Payback time in Russia

By bne IntelliNews May 21, 2010

Guy Norton in Moscow -

In the course of the market panic that followed the demise of Lehman Brothers in the autumn of 2008, it was widely assumed that bad debts in the Russian banking sector would rise dramatically to levels of 30-40% - effectively wiping out all profits in the sector and causing the financial collapse of a whole raft of lenders. Against almost all expectations, however, the reality has proved to be startlingly different.

The latest data from the Russian central bank indicate that actual non-performing loans (NPLs) across the sector average just 10% of total lending as Russian borrowers both on a corporate and an individual level have proved to be far more reliable on the debt repayment front than many financial analysts gave them credit for.

Despite last year's recession when GDP shrank by almost 8% and unemployment rose sharply, ordinary Russians have conscientiously serviced their debts, which means that consumer finance firms such as Renaissance Credit are now happy to restart lending again. "The willingness to pay has been very good," says Kieran Donnelly, head of funding at consumer finance firm Renaissance Credit, adding that as a result ordinary Russians kept their money on deposit in banks rather than withdrawing it and reverting to the once-traditional method of stashing it under the mattress.

What's more, those depositors at the small number of banks that did go under in the last couple of years have seen their hard-earned cash paid back to them through Russia's deposit insurance scheme in a very short period of time. "People were paid back by the government within 14 days," says Donnelly.

The dawning realization that Russians are not any more likely - in fact arguably less likely - to walk away from paying back loans than their counterparts in Western Europe or the US has had a positive effect on the perception of the entire Russian banking sector, say bankers. "People have finally realized that NPLs will not be the albatross around Russia's neck that was once feared," says Steven Meehan, chief executive for Russia/CIS at Swiss bank UBS in Moscow.

As a result, the country's leading banks have regained access to the international loan and bond markets, which will help them to raise fresh capital to offset the provisions they made against bad debts in the course of 2008-09.

Meanwhile, on the basis that every cloud has a silver lining, even the rise in NPLs has created new investment opportunities. That's why Scandinavian private equity group Mint Capital recently bought into Capital Collection Agency (CCA). As a leading firm in the debt collection industry in Russia, CCA is well positioned to exploit opportunities in an expanding marketplace, says Ulf Persson, managing partner at Mint Capital. "Obviously, the level of NPLs in Russia has increased since the onset of the economic crisis, but debt collection agencies have created a market-based solution to the NPL problem," says Persson.

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