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Who will Suffer from a Boom on the Consumer Loan Market?

Taking into consideration information about consumer loans excess, the following questions arise:
Does it increase too fast? What product groups show the increase? What is a driver for this increase? And what are consequences for our national economy, population, and banks that extensively operate in this retail credit market segment? Is there a need to tighten regulations for banks that provide consumer loans? What conclusions do decision-makers in banks, supervisory boards, and shareholders has to draw?

Let’s have a closer look:
Three things are mentioned as negative consequences of consumer crediting:
- It speeds up inflation;
- It affects the trade balance, as it stimulates demand for imported products. Besides, it decelerates the development of a real sector of the economy (corporate sector);
- It affects stability of lending banks and, as a result, may lead to a new stage of crisis.
With a realistic assessment of these three challenges, I propose to begin discussion of the strategy of government actions in respect of consumer crediting.

Challenge 1: Is there an acceleration of inflation?

Loans can trigger inflation, but from my point of view, in our country there is no demand inflation. There is a cost-push inflation: prices growth for power sources, raise of utility rates, and rates of other natural monopolies, and the growth of prices for domestic products due to inefficiency of manufacturing processes and out-of-date technologies. The demand inflation is represented by the global price advance for oil, metal and food (also due to monetary policy in Europe and the USA).
This is the reason for raising of prices in this country. Cash loans either have nothing to do with it or their impact is not significant. Moreover, tet’s keep in mind that profit of population has dramatically decreased in 2008-2009 and people are now spoiling for consumption (all of us remember a harsh downfall and even a lack of demand for many products and services in Ukraine for two years). Nowadays loans play role of a compensatory mechanism which stimulates consuming activity and, sure, a consumers demand. There’s nothing bad about it. Vice versa, it is beneficial for the economy in general and the collection of taxes to national and local budgets. The US is combating for that at present by implementing a quantitative easing policy. However, without success. A final consumer demand is a driving force for a real (corporate) economy sector.

Challenge 2: Is the trade balance deteriorating? Is there a risk for Ukrainian currency exchange rate caused by consumer loans?

Yes, it is. In comparison with 2010, import and export increase is under way today. But if you take a closer look at statistical data, you can see that a negative balance for merchandise trade reduced twice from February. Import also went down from peak figures in March: down 10% in April, and down 3.3% in May. So, no disastrous processes are happening at the moment. We can nothing to do with the fact that Ukrainian plants and factories do not manufacture (or manufacture in a little quantity) microprocessors, LSD screens, cheap footwear and sport-utility vehicles (or produced in small quantities) in Ukraine? Neither Poland nor France produce them. So, we have to import those products anyway, at least for a while. There is no need to cut loans, there is a need to stimulate export – but this is a dedicated topic.

Someone believes that a purchase of imported consumer goods (electronics, home appliances, cars) in credit fails to spur our national producers. But let's start with the fact that our local producers do not basically produce the specified products (or produce insignificant volumes thereof). For example, cars assembled in Ukraine are credited in the same way as imported vehicles. One also has to remember that crediting of expensive purchases relieve pressure of current spending for families.

So, Ukrainian families can spend more money at the present time on food, entertainment, rental and purchase of real estate, etc. This results in expansion of domestic goods and services consumption.

In order to combat for the foreign trade balance, it’s more appropriate to implement incentives (including tax incentives) for doing business (export-oriented and import-switching businesses) instead of limiting consumer lending. We should also provide incentives for mini- and micro-crediting for the small business that can offer a credible alternative to some imported goods (clothing, footwear, food) and services (e.g., tourism).

Challenge 3: Is there any decrease in stability of lending banks?

This challenge has two constituents: risk management and currency risks. As for exchange rate (currency) risks, they were eliminated in a consumers segment with the termination of issuing of personal loans (for non-entrepreneurs) in a foreign currency. I’d like to remind you that major challenges faced by banks during the global recession where connected with personal loans in a foreign currency (unfortunately, the crisis evolved from the mortgage sector and related securities, not from the consumers crediting sector which later suffered as a consequence).

I totally agree with an NBU policy as for risk management issues. Development of the credit bureaus system has to be promoted. We should thoroughly restrain a too risky credit expansion and, as a result, the dumping on the market. An aggressive launch of operations on the consumers crediting segment by amateurs may be very dangerous. Amateurs are not always small or middle sized banks. It is any banking institution which has neither expertise nor work experience in retail sector or has little awareness of specific issues related to technologies, risk management or IT systems. It is any bank that enters the market due to excess liquidity only. These banks will face very high risks which they have to be able to manage. When I say “a too risky expansion”, I mean a ”galloping” growth of the credit portfolio which is not based on the awareness that the portfolio is really of quality. The bank has to prove its right to develop its credit portfolio by showing a high quality of loans issued earlier and the credit recovery rate. The same refers to the right to have high ratio of deposits from individuals on the liabilities side. This right must be based on a high quality of credits issued by banks earlier.