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New credit expansion, how it boosts, and risks imposed

A new credit expansion taking place in Ukraine today was the reason for a meeting of KreditMarket experts with reporters of economic publishers, news agencies, and TV channels. Not only the expansion, its driving forces and forms, but also market risks associated with this process were discussed.

When making a welcome speech, Denis Rakovsky, Sales Director at KreditMarket, called to notice that the banks’ activity directions have recently changed – they have shifted from secured and long-term loans to medium-term mortgage credits (car loans) and short-term unsecured loans (cash loans and consumer loans). The portfolio of consumer loans (for 5 year period) increased by 20% compared to 2010, but the portfolio of mortgage loans decreased by 12%. However, the statistics does not reflect the actual market situation.

“As of today, car crediting indices got back to the level of summer 2011: big car dealers’ share of sales on credit was 17-20% this summer, and after the autumn decline it got back to the point of 15-17%,” says Mr. Rakovsky. From 10 to 20-25 banks can work with big dealers under different programs simultaneously. Meanwhile, the level of effective car credit rates is not so low, and we may observe a clear trend of some appreciation of credits.

When talking on the present mortgage market situation, Denis Rakovsky expressed his opinion that a strongly marked partial crediting is popular in this segment. According to his estimates, a mortgage receipt for Kyiv apartments averages USD 30 thousand covering the share of 25-30% of about USD 100,000 being the total apartment cost in the residential district. It means that the mortgage turned from the actual driver of the real estate market into a tool of buying real estate and change of living conditions at the price bottom. “For example, in Kyiv a debtor who was approved for a credit (certificate) may spend much time tossing about and looking for an optimum apartment offer, since today good apartments are bought very quickly,“ Mr. Rakovsky explains the situation.

In his opinion, if talking of some “average” market portrait of a debtor, today the centre of gravity shifts from the middle class+(plus) to the middle class-(minus). It means that loans are more actively taken by customers with high risks of a regular income loss/decrease.

Meeting participants were given a list of the highest risks associated with the credit expansion in 2012.

“In 2008, the currency risks and mortgage price decrease risks were main threats, but today these are decreasing paying capacity and multiplication of debtors (when one person takes many loans, including for repayment of the previous ones),” states Denis Rakovsky.

According to him, an artificial credit expansion is taking place now: first of all, the artificial credit part mainly includes loans with the minimum down payment and credits issued without any actual assessment of paying capacity (there are plenty of such offers), and credits issued at the rate significantly lower than the market driven level.

Each of these sources may cause a range of problems. The first one is the inflow of pre-determinedly insolvent debtors, or even the ones who do not repay loans intentionally. The second one is encouragement of fraudulent actions and dishonesty of debtors. The third one is ineffective consumption of the banking capital. As a result, we may see a new crisis twist.

Oleg Boltik, Risk Management Director at Kreditmarket believes that the major part of oncoming problems can be prevented due to increased efficiency of the credit market’s existing infrastructure. “There are three big credit reference bureaus containing about 20-30 mln. credit histories in Ukraine. Also, the important thing is that this information does not typically overlap. It means that the quality risk management requires using data from three bureaus at the same time. In terms of prices, the inspection of a certain debtor varies between UAH 15-70,” says Oleg Boltik. “Unfortunately, for some reason or other, many banks refuse from inquiring data from three bureaus. As a result, they do not get the full information on the potential debtor.”

One more barrier to establishment of the effective credit market infrastructure mentioned by Kreditmarket Risk Management Director is unwillingness of many banks to provide information on car and mortgage credits to the credit reference bureau: “The banks are obliged to provide this information on unsecured loans to the credit reference bureau and, at the same time, there is no strict requirement to submit such data on mortgage credits. As a result, it may happen that a debtor, who did not repay car and mortgage credits, will come to the bank for a next loan. Meanwhile, the bank will be aware of neither actual debt load of this credit applicant nor his possible disputes with previous lenders.”

According to Oleg Boltik, the ideal solution would be submitting the credit history information through “a single window” allowing to get access to data of all big credit reference bureaus at the same time. However, in his opinion, for implementation of a similar scheme, both the political will and critical mass of the credit market participants ready to be involved in this full-scale information exchange are missing.

Igor Durytskyi, Head of KreditMarket, described how banks build their strategy in the credit expansion conditions: “How can banks react to the growing risks? Everything depends on the risk management quality within a certain crediting institution. Upcoming problems can be identified immediately or too late depending on its efficiency and wishes of top managers.”

“As the practice shows, it’s possible to break the situation with “bad” retail credits’ build-up in the fast growing portfolio if the system problem has been detected no later than in three months after its actual emergence,” says Igor Durytskyi.

“If there is a clear understanding of the process “gaps”, then sometimes under favourable market conditions it’s possible to change the situation in 6 months from the negative trend beginning,” he believes.

Mr. Durytskyi considers the term of 12 months and longer to be critical for a crediting institution: “If the trend shows the problem extension within a year or more, as a rule, the situation becomes irreversible, and the only way out would be capital injections by shareholders or emergency loans from more successful business lines (of course, if they are available).”

How is it possible to prevent from this event development? Igor Durytskyi thinks the solution is establishment of the inner bank system of constraints and counterbalances, fair risk management system, formation of the balanced system of incentives for top managers. This system should not be limited by such factors as the growth rate and market share, it should inevitably include #1 - profitability, #2 – operating cash flow, #3 – risks, higher quality sales structure and, preferably, qualitative indices in all process directions.

“In 2009 and early 2010 I had an impression that the banking system did learn its lessons. However, in late 2011 my opinion was the opposite: conclusions and lessons were completely forgotten by the majority. It serves as a ground for very serious fears,” Igor Durytskyi assessed the situation.