Ben Aris in Moscow -
Consumer credit has been booming in Russia for more than a decade, but 2014 was a watershed year because the amount Russians spent on servicing their personal loans for the first time overtook the amount of new loans they took out. Having gorged themselves on the fruits of capitalism - the consumer durables, foreign holidays and fancy smartphones - Russians who over-extended themselves have just met the unpleasant side of the market system: the repo man.
Retail loans soared in recent years because they were one of the most profitable businesses available to banks in an otherwise moribund economy. But at the end of 2013 Alfa Bank's chief economist, Natalia Orlova, pointed out that Russians were increasingly taking out new loans simply to pay off old loans - from having virtually no debt for most of the last two decades, the Russian consumer was suddenly starting to look overleveraged.
Alarmed by the inflationary dangers of a potentially system-wrecking consumer loan bubble, the Central Bank of Russia (CBR) poured a bucket of ice water over the business in 2014 by hiking prudential reserves requirements and capping the interest rates that banks can charge, which has just gone into effect, nipping the problem in the bud.
At the end of 2014 the CBR estimated the total outstanding consumer loans portfolio at RUB646bn ($10.7bn), of which 5.79% was delinquent. That was up from 3.7% at the start of the crisis period in 2009, and it will probably grow further in 2015, albeit modestly now the CBR has clamped down on the business. But banks are still left with the problem of collecting on bad debt.
The bailiffs are back
Russia's debt collection agencies (DCA) appeared almost as soon as unsecured lending did, pioneered by Rustam Tariko's Russsky Standart bank in 2001. In those days anyone with a face and a passport could take out a short-term loan.
Elena Dokuchaeva cut her teeth working in the retail department of a Russian high street bank, but left to found Sequoia Credit Consolidation in 2003, today Russia's leading DCA. She is backed by a group of private Russian investors, and more recently US investment firm Goldman Sachs bought a "significant" minority share in the flourishing firm, says Dokuchaeva.
Walking into Sequoia offices in central Moscow close to Mayakovskaya square is an anti-climax. Instead of lots of muscle-bound men sitting about in leather jackets smoking and drinking coffee, the modest office looks like any other as clerks pore over computers studying statistics or sending messages to the three call centres, one in Moscow and two in Russia's regions. It turns out that most people are wiling to pay their debts off and only need some help in organising their finances. "Pretty much from the start we have tried to be ethical collectors," says Dokuchaeva. "We don't use strong-arm tactics and indeed often all that that is needed is to speak over the phone or send an SMS to convince people to pay. The occasions where we send representatives around to the house of the debtor is not very often, not to mention very expensive."
In 2007 Sequoia got together with several other leading DCAs and set up the National Association of Professional Collection Agencies (NAPCA), which now has 30 of the biggest companies as members – although there are more than 1,000 companies working in the debt collection business in Russia, many of them simply a couple of guys with phones.
The business is still essentially self-regulating because while court bailiffs exist in Russian law, the whole concept of private debt collector remains undefined. On July 1, a new law on consumer loans came into effect and more changes to the civil code are planned this year that will define the status of the DCAs and give them access to people's credit histories; currently only banks are entitled to look at someone's credit history.
In the meantime, the members of the NAPCA limit themselves to calling people during office hours and threatening behaviour is banned. If a representative is sent to someone's house, then they are obliged to leave a flyer that includes a company telephone number where the debtor is encouraged to report any abusive behaviour. "And we fire people for not following the code of conduct," says Dokuchaeva. "We have to, as it’s the only way you can be sure you can sleep at night"
There is no need to send the heavies round to collect overdue payments, because like most other business lines in consumer banking, debt collecting is more than anything a numbers game.
Dokuchaeva says the first thing Sequoia does is parse the accounts by type and then assign a method. In most cases little more than a few SMS messages or a phone call from the call centre is enough to prod the debtor into making payments. In the more difficult cases, the company might restructure the debt and concentrate on at least collecting the interest payments and leave paying off the principle part of the debt for later. The key, says Dokuchaeva, is to be cost effective and politely persistent. "We are still trying to collect debts that people took out as long ago as 2007."
And Sequoia doesn’t have to collect many debts to make a profit. The business has grown exponentially in the last decade as banks increasingly outsource their debt collection efforts to the DCAs: estimates for the total value of problem consumer debts in Russia vary, but Dokuchaeva estimates banks sold a total of RUB200bn ($3.3bn) to DCAs in 2014 and gave the agencies authority to collect the same about on the bank's behalf on a commission basis, effectively outsourcing the job to the DCAs. These commissions make up around 85% of Sequoia's income. "About a third of the delinquent debt is placed with DCAs at any given time," says Dokuchaeva. " However, estimating the size of the overdue loans is difficult because many of these debts are offered to several DCAs consecutively and so totting up the amounts outstanding mean that figures are counted several times."
Retail banks all have debt collection departments and typically try to collect the debt themselves several times before turning to the DCAs, which are paid on a commission basis. Finally, if that doesn’t work, the banks sell the very worst debt to DCAs, which were typically paying 2.33% of the face value of these debts last year. It sounds like a very deep discount, but Dokuchaeva points out that Sequoia can spend about five years on trying to collect the debt, which incurs significant personnel costs.
Russia's economic slowdown and the CBR's efforts to cool the business caught an increasing number borrowers out, while the central bank's decision to hike the policy interest rate to 17.5% in December will only make things worse for borrowers in 2015.
Even before the ruble currency crisis broke, Sequoia says the demand from the debt repayment departments in banks went shooting up and some banks are only waiting seven days before handing over the work of debt collection to the DCAs. Dokuchaeva complains that not only are banks offering more debts sooner, but the volatility and uncertain outlook for the economy is making it impossible for DCAs to price the debt that they buy from banks.
But the main problem remains that the average Russian is almost completely financially illiterate. "Based on the research we did, we found that most Russians only plan their finances one or two months in advance, and less than 10% plan for more than one year in advance, which is currently the average length of the loan," says Dokuchaeva.
Put in other terms: before the consumer debt bubble started to grow, the average Russian owed approximately one month's salary to banks, but that has doubled in the last two years to RUB70,000 ($1,200 at December exchange rates), or a bit more than two average monthly salaries. This remains a relatively low 17% of GDP and is the sort of sum that can be raised from friends and family if necessary; so the rise in consumer non-performing loans does not threaten the whole economy. "The problem with the debt is not the size, but the fact that most of it is unsecured credits, credit cards, or point of sale debt. It's a very expensive form of borrowing and people were overloading themselves," says Dokuchaeva. "The easiest debts to collect are mortgages; there the recovery rate is up to 100%, but that needs a court case to resolve."
Sequoia estimated that Russians had an average of 1.7 loans each in November, up from 1.5 in 2013, but Dokuchaeva says the record was one man who had taken out more than 20 credits at once. The amount of time it takes for people to get into trouble has fallen too: in 2013 loans went bad after seven months; in 2014 it took just 4.5 months.
"As a rule of thumb if someone has more than five bad debts simultaneously, then you can expect to never get your money back," says Dokuchaeva. "Collecting debts is important if Russia aspires to be a consumption-led society where people need to learn to borrow responsibly. This is part of the learning process we have to go through. Still, in Russia there is a tradition to clear your debts before the end of the year and so we normally collect twice as much in December than any other month of the year."
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