May 15, 2020, « M.B.A. Finance» took part in the interview organized by the news portal DEBT.RF
Russians have become more financially literate, but the sphere requires changes in bankruptcy legislation
Since May 12, Federal and regional authorities have eased restrictions on citizens and businesses in connection with the coronavirus. The exception was Moscow and other regions of the Russian Federation, where the number of infected remains at a high level. The country’s economic activity is gradually beginning to recover, but some things have already changed. People are rethinking the prospects of remote work, and they are looking at human capital in a new way.
The financial sector, which includes not only banks, microfinance organizations (MFOs), pawnshops, debt collectors, but also arbitration managers, is of particular interest after the quarantine is lifted. The portal DEBT.RF decided to interview market participants and find out what conclusions they made during the 1.5 months of self-isolation.
Alexander Pyatigorsky, the Director of the Digital Department of bank Otkritie, said that during the period of self-isolation, the number of users of the Internet bank and mobile app, as well as the volume of transactions for purchases via the Internet, increased several times. In addition, since mid-March, there has been a steadily growing demand for home delivery of retail products, which is also directly related to the regime of self-isolation and the desire of customers not to leave their homes.
“Recently, we have further expanded the range of services available in our remote banking channels. Thus, we have launched a free telemedicine service for our clients, added the ability to issue investment products of management company “OTKRITIE” and “OTKRITIE Broker” online, and increased the list of certificates and reports for products that can be issued in the remote banking services channels. Today, the vast majority of services provided by the Bank are available in the Internet banking and mobile app,” said Alexander Pyatigorsky.
OTKRITIE has decided to provide 0.5% discount on the main interest rate to borrowers who take out mortgages online.
The press service of Sberbank reported that most banks adjusted their credit decision-making strategies during the quarantine period, and this affected the volume of loans issued. Sberbank has also adapted its risk strategies, which is reflected in the level of approval. When making a decision on granting a loan, the Bank must understand the source of its repayment. Salary at the place of work is a source of income, but not the only one that is taken into account when considering a loan application. For example, the Bank also takes into account pension contributions or income of the self-employed.
Anatoly Popov, the Deputy Chairman of the Board of Directors of Sberbank, told how the financial organization works during the pandemic. For a period of just over 1 month, customers submitted applications to Sberbank for interest-free loans by the amount of more than 42 billion rubles. Of these, loans by the amount of more than 21.2 billion rubles were approved, and about 13 billion rubles were issued. Since the end of March, more than 85 thousand applications for credit vacations have been received, more than 61 thousand applications have been approved, and 48 thousand contracts have been restructured. The total volume of restructuring amounted to 111 billion rubles. High demand for restructuring is observed in retail, public catering, and consumer services industries. 28% of non – food retail borrowers, more than 34% of catering clients, approximately 40% of tourism, sports, leisure and education companies, and more than 60% of companies engaged in exhibition activities applied for restructuring. Compared to April last year, the decline in lending in the affected industries was just over 8.5%, while lending in other industries declined by almost 18%. The launch of state support programs contributed to more active lending to customers of the affected industries. The volume of loans issued to Sberbank clients from the affected industries in April 2020 amounted to 60 billion rubles. In April 2019, this amount was 65.8 billion rubles. For other industries, the volume of new disbursements amounted to 731 billion rubles, compared to 890 billion rubles in April 2019.
Olga Yasonova, the Managing Director and the Head of the Corporate Business Department of Ak Bars Bank, said that the financial institution was among the first to sign an agreement with the Ministry of economic development of the Russian Federation on the implementation of a state program to support system-forming enterprises during the coronavirus period. The Bank will issue soft loans for working capital replenishment for up to a year at a rate of no more than 5% per annum. Assistance to system-forming enterprises is an important step in terms of reactivation the country’s economic growth and preserving a large number of jobs.
The press service of SRO MiR stressed that the epidemiological situation does not yet allow us to talk about a significant easing of regime measures in many of the largest regions of the Russian Federation. In terms of business, this is a significant point. Therefore, it is premature to draw any dividing line between 11 and 12 May.”During March-May 2020, the demand (applications) for microloans is at a level higher than pre-crisis values. However, most companies have significantly tightened their scoring, and real issues do not show the same dynamics. In other words, in the current conditions, lenders restrain the demand from borrowers in order to prevent excessive crediting of the population. This is the situations when borrowers take on financial obligations that they will not be able to fulfill,” the press service of SRO MiR notes.
The purpose of issuing loans remains “traditional”, with the exception of currently absent for objective reasons “tourism” and “payment of transport costs”. The most common reason for obtaining microloans is “for urgent needs” on loans from individuals and for “maintaining business” from representatives of small and medium-sized businesses (SMEs). The number of applications from business borrowers has also increased. The demand for remote services continues to grow. SRO MiR allows for an increase in the share of such loans to 50% of the total portfolio of MFOs by the end of the first half of 2020.
Nadezhda Dimchenko, the Director of regional development, client products and services at MigCredit, pointed out that coronavirus has become a powerful catalyst for launching online services. More than 50% of the company’s loans are issued remotely, but special services are being developed for older people who have difficulties interacting with Internet resources.
“We see that banks are tightening their credit policy, so we expect to see on our side a large number of customers who are rejected by banks for various reasons. We will be ready to offer such borrowers products that are adequate in terms of amounts and period. Practice has also shown that in conditions of limited lending by banks, clients are ready to submit additional documents to MFOs. We ask many clients to take a selfie with their passport, scan and attach their passport, show contracts with a previous credit institution, and borrowers are ready to do this,” Nadezhda Dimchenko said.
It is quite difficult to make forecasts about the terms of recovery of the MFO market – too many variables. But now we can say for sure that quite a large number of MFOs will be forced to leave the market – for them, the pandemic and self-isolation will be fatal. According to Nadezhda Dimchenko, there are companies that have decided to temporarily suspend the issuance of loans. The decision was made because they do not understand how to handle the risk assessment. It will be very difficult for them to restore operations. In general, a lot will depend on the management decisions that are made within the companies in terms of the survival of MFOs. For small organizations, especially regional ones, the question of survival in 2020 will become acute. And changing the business model does not guarantee a positive result at all. Because a qualitative change of processes is like a new business that needs investment and a new focus. There will be need a period for operational payback, for investment payback, and not everyone will survive this race. Now it is quite difficult even for large players to solve issues related to customer evaluation. Some of companies simply decided to keep a low profile assuming to wait out this storm, but this can be a disastrous practice. Experience shows that the issues of April and May are well served in terms of payment discipline, but this is only due to the fact that MigCredit has changed the system for evaluating borrowers.
Irina Khoroshko, the CEO of IDF Eurasia in Russia (Moneyman brand), said that at the end of April, there was no influx of applications from users without a credit history. Although there were expectations that many people would go for loans. However, there was a slight increase in new requests from users who previously used the services of banks. The number of such requests increased by 2%.
“By the end of April, we are seeing a new trend. The average loan amount received by borrowers in alternative lending services decreased by 16% compared to March: from 14,000 rubles to 11,760 rubles. In our opinion, this trend is explained by two factors. First, there is a high level of uncertainty among citizens regarding their financial future. Secondly, during the crisis, people “mobilize” and try to approach financial planning as rationally and responsibly as possible,” Irina Khoroshko summed up.
Today, only reliable customers who have a high scoring rating can count on a loan. Customers of banking services have a high rating and are considered more reliable. It is important to note that if the user has experience working with banks, this does not guarantee that they will receive a loan from MFO.
Andrey Kleymenov, the General Director of the Eqvanta Group (Bystrodengi, Turbozaym, and Reshka brands), confirmed that there are more requests for loans, but the approval rate is significantly lower today: 40% less than in the pre-crisis period.
“Now we pay special attention to evaluating customers who work in the industries most affected by the current situation. We conduct daily monitoring of key indicators and promptly adjust the scoring settings. We issue more payday loans than consumer loans, that is, with a smaller average sum and a period of up to 1 month. The focus on short-term borrowings during this period is due to high demand from customers and their faster turnover, as well as lower risks in the crisis,” said Andrey Kleymenov.
According to the CEO of the Eqvanta Group, loan payments in April fell by 30% compared to March and stabilized at this level. But this is better than expected, and is due to the fact that soon after the start of the restrictive measures, offices reopened, and some customers come to pay offline.
Alexey Lazutin, the Chairman of the Board of the National Association of Pawnshops (NAP), believes that it is too early to make any conclusions. Once again, we can make sure that pawnshops are the only guaranteed source of loans for the population, even in times of the economy crisis. This is especially evident now, when other financial institutions, which previously actively offered loans and instant loans to everyone indiscriminately, stopped working in the same mode and changed the conditions for tariffs. A pawnshop, even in difficult times, remains an organization with the most simple and transparent product, where a person who has a collateral item will receive money in any case. This is the nature of collateral lending.
“Over the past 1.5 months, we have seen, on the one hand, a gradual increase in interest in pawnshops’ services, on the other – a decrease in customers’ solvency. Taking into account the current situation, all NAP participants meet the consumer needs: they extend the grace period, provide deferred payments, and take other steps to support them. Companies lose some of their revenue, but they help their clients in difficult times instead of blindly chasing profits and profiting from those who are in a difficult situation. We also see an increase in the number of customers who use pawnshop services online. This is a good incentive for all industry participants. This motivates us to develop and improve our entire customer service in the technology sector, ” Alexey Lazutin sums up.
The Chairman of the Board of NAP also pointed to a new trend in connection with the extension of the grace period for certain products to 60 days: the terms of pledged property release for sale have increased in recent weeks. Pawnshops do not specify the purpose of the loans. However, Alexey Lazutin suggests that based on the average receipt on the market (about 10,000 rubles), often the money that a person receives in a pawnshop goes to pay for the most urgent and vital things: food, utilities. Among the clients there is a segment of entrepreneurs, owners of small businesses who also use the services of a pawnshop. Legal entities may need financial assistance to cover a cash gap or solve urgent problems that have arisen, including as a result of the coronavirus pandemic. Often, for small stores, catering companies and services, a pawnshop is the only way to find the necessary funds. For this group of clients, some pawnshops develop specialized preferential rates for periods of epidemiological and economic difficulties.
Elman Mekhtiev, the President of SRO NAPKA, said that there were no sharp changes in the behavior of debtors. More often, people began to cite financial difficulties as the reason for late payment. However, the growth of such debtors is not critical: 60% against 50% a year earlier. Also there was no mass appeal by debtors to reduce payment or grant a delay. Here we should take into account, that debt collection agencies working under the cession agreement, the amount of monthly payment is minimal and comfortable for a debtor. In some cases, it does not exceed 1 thousand rubles. Elman Mekhtiev noted that legal entities during the coronavirus pandemic are in a difficult situation, especially if their business was “frozen” during the self-isolation regime. In addition to their obligations to employees, they have debts to creditors. If individuals can cite various reasons, then legal entities currently do not have the funds, and therefore cann’t fully fulfill their obligations, which can only be solved by starting business again. At the same time, they will need time to restore their previous turnover. It remains to be believed that the support of the Government will function, and we will not have to see a mass departure of small companies from the market. NAPCA in early April developed a program to support debtors. Often, debt collectors do not ask debtors for official documents about reducing income, which allows them to help the maximum number of citizens.
Fedor Vachata, the General Director of the debt collection agency M.B.A. Finance, believes that it is too early to talk about a full resumption of business activity, most likely it will happen in the early summer. Before the pandemic, we were constantly talking about a high level of people’s debt, declining incomes and growing debts – that is, about 40% of the economically active population already had problems servicing loans. And in this situation, their number may increase by 1.5 times.
“I think that closer to July there will be a more complete picture of what is happening with the business, and how it will recover. Now the unemployment rate has already increased. As far as I remember, according to Rosstat, this is about 4 million people, but the figure may increase in the coming months. This means that overdue debts will also be confident to go up,” predicts Fedor Vachata.
The General Director of the debt collection agency M.B.A. Finance said that during the entire period of quarantine, the company received less than 2% of applications about coronavirus disease. About 10% of the total number of debtors apply for credit vacations – these are those citizens who have actually documented a decrease in income or loss of work. It is predicted that their number will increase by about 20% closer to July. Despite the tough situation, M.B.A. Finance has not yet registered a serious decrease in debt payments. Whatever the situation is now, citizens understand that debt remains, and if they are able to pay, they try not to miss payments.
According to Fedor Vachata, the company has always held actions to write off part of the debt, this is a working model for all debt collection companies. M.B.A. Finance adheres to the format of providing credit vacations to those who are in a difficult situation, are ready to write off part of the debt, change the repayment schedule. First of all, the company does not think about how to quickly return money, but how to help their debtors. Debt collectors (no matter how they are treated in society) are financial consultants, and their purpose is to help get out of a difficult financial situation.
Sasha Danilov, the CEO of Debex, an online debt auction, spoke about the uncertainty in the market since the beginning of the pandemic. He stressed that the situation is new for everyone, and there is not a single scoring model that today clearly predicts the outcome of sold portfolios. However, sales in Debex are active.
“Only one major seller announced their plans to move portfolio sales to the third or fourth quarter. Others believe that the negative trend can last quite a long time, so they need to sell as soon as possible. And the sooner, the better. Most buyers are as active as in previous periods. Individual agencies announced the suspension of operations. It depends on their investors. But, in general, their actions do not determine the vector of market movement,” said Sasha Danilov.
The CEO of the online debt auction Debex expects that in the short term, fees for the current portfolios of debt collection agencies will fall, which, in turn, will “move” down the valuation models. Over the past 2 months, we can definitely say that there is some decline in portfolio prices from 10 to 20%. Most debt collection agencies today look at reducing payments for current portfolios, which discounts the cost at which they are ready to buy new lots. The downward trend is likely to continue if the country’s economic situation deteriorates. However, investing in NPL portfolios could be a highly profitable strategy today. On the one hand, their prices will fall, and on the other – the NPL will get a lot of reliable debtors who are overdue for objective reasons and who will be ready to pay off their debts as soon as the economy resumes growing.
Anatoly Niy, the Arbitration Manager, said that the quarantine had almost no effect on the volume of work, they even increased slightly. He considers the moratorium on bankruptcy imposed by the Russian Government ineffective. The fact is that the moratorium prohibits filing insolvency claims only to creditors, but the debtors themselves have the right to initiate their own bankruptcy.
“What should organizations do if they have nothing to pay salaries and do not meet the criteria for receiving subsidies or interest-free loans? The Russian Government has actually restricted debtors on both sides. If you file for bankruptcy, there is a moratorium; if you don’t file, there is subsidiary liability. And if the company has salary debts, the Prosecutor’s office begins to “hunt” it, and criminal proceedings may be initiated against the managers, ” Anatoly Niy sums up.
As for citizens’ bankruptcy, the Arbitration Manager expects a small increase due to the loss of work. However, he does not expect a surge in cases of insolvency of individuals: from year to year, the number of bankrupt citizens has increased even without the impact of the coronavirus pandemic. Sergey Lysenko, the member of the Union of Arbitration Managers SRO Severnaya Stolitsa, pointed out that recently the market of banknote services has been stable in growth. And now, after the recent events related to the COVID-19 pandemic, the crisis in the economy is obvious. Sergey Lysenko expects a surge in bankruptcy procedures. In his opinion, the insolvency will affect both small and medium-sized businesses and large businesses, which will also suffer, despite all the support programs adopted by the Government of the Russian Federation. The Arbitration Manager calls the current legislation in the field of bankruptcy “procreditor’s”. It does not protect business owners. As a rule, bankruptcy is initiated by creditors, and after lifting the moratorium on the insolvency procedure, Russia will face a large-scale redistribution of property. The classic scheme “took a loan – gave the business”, according to Sergey Lysenko, is still exists. The expert also believes that in the near future, arbitration courts will face an even greater burden. Instead of the classic 10 minutes, participants will be given no more than 5 minutes per court session.
Georgy Koltashov, an expert in the field of restructuring of distressed assets, said:
“I assess the moratorium on bankruptcy positively from the point of view that it gives an impetus to rethink the current legislation and current practice. Most of the processes in the areas of debt recovery assistance and debt evasion services have been suspended. In the debt consulting market, debt collection agencies, companies dealing with distressed assets, and banks continue to put pressure on debtors. This is due to the fact that the legal protection mechanisms did not work. During the months of quarantine, there was a clear market demand for a rehabilitation procedure that ensures debt restructuring. Currently, the segment of mediation services, anti-crisis management and, accordingly, financial recovery of enterprises, debt restructuring in our country is not yet developed due to the legislative shift in the balance of interests towards creditors and unscrupulous debtors.”
However, everything can change after the pandemic. The government bill supplementing the provisions of the law “on insolvency (bankruptcy)” with the possibilities of judicial restructuring was adopted in the first reading, but this is only a temporary measure. Debt legislation needs to be systematically reformed. George Koltashov considers it necessary to develop and adopt a unified debt code. The expert believes that the moratorium on the bankruptcy procedure will prevent its use for unfair purposes, as well as help find a more effective system for resolving debt conflicts.