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Analysis & Opinion
20.04.10 Vengeful Borrowers
By Tai Adelaja

In the heady days of a resource-fueled spending spree, Russians loved to buy everything – from kitchen utensils to big-ticket items, like cars – on easy-to-get, no-questions-asked consumer credit. Between 2004 and 2008, the volume of individual borrowing rose 12 times to three trillion rubles ($101.8 billion) or nine percent of GDP. More than a third of Russian consumers made use of bank credits over the same period, figures from the State Statistics Service show. In the past year, however, Russia’s nascent consumer credit market has flattened out, as the global economic downturn thrust the economy into a tailspin.

Virtually all domestic banks have tightened eligibility requirements for consumer lending. As household incomes declined, the overall mortgage loan portfolio declined by seven percent last year, while overdue mortgage loans tripled. The market for auto loans has contracted drastically since 2008, when about a half of all cars were bought on credit. “Retail lending has been declining for about 14 months in a row,” Leila Sharifullina, a banking analyst at Alfa Bank, said. “It only started to show slight signs of improvement in March, jumping by 0.6 percent, but it is too early to say that this is a trend.”

As bank after bank closed its doors, Russians willing to procure low-cost credit for low cost-items have turned to pawnshops, which increased lending to individuals by 18 percent in 2009, the Kommersant business daily reported. Dmitry Terentyev, the general director of United Lombard, said that Russian pawnshops, which generally accept highly liquid assets such as gold jewelry, lent out about $1 billion in 2008 as interest rates on bank loans skyrocketed, hitting 25 percent to 30 percent on short-term loans per month. “Last year, pawnshop lending increased 15 to 20 percent to about $1.2 billion,” Kommersant quoted Terentyev as saying.

With the economy now showing signs of recovery and banks making concerted efforts to revive consumer lending, Russians are acting with a vengeance, shunning easy credits as willingly as they embraced them, even as banks struggle to relax lending rules, analysts say. “During the crisis, a large percentage of banks shut the doors on their customers by refusing to provide them with much-needed credit facilities,” Mikhail Shlemov, an analyst with VTB Capital, said. “But now that they are eager to lend out excess liquidity, many customers are not in the position to take credit risks, because some have lost their jobs and other sources of income during the crisis.”

Analysts claim that the conservative policies adopted by banks during the crisis are backfiring. Alexander Morozov, the president of the National Association of Professional Debt-Collection Agencies (NAPCA), said that even consumers who had no problems with their jobs and whose businesses flourished through the downturn are also very cautious in obtaining loans. “In many respects it is a result of psychological factors – talks about the crisis tend to magnify its negative effects on potential borrowers,” Morozov said. “The cautious attitude adopted by banks is another cause for concern. Unlike pre-crisis years, requirements for potential borrowers have become stricter, while the cost of obtaining credit has greatly increased.” Morozov said that debt collectors have generally been understanding and courteous with consumers who found themselves insolvent as a result of the credit crunch.

By sitting on liquidity accumulated through expensive retail deposits in 2009 and with conservative lending policies at the height of the crisis, banks have not only quenched the appetite for borrowing, but pushed the country’s lending institutions into a corner at a time when consumer activity is needed to jumpstart economic recovery. The stagnation in lending has made most of the funds sit idle, which in turn has reduced the return on equity, and a lack of enthusiastic borrowers has meant that banks can no longer generate profits through interest rates. “The influx of retail and corporate customers to Russian banks during the crisis has been both high and sustained, increasing by about 100 basis points every month on average. However, retail lending has also been declining for about 14 months in a row,” Sharifullina said. “In a situation where you have an inflow of deposits without real demand for the lending product, in most cases banks had to stash away this excessive liquidity into their security portfolio.” The result was a drastic change in Russia's banking landscape in the last year.

At least 42 credit institutions closed shop in 2009, compared to 28 in 2008, while the number of financial institutions that turned over profit shrank by 179 compared to 73 in 2008, according to the January-November 2009 report posted on the Central Bank's Web site. A total of 138 banks reported significant losses in 2009, compared to just 45 in 2008.

One of the banks now making frantic sales pitches in an attempt to draw back run-away borrowers is Sberbank, the nation’s largest lender. Sberbank CEO German Gref said on Friday that the bank would lower interest rates by 50 to 100 basis points in further efforts to attract new retail borrowers for its lending products. Sberbank, which extended about 78 percent of all Russian mortgage loans last year, would also abolish some commissions associated with its retail lending, in efforts to boost their lending portfolio by ten percent year on year, he said. “Sberbank is in a position to lower the lending rate and grab more market share because it has a low cost of funding, since about 60 percent of its funding comes from retail customers who deposited with the bank,” Sharifullina said. Moreover, 40 percent of the retail customer spending came from the pensioners, who are a very cheap source of funding for the bank.” Bank Rossii has also been intensifying efforts to revive retail lending through a gradual reduction in the interest rate.

From the beginning of 2009, the Central Bank has reduced the refinance rate from 13 to 8.5 percent, which has caused a reduction in the interest rate charged on consumer credit. Through a raft of fiscal measures, including huge cash infusions, the government has also taken steps to reduce interest rates on mortgage loans, making them more accessible to borrowers. Shlemov said that these collective efforts to jumpstart the mortgage loan market could help to lead the segment to economic recovery this year. But despite government efforts to revive the car loan market through a sweetheart subsidy deal last year, car loans may not necessarily enjoy a boost, because they are not of primary concern to consumers, he said. “The latest lowering of interest rate by the Central Bank has pushed down mortgage loans rate to around 10.5 percent from a high of 17 percent,” Shlemov said. “There are already unmistakable signs that the mortgage market will grow significantly this year.”

But Sharifullina at Alfa Bank disagreed. “Right now only large banks and institutions remain in the mortgage market because many private banks could not participate,” Sharifullina said. “Many banks simply lack funds with long maturity that could allow them to advance mortgage loans for a period of ten years or more. Only a few banks like the VTB, which received 180 billion rubles in state support, could take part in the program.

The lending institutions would need to double their efforts and repackage their lending products before the Russian consumers regain the propensity to borrow and spend they had in the pre-crisis days, Sharifullina said. This is because consumer confidence, a key driver for retail borrowing, is still lacking, she said.

David Nangle, a banking analyst at Renaissance Capital, said that time is crucial to recovery in the consumer credit market. “During the crisis, a lot of borrowers were scared that they were going to lose their jobs or means of subsistence, while banks were calling them everyday about repaying their loans,” Nangle said. “The memory of the crisis is still very fresh, and people are not yet willing to take a credit or take a risk. This is the early stage of economic recovery. Banks are still sitting on a lot of liquidity and are still trying to lower the rate. The economy is starting to regain strength, unemployment is starting to fall, rates are coming down and consumer confidence is picking up. But there is still a need for a little bit of time for confidence building.”
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