UKRAINIAN INDEX
OF EFFECTIVE INTEREST RATES
ON CONSUMER LOANS FOR INDIVIDUALS
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What Will the “Black Swan” be Like?

Today, practically all experts stress the return to pre-crisis volumes of the consumer lending. However, very often, though hushfully, bankers speak of a very fast return of the full cost crediting or zero interest lending practice (in case of lending purchases in Technomarket shop). However, this growth can show its reverse side.

It’s not the one, but two Swords of Damocles hanging over each top-ranking banker. The first one is a fear for money provided to a loan-subscriber, the second one is a fear of insufficient income for business running. If the first one makes us grant the cash loan of ten to twenty thousand hryvnias doubtingly, the second one pushes us into covering 80-90% apartment cost with a loan. Moreover, realtors believe it’s possible that real estate prices may possibly decrease by 10-15%. Banks often turn to lending types that were a kind of terra incognita until quite recently, and they imply absolutely different rules of game and different risks.

In other words, bankers see a problem and try to respond to it while being pushed into that by bills for the office rent, security, pay rolls, etc., and, certainly, by shareholders’ demands to make up for the time wasted in crisis time.

This is just the backwater the "Black Swan" is likely to swim from. What exactly do I mean? There is potential of increasing interest rates for long-term mortgage loans. Most probably, they require the rate decrease, including for increasing reliability of these loans. It’s not easy to make money on short-term unsecured lending since they require wide-scale sales networks (which are expensive to maintain) for such products, and the main thing is the pinpoint accuracy of scoring and the loan granting process: the smallest imprecision may result in burn-up of the major part of portfolio. As a result, we face an acute necessity for new financial technologies, otherwise, it will be impossible to decrease the net cost of the loan product and improve its reliability. In this case, the "Black Swan" is a technological backwardness that may pull business to the bottom. These stones contain the words: “high overhead expenses”, “scoring errors/absence”, and “managers’ pursuit of fast and high financial rates”.

The highest and most dangerous risk is the one we are unaware of. On the eve of the US mortgage crisis, a very smart book on managing bonds was published. By the time of this seventh re-publication, several generations of financial experts had been overreading this book for almost 20 years. It was translated into Russian in 2008 when the mortgage crisis was storming across the USA and Europe. Its authors, headed by the stock market guru Frank Fabozzi, say that mortgage bonds imply two major risks: the debtor default and advanced repayment of credits “packed in” mortgage bonds. They also stress that real estate market development requires new approaches to evaluation of credits, portfolio risks, etc. As a result, only one risk (the mass debtor default) occurred of all major risk trends (the default risk, advanced repayment of credit, allowance of non-standard credits).

For the mortgage market, the "Black Swan" grew on unreasonable appetites of all its players, moreover, not so much bankers as real estate agents and credit agents who were ready to supply lenders at a rate of knots and then repack loans (securitize assets) into new securities.

And there is another "Black Swan" in the national loan market: this is the growth rate of the major population disposable income.

It’s not a secret that credits are taken in view of the expected future growth of the personal income. In fact, the US loans were accommodated for these reasons, based on the assumption that settled poor persons would work and earn more; as a result, they would raise money for servicing of loans that seem to be unduly risky.

What about the income of Ukrainians? It is growing, but very slowly. Today, the salaries are far behind the economic growth rate (by the way, this rate is accelerated by growing inflation). In turn, the inflation consumes the personal income part which could be channeled to timely and even pre-schedule loan repayment. What is the output? This is our disappointment in expectation of the personal growth rate and decrease of the disposable income, the earning part remaining after payment of vitally necessary expenditures (food, transport, taxes, and utility bills).

Meanwhile, we see the artificial credit expansion; the artificial component is represented , first of all, by credits with zero and minimum initial debtor’s payment or loans accommodated without any factual underwriting (there are plenty of them), as well as loans provided at the rate significantly lower than level required by the market.

Each of these sources is capable of creating the whole flock of "Black Swans". The first one implies the inflow of knowingly insolvent or even non-paying lenders. The second one encourages frauds and inflow of unscrupulous debtors. The third one means the banking capital decumulation. The result is a new crisis cycle.

 
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