Page 41 - IFR Opportunities in Russian capital markets

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ifrintelligence reports/Opportunities in: Russian Capital Markets
CBR acts to curb NPLs
The CBR is working hard to head off the problem of NPLs before it gets out of hand. In January 2007, it ordered banks to advertise their real effective interest rates to consumers, rather than their nominal rates.
Two new rulings have been introduced: Central Bank Directive No. 1759-U "On the Introduction of Changes to Central Bank Regulation No. 254-P of March 26, 2004, On the Procedure for Forming Reserves by Credit Organizations against Possible Losses on Loans, Loan Debt and Equivalent Debt" and Letter No. 175-T "On the Determination of the Effective Rate on Loans Provided to Individuals."
Banks load loans with hidden charges and add-ons that drive the rates up from a typical nominal rate of 29% a year to between 90% and 124% a year in 2006, according to the CBR.
Credit cards are a better deal, but here too the banks are massively overcharging with real rates of almost 60% a year against a declared rate of 28%. Large, long-term credits with collateral have the best rates. Car loans cost a real rate of about 25%, against the declared rate of 13%.
The CBR was spurred into action as it says that NPLs are rising at 9% a month, outstripping the rise in the volume of consumer loans of 5% a month in 2006. The bank is sketchy on the details, but it has been reported that the CBR believes the proportion of NPLs in some small retail banks is up to a third.
CBR Deputy Chairman, Gennady Melikyan, said the CBR was hoping to reduce the risks of default and was acting in the interests of the Russian consumer. This is the first time the CBR has ordered banks to reveal their real effective interest rates to consumers. The CBR has issued similar warnings in the past, but only as advisories, which were largely ignored by the industry.
The CBR's move will only turn up the heat on an increasingly competitive business. The margin on retail loans fell from 16–17% in mid-2005 to 13% as of August 2006, according to Russian bank rating agency RusRating.
Home credit bites the bullet
The most high profile bank to have problems with bad debt was Home Credit Finance Bank, owned by the Czech financial group PPF and the second biggest provider of consumer credits after Russian Standard (Russky Standart). In the first half of 2005 it was unique among the consumer finance banks after it reported a net loss of RUB195m (US$6.9m) in a rising market. The bank had been expanding rapidly – too rapidly as it turned out – and NPLs rose to 27% of its gross loans, against 12% in 2004.
Even Russian Standard has run into trouble. At the end of August 2006, Russia's premier bank rating agency, RusRating, downgraded the consumer wunderkind one notch because of "high credit risks of the leading consumer lender and the decrease of profitability in the sector."
However, ratings agency Standard & Poor's, which rates the banks’ many bond issues, said that rising NPLs are still nowhere near big enough to threaten the bank. "With the share of overdue debts of 5–10% and an effective interest rate of 50–60%, profits cover absolutely all Russky Standart's risks," an analyst at Fitch Ratings said.
Home Credit also played down its problems with NPLs. In its defence the bank said that these bad debts were technical defaults: the number includes payments that were a month overdue and the bank recovers much of this money fairly easily. However, Home Credit was forced to increase provisions for bad debt by 60% for the first nine months of 2005 and "sharply tighten" the origination and collection procedures. The parent group injected RUB5bn into the bank to support it, as well as writing down RUB3.5bn in the fourth quarter of 2005 to ease the pressure.
The rescue operation worked. By September of the following year the bank was again earning healthy profits. Reported net profits increased to RUB184m (US$7m) for the first nine months of 2006, winning back almost all the ground lost over the same period the year before.
The bank also had a good full year, seeing the volume of its consumer loan growth increase by 20% over the same period to a total of RUB37.5bn.
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