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Unsecured consumer lending market boiling hot

All signs of boiling are evident in the unsecured consumer lending market. However, only few market participants realize this fact…

For clear demonstration of the current situation in the unsecured lending market of Ukraine, we would like to mention the following parable: If you throw a frog into a pot with hot water, it will try to jump out and, as a rule, it won’t be boiled. But if you put a frog into a pot with slightly warm water, and the pot will be on the stove or on the fire while the water starts boiling slowly, the frog will be cooked without noticing that it started boiling. At the same time, it will feel very well.

The same situation is observed in the consumer lending market: water is being heated slowly, and the players feel comfortable. But who will manage to jump out when the water boils?

In fact, the market shows threatening trends: the prime borrowers’ segment (“A” and “B”) narrows, almost disappears, but C and D class borrowers (from “A” (the best) to “F” (the worst)) are borrowing from many different institutions at the same time. The cross lending is observed: more and more abuses have been made by broker agents (explicit or hidden) who submit and confirm loan applications to several banks at the same time (in fact, they submit parallel applications to a number of banks within an hour). In this case, it takes the banks one or two months after the loan issuance to find out about these multiply financed borrowers (as a rule, this fact is found out by the banks conducting such an analysis). Then it’s followed by an unexpected worsening of these credits compared to the indices that were recorded previously, at the moment of these loans’ issuance.

What should banks do? They have to deal with the second and third class borrowers. As a rule, the first class borrowers refuse from using unsecured cash loans and start using other products.

Thus, the risks grow, and new players go further, including into a segment of low quality loaners, by weakening requirements and decreasing rates (it reminds of the 2007-2008 trends).

At the same time, the monetary resources’ cost is still growing in the financial market. As it was mentioned before, crediting risks increase due to the client base worsening. However, at the same time, new players entering the unsecured lending market agree on dumping by offering decreased prices for its credit products. Certainly, it’s good for a consumer. However, in terms of new players entering this segment, the price scissors apply to them.

The UAH annual resources’ cost increased to 20-25 %, and you also need to take into account reserving costs and operating costs to attract deposits, as well as the risk cost that was assessed up to 10% before and 15-20% now (and it works for the best players). Hence, at the point of entry we have 45% annual interest rate as minimum. And we did not include the credit issuance earning. But the bank needs to get some income and cover overhead charges. Thus, by offering admittedly dumping prices new players work at a loss from the very beginning.

To summarize the facts above, we’d like to turn your attention to three trends observed in the Ukrainian unsecured lending market.

The first trend is the quality debtor wash-out and dealing with already credited and financially unreliable borrowers.

The second trend is the resources’ cost increase and credit risk growth.

The third trend implies the new players who enter the market and are ready to pay for losses at the first stage. However, in fact, these banks always face losses, but they do not believe in this for a long time and cherish illusions of their exclusiveness (“we will have luck...we are different from other banks…”).

The problem is aggravated by the fact that the market is entered by heavyweight banks having no history philosophy experience in this segment at all. However, the things might look very bad in the classical banking segment, and these banks are forced to get involved in this area they considered beneath their dignity before (things change so fast).

What do these players hope for? Most likely, they rely on the fact that they will succeed in paying less for risks than it’s paid on average in the market. They hope they will have a better statistics of bad loans, and there are customers waiting only for this exact bank (and they did not get 3-4 credits more). However, as the practical experience shows, its’ impossible to deceive the market.

If we get back to that story about a frog in the pot to demonstrate the current situation, many market players are facing the end of that “heating” stage after feeling comfortable and pleased and having reported of the increasing credit portfolio, and after new players were “welcome and wished success”. Today, we can clearly hear “gurgitation” in their pots. And very soon we will see a steady “boiling”.

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