UKRAINIAN INDEX
OF EFFECTIVE INTEREST RATES
ON CONSUMER LOANS FOR INDIVIDUALS
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Forecast of Personal Loans Market Development in Ukraine

As we forecasted in mid-2009, recovery of the financial retail market started with short-term offers: cash loans, consumer credits and credit card overdrafts. The following stage was marked by a car loans growth and emission of credit cards with a limited function range. Recovery of the mortgage lending segment will occur at the last stage, because of unavailability of a sufficient amount of long-term investment on the market.

Nowadays, consumer credits and cash loans is the only market segment to have almost recovered after the crisis. This is where financial institutions may generate real profit. That’s why consumer and cash crediting is booming in Ukraine at present. This segment is quickly returning to its pre-crisis level (sales volume and loans portfolio). However, past mistakes will certainly make future-oriented professional market operators change their operations. Changes will have to be made in methods of operational risks evaluation and in concepts of cooperation with credit history agencies, efficient evaluation of customers’ solvency and arrears management, etc.

Two factors have to be taken into consideration talking about current environment of personal loans market development:
- foreign currency crediting is still prohibited or absent;
- banks have excessive cash liquidity.

A real boom is observed in the consumers crediting segment. Only 9-10 banks are active and dominating market operators, while at least 15 banks position themselves as market operators in that sector. A major feature of the current state of the market is that the consumer lending market is filled with operators that have never operated in that field before due to a lack of competency or high operational risks.

The segment of consumer crediting for purchasing products is obviously overheated. Large retail networks create rules of the game for banks as efficiently as they did before the global financial crisis.

My interest rate forecast is the following: reduction in the interest rate is expected due to the pressure of networks on bank-partners. Interest rates in absolute terms are hard to record due to joint marketing campaigns of banks and stores.  Effective interest rates for standard product offers are approx. 70%-170%. Products sold as a special offer cost much less (often at the bank’s breakeven point or even lower taking into account actual reserves). However, according to recent statements by the NBU, the situation in this segment may dramatically change if regulatory institution will increase capital and other index requirements for banks, which loans portfolio is larger than their capital. The minimum consequences of such actions is the increase in personal loan rates, and the maximum consequences – some financial operators will be out of market.

As for a share in sales of products and household appliances financed by lending, we forecast a steady increase in sales from 20-25% (during the crisis in 2009-2010 ) to 35-40% of sales generated through retail networks at present. Current rates may reach a pre-crisis level of 60% within the next year. Monthly volume of cash crediting may reach UAH250-300 M, and to UAH1-1,5 bln for consumer crediting.

Nowadays, real interest rates for cash loans are approximately 60-150% p.a., which is 90% p.a. at average. However, overpayment is much lower for this type of loans due to their short-term nature.

Our forecast to the end of this year: we expect stabilization of cash lending market as too many operators has entered this market segment recently. When first results of customer and operational support of such loans will be analysed, many newcomers will reevaluate their policies in this crediting sector. Our forecast for interest rates: we expect small fluctuations in prices. At the same time some players may still make “pleasant surprises” to their customers first and then to their shareholders due to lack of experience in this segment. We believe the segment will grow by at least 30% annually in the near term.

The credit cards segment is represented by about 15 banks. Effective interest rates are 45-75%. It stands to mention that cards issued by some banks have a rather limited functional capability if compared to a classical credit card.

Our forecast to the end of this year: slight fluctuations around current interest rates. We should mention a high riskiness of that product for banks which very often exceeds risks for unsecured consumers loans.

Mortgage is available in UAH only. Approximately 50 banks operate on the secondary market, and a significant market share is occupied by appr. 10 banks. Real interest rates vary from 17% to 22%.There are high requirements on initial payment, which starts from 30% of the real estate price. Also, high officially proved income is needed in order to receive a mortgage. These major requirements will most probably be obligatory for a pretty long time. The market is slow due to a lack of effective demand from solvent clients.

Segment of classical auto loans keeps up growing: Approximately 40-50 banks issue loans, and a significant market share is occupied by appr. 10 banks. Requirements to a borrower are still high, in particular, they refer to initial payment and official incomes. However, there are offers available with the minimum payment, which is 10-15 % of the car price. According to our forecasts, the prices will not change significantly (nowhere to change), excluding special offers from companies associated with car manufacturers (and distributors). The effective rate for auto loans is 28-47 % in UAH. The primary market is overheated enough, with a price dumping. Some operators offer products  considerably below the rate of attraction of annual bank deposits, which means that there is additional profit in a tandem with car distributors and manufacturers. Monthly sales volumes of new cars in credit vary around 6000-6500 cars, which makes up about 15 % of total monthly sales.

Market for used cars loans is represented by approximately 12 banks, while there are four active operators only. Effective rates for used car loans are 22–35 %, monthly sales – 4500-5000 units.

 
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