associated with ASIC and the ACCC.

“What we're what we're seeing is that a lot of those large utility providers are recognising that there's a there's some challenges coming and strengthening their service providers,” Smith said.

In particular, Credit Clear helped identify cases of vulnerability and financial hardship where Smith said, the company was considered “subject matter experts”.

“We're trained to identify a vulnerable or financial hardship customer,” Smith said. “We need to know what their current situation is and ensure that we're not pushing them into further distress and provide them solutions which allow them to take the time to recover.”

This is particularly important now for lenders who were warned by ASIC in August about their financial hardship obligations.

This was followed five days later by ASIC suing Westpac over mismanaged hardship notices between 2015 and 2022.

Smith said he could see these types of situations becoming more frequent as financial hardship notices rise.

“Any organisation that's sort of pushing too hard to collect an overdue bill or who is not meeting their obligations exposes themselves, not just in terms of fines but in terms of public relations,” Smith said. 

“What the Westpac situation showed is that there will be consequences for companies that don't you know or don't follow the regulations and the laws and companies need to be prepared because there's already a sharp uptick in people who need this support.”

Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!