Matthew Day in Warsaw -

As Central and Eastern Europe settles down to weather the winter, the accompanying bitter economic climate has also began to make its presence felt on the small-credit market.

A long way removed from the headline grabbing market for big-ticket loans, the small-credit sector has for some time been making steady progress in CEE. Offering consumers rapid and easy access to small unsecured loans, it has flourished in regions where until recently high-street banking was something of a rarity, and credit cards the preserve of the cosmopolitan and wealthy few. The UK company International Personal Finance, for example, entered the Central European market in 1997 under the name Provident, and now boasts some 1.6m customers.

All good stuff, but the market now faces a testing time. "We are seeing that the market is coming down," says Alexander Labak, CEO of the Dutch-based Home Credit Group, which operates in markets such as Russia, Ukraine and the Czech Republic. "Consumers can see what is happening and that is making them less willing to take on debt. People are stepping out of the market."

"Nearly two months ago, we started to have challenges on liquidity and people were talking about liquidity issues on the market," Labak continues, going into details. "Now things have turned relatively quickly to questions about credit quality on the market place."

Debt collectors

Question marks over the quality of credit, and the growing fear that customers across the region will have problems repaying has led the sector to follow in the footsteps of big banks and tighten lending criteria. Christopher Rodrigues, non-executive chairman of International Personal Finance, which has just added Russia to the list of CEE countries it operates in, says that the company will use "a slightly tighter credit criteria" in 2009, with the company conceding that it will shelve plans for pilot projects.

Home Credit has even taken the step of hiring more staff on the collection side of the business to help ensure the money keeps coming in. "Giving out money is not so much a problem, but getting it back is more of a challenge," quips Labak, although he adds that recession might keep those who have a high risk of defaulting away from the market as they realise they can't afford debt.

Yet at the same time, unlike their big-lending relatives, the sector still sees cause for limited optimism in 2009, which follows on from a year that saw positive financial results. "Typically, in a recession we find competition retreats and demand for our products increases," says Rodrigues. "The market for small unsecured loans doesn't disappear, in fact it grows."

This, no doubt, has helped the company persevere with a move into the Russian market started in the autumn of 2008 in spite of the worsening economic situation. "There is liquidity available and there is no reason to pull back from our current plans," he continues. "We're funded through to the middle of 2011. So we're well funded, have very little exposure, and our model appears to work."

The sector also helps to dodge the worse that a poor economy can throw at it by being nimble footed. With loans on the small size and lasting for not much longer than six months, lenders have far more flexibility when it comes to adapting to a rapidly changing market than mortgage lenders do, for example.

But while the sector prepares to confront what is expected to be a difficult year, it also has to deal with an unexpected result of the recession: the once broad similarities that many of the economies in the region once shared had have started to evaporate in the heat of an economic downturn. "What you see now is that in times of stress the emerging markets are separating more from each other than they were when in a situation of general prosperity," Labak explains. "We now have to differentiate between the markets we operate in. In the Czech and Slovak markets they never had real liquidity issue to start with, and also seem to be substantially less affected by an economic downturn than Ukraine. I think for us we are managing at a country specific level, so in the emerging markets we now have a diverging market approach."

As examples of this, Labak points to the differences between Ukraine and Russia. Home Credit has become "cautious" about Ukraine given the economic mismanagement and Labak expects its market to stall; Russia, on the other hand, where the government has "done a responsible job at ensuring liquidity," should remain strong.

Going further, Belarus, Labak adds, now benefits from its relative economic isolation and has become, for Home Credit, "a stable economy that needs little correction."

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