Ben Aris in Moscow -
With consumer lending booming even as the economy slows, Russia's level of bad debt is creeping up. And banks anticipating trouble are increasingly passing on their problem loans to dodgy credit collection agencies.
Express loans to consumers were rising by just under 40% last year and keeping Russian consumption afloat. But as the economy stalls, loans are starting to go bad. While data on the true level of non-performing loans (NPLs) are sketchy (the official numbers are certainly an understatement), experts believe the level of bad debt has doubled this year from about 4% of total loans to around 8%. This is not a huge level, but worried about a new crisis the Central Bank of Russia has already moved to tighten rules around lending by accelerating the implementation of the Basel III rules that force retail lenders to hold much larger reserves against problem credits.
Bad loans caused much of the pain in the 2008 crisis and threatened to bring some banks down, so managements have prophylactically been cleaning out the worst offenders and selling these debts on to the dozens of debt collection agencies that have sprung up. The problem is that, as is usual in Russia, business is running far ahead of legislation and the rules to regulate these operations are not well defined, which has led to a lot of complaints and some abuses.
In December, VTB24, the retail arm of state-owned VTB Bank, invited eight debt collection agencies to bid for its portfolio of an unspecified volume of bad loans, including market leaders Morgan & Stout and Sequoia Credit Consolidation. The tender was won by Rusdolg, part of the Russian Debt Corporation, which bought the troubled loans portfolio for RUB4bn (€97m), although the value of the underlying credits was not disclosed. According to market insiders, the small agency has never worked with individual debts before, but won the tender by offering an unreasonably high collection rate.
The collection agencies are getting ready for not only for an influx of overdue loans, but for deterioration in their quality as well. In 2012, the agency collection market increased 10% to RUB14bn ($467m), according to the Sequoia Credit Consolidation Agency. The National Recovery Service puts the volume of bad debt sold by banks far higher at $3.2bn last year.
Mikhail Zadornov, the head of VTB24, said at the start of April that he plans to increase the amount of bad debts handed over to collection agencies by a third this year. GE Money Bank, the Russian affiliate of the US financial group, put RUB380m of NPLs up for sale in January, MDM-Bank sold on RUB4bn in March, as have Home Credit Finance and Renaissance Credit. Even the state-owned Agency for Housing Mortgage Lending (AHML) put up a tender for the collection of RUB1.30bn ($42.27m) unsecured mortgage debts to debt collectors.
UniCredit Bank in Moscow is going in the other direction and is offering to buy other credit institutions' of pools of debt in the amounts of RUB10bn-40bn as a way of beefing up its retail business.
And the largest Russian lender Sberbank said from June 1 its own debt collection subsidiary, ActiveBusinessCollection, will be up and running. At first, the subsidiary will acquire 120,000 cases of credit cards and old loans overdue by more than 360 days to the tune of RUB1bn. Retail loans in arrears at Sberbank were a total of RUB54.2bn by March. The business model chosen by Sberbank is solely a matter of reputation, says a manager of a bank possessing a similar business unit. Probably, Sberbank wants to be sure that debts are collected correctly and debtors are not harassed more than it is needed, he said.
A good bad business
Bad debt collection is clearly a profitable business. Officially, the bidders for VTB24's debt demanded a 25%-28.6% premium on the collected sum, however Sequoia Credit Consolidation demanded a whopping 47% on top of the debt as its payments for collecting a bad debt. But that is only what the companies admit to. In reality, according to Igor Kostikov, a former stock market regulator and now the head of the Financial Services Consumers' Union (Finpotrebsouz), a consumer protection agency dealing with debt collection, the companies will multiply the sum several times over and intimidate the debtor into paying more, often with the complicity of the authorities.
Russian social media is awash with complaints. "My son took a RUB112,000 loan in 2008. Then he was arrested and went to prison for five years. Nobody paid anything to the bank. Then the credit was passed to [one of the major credit collection agencies]. Today I got an SMS message: Regional representative of [agency] sent to you to revise your property and check your income. And the number 8-800-100-XXXX. When I called, a woman said that if we can't pay, they will go to court. The sum now is about RUB1.4m," according to one post on March 13.
There is already a federal bailiffs service, but these rules regulate officials appointed by the court to recover assets and cash once someone has been declared in default or bankrupt. However, banks rarely take their bad debtors to court and hand their debts over to the debt collectors before a court case, leaving the whole issue in a legal limbo. As a result, collection agencies resort to a variety of tactics to get their money.
One common tactic is to send burly collectors to a debtor's home at unusual hours of the day. Another common complaint is the collector's threats to seize a debtor's property despite the fact there has been no court case (something they have no power to do). Almost all of the collection agencies sail close to the wind. According to bne enquiries, two companies admitted to making use of stolen databases of personal information - mostly from mobile phone operators - to get phone numbers and addresses of debtors, but even in Russia this is illegal.
It is a fast growing business. LLC MBA Finance is a Czech company that is expanding rapidly in Russia and the rest of Emerging Europe. Creditexpress International was set up in 1999 and has large offices in Bulgaria, Romania, Ukraine and Russia, and also offers high interest rates to distressed borrowers.
Morgan & Stout is one of the most respectable agencies and has attracted Swedish investment firm East Capital as a minority shareholder in 2008. It was established in 2007 by a group of Russians with experience in the financial sector and now has offices in 16 Russian cities covering 46 Russian regions. However, like all the companies researched for this piece, Morgan & Stout also had a slew of complaints against its tactics. "I took a RUB100,000 loan for developing my business. It didn't work out, debts grew. I didn't pay for a year. Then the bank security service started to call. Later, guys from Morgan&Stout started to call saying they represent the bank now. At first there were SMS messages, then calls up to eight a day. The call went like this: Our brigade is on the way to your flat. No one showed up. Then they started to threaten me with jail, they could make my boss fire me etc. The new trick - they called and said there was a woman in Novosibirsk who can pay for me if I strike my name off my residency registration and sign in hers instead," wrote one blogger in February last year.
Sequoia Credit Consolidation, part of Adela Financial Retail Group, is probably the market leader. The company is very public, speaking at conferences and cooperates with the Russian authorities in efforts to develop legislation covering the sector. However, even Sequoia is not without its problems and Rospotrebnadzor has at least one legal suit against the company for alleged abuse of debtors' rights.
The government is not sitting on its hands when it comes to setting up some rules for the sector, but it's going slowly and confusion reigns. In 2012, the Supreme Court of Russia resolved that debt may only be sold on with the borrower's consent, but the court failed to define what sort of loans it was talking about and most banks have simply ignored the rule. Russia's chief bailiff, Artur Parfenchikov, told a press conference in February that the Federal Bailiff Service actively supports the development of the collection market, but the bias is in favour of helping banks collect bad debts rather than protecting the interests of citizens. "We support the encouragement of the collection market. We have developed a draft law, which was passed to the Ministry of Justice. This is a very important step. We need a law that clearly defines the issues, which the legislative and regulatory compliance practices of collection agencies do not touch upon," Parfenchikov said. "We in no way oppose such activities, and in fact seek to encourage them. Collection activity must be fully self-regulated, and does not need to be licensed centrally."
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