10:33 30.12.2021


Non-bank lending: a worldwide boom, how about us?

8 min read
Non-bank lending: a worldwide boom, how about us?

Yevgen Rezuyev, Director of Ukr Credit Finance (CreditKasa brand)


Growth in lending at the inflation rate, new products, and increased competition with the banking sector, Director of Ukr Credit Finance (CreditKasa brand) Yevgen Rezuyev spoke about the key trends of 2022.

It is a tradition, to sum up the year’s results and make plans for the next one in December. The non-bank financial sector (NBFS) is developing quite actively. However, next year we will see several trends continue in 2021.

One of the tendencies, for example, was the increased competition between the banking and non-bank sectors. Banks began to work more actively in the consumer lending segment: they are ready to take on more risks and have adjusted their credit policies, which allowed them to increase the number of attracted clients. If you look at the statistics, the banking sector in the consumer loans segment is growing at a higher rate than in the non-bank sector.

*NBU data, Ukr Credit Finance LLC calculations

This trend will continue in 2022. According to my observations, financial companies are developing at the same pace as before. No events happened to drive the industry from the outside as well as there were no situations that would significantly slow down our work. As a new regulator of the non-bank financial sector, the National Bank creates many restrictions for its work. Still, one cannot say that these restrictions are not logical or do not allow the non-bank segment of the market to develop actively.

In my opinion, the regulator’s actions have recently been aimed at mitigating extremes. If one of the market players behaves completely inadequately, the regulator suppresses such activities. As a result, all other players begin to comply regularly with all the regulator's requirements, from disclosing information or communicating with clients to collecting.

Now the regulator understands the specifics of the industry much more than ever before and is ready to hear sound arguments from market players. But it is important to remember that the NBU, on the one hand, is our regulator, and on the other hand, it performs the function of protecting consumer rights; therefore, in some cases, the question arises – which side to take in a disputable situation. And the National Bank, as a rule, takes the side of clients. And here, of course, we as an industry lack adequate mechanisms to protect creditors’ rights.

I would associate the existing trend with the greater willingness of banks to operate in this segment. Banks, being able to attract a cheap resource from the population, offer a lower cost of loans with the same level of risk. We work on our capital, which is the most expensive resource.

Despite our desire to make loans more affordable for most of the population, we do not see anything that would help reduce the cost of loans. In 2019, everyone observed unprecedented generosity from some financial companies, which issued the first loan and several subsequent ones at 0% (0.01%) and offered massive discounts on interest payments. This behaviour was possible due to a combination of two factors: a growing market (companies planned to cover expenditures by increasing their client base) and, in fact, less control from the regulator (then it was the National Financial Services Commission). In 2021, the legislation was changed that concerns collectors' work, so we now have fewer tools for collecting the debt. This, of course, was reflected in the average cost of loans in the market. Most companies now continue to issue loans at 0.01%, but they are more selective about those seeking the loan.

Another trend in 2021 was the increase in customer acquisition costs. This is an ongoing process that depends on what is happening in the country. For example, in the spring of 2020, when the lending market collapsed, the cost of acquiring a customer was relatively low. But throughout the entire 2021, we saw an upward trend. And I think the trend will continue in 2022.

We will also see an increase in the credit load per client. This situation applies to both the banking and non-bank segments. The main danger is that excessive load can provoke an increase in the number of defaults, which will cause negative profitability of our business.

If talking about any external or internal economic risks, I would assess their impact on our segment as minimal. We do not attract funds from the population. We do not issue loans in foreign currency. The only thing we notice is that as soon as something unusual happens, the demand for loans grows. For example, in mid-March 2020, when the lockdown started, we saw a spate of requests for loans from customers. At that time, most banks had already reduced their lending, and several companies in the non-bank financial sector slowed down their activity, so there was a substantial short-term unmet demand. But all subsequent lockdowns were no longer accompanied by such behaviour. March 2020 was the perfect storm. Clients did not think much about whether they would repay loans at all, and if so, from what sources. Now Ukrainians have a more balanced approach to this kind of spending: they take money to cover their daily needs only when they have no money at all.

What the year 2022 will be like depends directly on the behaviour of the financial companies. Suppose we discuss the competition between banks and companies in the non-bank sector. In that case, the latter can offer customers greater flexibility and less interaction complexity than banks. Moreover, NBFS companies are willing to take more risks. We work with many clients that banks can’t make happy. Of course, this risk is reflected in interest rates, but such a product is also in demand.

Let me give you an example. We grant all 100% of loans to bank cards. Our clients are people who have experience in dealing with banks. And the bank can issue a loan to a client, but if a person resorts to an MFO, they were either refused, or the limit was closed for risk reasons.

The debt load problem can be partially solved by inflation as a macroeconomic factor: nominal incomes of Ukrainians will grow, so the level of debt load may decrease. But to a greater extent, it is advisable to increase financial literacy. Our loans are not intended to cover long-term needs. And for us, clients who take out a loan and do not repay it for a long time, thereby increasing their debt load, are far from ideal. If the client understands that they need money for several years, they should find an alternative to get a cheap long-term loan. But then there is a vicious circle: banks are not eager to issue loans to borrowers with high risks, and financial companies do not have long-term resources to provide such cheap financing.

I think that in the coming years, new products will appear on the market, including specialised ones, with a lower interest rate and a longer service life. This will be associated with the development of opportunities for attracting debt financing. Now financial companies have tools for attracting borrowed funds (bank loans, bonds, etc.). However, this is quite expensive so far, so we will have to wait for the Ukrainian Klarna.

Also, the necessary conditions for the emergence of new products include a reasonable level of regulation, including collection activities, and a greater emphasis on protecting creditors’ rights. As a result, social populism that does not allow lender to return their money keeps Ukraine from inexpensive consumer loans and cheap mortgages. And if the lender does not return its money, then it, as a result, does not issue new loans – another vicious circle.

But it is important to note that the issue of cheap long-term financing is an issue for the regulator regarding the discount rate and the issue of the judicial system’s work, compliance with current legislation, etc.

In general, there is no more significant benefit to customers than the increased competition regarding market prospects. The regulator's emphasis should not be on adding a maximum of administrative restrictions, thereby reducing the risks of non-market behaviour of companies, but on ensuring that there are as many adequate active players as possible, that would be interested in developing the industry.

Now there are many players, and the development of the market, it seems, will move towards creating new brands, products, and projects by existing players. It isn’t easy to enter the industry from scratch.

In 2022, we hope for an increase in lending volumes above inflation: incomes of Ukrainians will grow, and with them, their needs will also grow, which will undoubtedly affect the average loan amount.