Ben Aris in Moscow -
Think of it as the Avon of the financial world. You are sitting at home and the doorbell goes. Instead of the Avon lady, though, an agent from International Personal Finance (IPF) is at the door offering to lend you from £100 to £2,000 to be paid off in weekly cash instalments over the next year. This story was playing out in Yorkshire 130 years ago, and today is becoming an increasingly familiar site in Poland, Romania, Lithuania, Bulgaria, the Czech Republic, Slovakia and Hungary.
"We offer to lend money to people that are not covered by traditional banking, people with thin credit files that want to borrow a small amount over a long period of time," says Adrian Gardner, CFO of IPF, which is listed on the London Stock Exchange (LSE) with a market capitalisation of £1bn.
The agent model is new to Central and Eastern Europe. IPF started with Poland in 1997, followed shortly after with the Czech Republic, and it has been moving into a new market every 18 months since. With the acquisition of MCB Finance in February, IPF has expanded its geographical footprint into four new markets – Finland, Estonia, Latvia and Australia. Today, the company serves nine CEE countries as well as Mexico, and Spain will be added later this year. In total, IPF works with 2.6mn customers, of which 800,000 are in Poland – by far its biggest market in the region – and employs some 30,000 agents in total. IPF hopes to continue to expand in the region, although it chose to close its Russian pilot office after the crisis hit in 2008 and has no plans to reopen it in the short term.
House to house selling
The way it works is an agent, who is a freelancer, not a company employee, goes from house to house offering to lend typically £400-500 in equivalent local currency at similar interest rates as the banks, although there are a few startup fees involved. The agent (almost exclusively women, for whom this is usually a second job) then visits the customer (also almost exclusively women) to collect a cash payment each week for up to a year.
It sounds pretty risky, as these are unsecured loans made to the poorer end of society – categories C2 and D on the socioeconomic scale – and IPF does have a higher default rate on the order of 12-14% than banks, which expect 3-4% of loans to go bad. Gardner says that a core part of the business model is to acknowledge that it's sometimes difficult for the punter to meet their payments every week.
"We operate on the principle of forbearance," says Gardner, who at the time of the interview with bne IntelliNews was visiting Romania where IPF is expanding its business. "If you have difficulty in making a payment, then the agent will work with the customer to reschedule the debt. If all the money is paid back within the year, there is no problem. If the debt is repaid over 18 months or two years, there is nothing extra to pay. It is only if it takes longer than this we start to charge interest. However, we have a contract with borrowers and only as a last resort will we use lawyers to recover the money."
There is a ready-made market for loans of this size, as they are too small and maturities too long to be worthwhile for banks. While using agents is an expensive option, the cost is spread across the network of a 100 customers that the agent typically has, all concentrated in one locale.
Poland has been a particular success for IPF, earning £118mn of group profits from the group's total of £746mn in 2013 on just over £1bn lent to customers. "[Poland] has been a very important market for us, but we have built up the infrastructure there and it is a very mature market. And customers like it: we have a 75% repeat rate after someone has taken out one loan," says Gardner.
However, of late business there is getting much harder. 2014 results released in February showed that IPF's total loans fell 2.7% to £1.02bn in the year ended December 31 as loans in its largest markets, Poland and Lithuania, fell 2% due to intensifying competition from payday lenders and banks.
IPF said it expected the market environment in Poland to remain challenging, though in general the lender’s business is in CEE is recovering after the slowdown seen in the final weeks of 2014. "The slowdown that we saw at the end of the fourth quarter bled over into early 2015, but by February of this year we felt we were largely back on track," Chief Executive Gerard Ryan told Reuters after the release of the annual results, which showed a 4.6% rise in full-year pretax profit to £123.5mn before exceptional items and revenue up 4.9% to £783.2mn.
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