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National Bank of Ukraine Needs to Tighten Consumer Crediting Requirements

Active involvement in the race for extension of the unsecured consumer lending can force banks into tough mid-term financial losses. Guile of problems of this kind consists in the fact that apart from evident fraud cases (which are promptly tracked within strict operating processes), losses are recorded as late as six months after the expansion started, provided that banks have quite an enhanced risk management and tough monitoring of troubled debts on the intervals. We’d like to stress that credit portfolios are permanently growing after an active start, as a rule, and it’s a common error to estimate indices based on the portfolio in this crediting segment.

Certainly, this approach will not result in the new crisis wave in the banking system (as it did not before), however, some players (in fact, their shareholders) of the consumer crediting segment may face quite a serious problem.

Despite one of the common misbelieves that consumer credits had generated the first crisis wave within the Ukrainian banking system, the true reason was galloping mortgage crediting in foreign currency followed by a chain of consumer crediting problems. Also, we need to admit that retail crediting market segments are deeply interrelated: the crisis instantly overflows from one segment to another one. Most likely, these are concerns drawing the NBU’s attention to this crediting market segment.

Today, many banks are being actively involved in the consumer crediting solely by reason of excessively short but relatively expensive liquidity and lack of understanding of where it can be “used”... despite the fact they can be undermined by high risk operations requiring, in particular, historically gained experience and statistics.

Newcomers’ aggressive entrance to the consumer crediting segment is extremely dangerous. By “newcomers” we mean any banks without an expertise and experience in retail crediting, technologies, and understanding of the risk management specifics, IT systems and proper operating processes, etc. It often happens that financial institutions (it’s especially frequent under pressure of home appliances and electronics networks) don’t take into account the whole range of risks, for example, they disregard operating risks that are likely to become disastrous. In the pre-crisis times the level of frauds (committed by staff and partner salesmen) exceeded all possible and permissible norms within these networks. Financial institutions did not respond while striving to increase sales at any cost and, as a result, the credit portfolio growth.

The bank can afford further credit portfolio extension only in case of high quality of credits issued earlier and their high collection rate. By the way, the same applies to the right for a high share of physical person deposits in liabilities – it should arise from the high quality demonstrated by credits formerly issued by the bank.

Top priority measures required for ensuring credit market stability include development of the  credit reference bureau system, implementation of the mechanisms of mitigating unreasonably riskful credit expansion and, as a result, decreased disregard of rules of managing operational and credit risks by financial institutions.

We sensibly consider the NBU’s search for appropriate measures of response to the consumer crediting challenge which aim to maintain the stable market development.