The increasing importance of credit risk management in Russia and CIS
The
Russian consumer finance market grew from a very small base and began
booming in 2003, according to Expert RA rating agency, when banks
had already issued 1.3% of GDP in credits to their customers. By 2007,
that number rose to 7.8% of GDP. By late 2007, Russian banks had given
out $100 billion in credits to Russian citizens.
All sectors of the consumer financing market were demonstrating rapid growth until summer 2008. The key drivers were credit cards, car loans and mortgages. Once popular, high-risk express loans were losing their popularity to credit cards, much of this due to the fact that banks were obligated to disclose the effective interest rate to customers. According to Expert RA, in 2006, the car loan segment grew 100% and mortgages were demonstrating even more impressive growth expanding 3.5-fold in 2006 and reaching $13.5 billion.
As a consequence of the world financial crisis, noticeable changes have taken place since summer 2008 in the credit policies of Russian financial institutions. Banks have imposed tougher standards on borrowers, such as level of income required, and narrowed down their lines of credit products. For example, loans backed by securities have almost disappeared completely and a growing number of banks only issue loans to customers over the age of 21. Financial difficulties have also had an impact on interest rates which have risen since the start of the world financial crisis.
Overall development of the consumer financing market is slowing down but growth rates are still impressive. According to the Central Bank of Russia, consumer loans grew 35.5% in 2008 (to around $168 billion) versus growth of 57.8% in 2007.
With this information in mind, let’s take a look at delinquencies. Overall delinquencies across all segments of the consumer finance market reached 95.47 billion rubles (around $4 billion) by January 1, 2008, up 90% from the previous year, according to gazeta.ru, the online political and economic newspaper. As of January 1, 2009, overall delinquencies among Russian retail banks were 3.8% of the total credit portfolio. Experts say this level is far from critical but delinquency rates are growing quite rapidly.
One of the reasons for this growth in delinquencies is the immaturity of retail credit risk practices in Russia. Given the rapid expansion of the consumer financing market and growing delinquencies, banks have been forced to introduce and perfect their risk management practices. However, even some large organizations still lack risk management mechanisms, whereas in Western countries this is an integral part of the banking business. The retail credit risk practice does not only contribute to the delinquency rate, it has a direct impact on the competitive proposition of the lender’s products. Still in many organizations, we see very manual and de-centralized credit decision processes.
The human resources market is another element demostrating the stage of development of the retail credit risk management industry. Currently, there is a huge lack of experienced personnel in the industry, which is explained by the fact that this market is very new.
The appearance of credit history bureaus and Western credit risk management strategies and tools should help correct this situation. This is one of the most important tools used in credit risk analysis. Most of lending decisions in Western countries are based on information received from credit history bureaus.
There are several factors why credit history bureaus do not develop as rapidly as one would like. First of all, many banks are still reluctant to share information on their borrowers with credit history bureaus. Second, although credit history bureaus have accumulated a wealth of information already, lenders need to learn how to use the information from the bureaus. And third, there are no means of sharing information on fraudulent activity.
Scoring is a relatively new term for the Russian banking system. For most small and mid-sized banks scoring is done primarily in primitive form. Major banks usually have their own information infrastructures in which they have invested heavily. But these in-house systems rarely stay efficient in the mid- and long-term perspective.
In spite of the fact that the Russian consumer finance market is still young, banks have made incredible progress in implementing Western experience in all aspects of banking activity. Experian hopes the awareness of banks about the benefits of automated decisioning, strategy management, collections and anti-fraud solutions offered by the company will continue to grow for the benefit of the Russian economy.
Daniel Zelenski
Country Manager
Experian Russia & CIS
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Experian entered the Russian market in 2004 developing a Decision Analytics team and launching Russia’s first credit history bureau. Today Experian-Interfax is one of Russia’s largest credit history bureaus with over 200 clients, including federal and regional banks, cellular service operators and collection agencies, and stores 5.5 million credit histories (as of March 2008).