Responsible lending, perhaps the most important lesson of the crisis

Autor: Bancherul.ro
2012-12-04 17:09

After four years of finacial crises, it becomes increasingly clear that perhaps the most important lesson learned by lenders and their customers is responsible lending, even if it seems a little bombastic expression. At first glance only, we'll further explain why.

We know that the global financial crisis has been caused by some complicated financial products based on mortgages whose owners were no longer known. Neither how they will be repaid. Later, around the world, including Romania, we found that many loans were granted either too big or had hidden cost or currency risk or to people who had no ability to pay. It became famous the Romanian phrase: "credit with an ID only", which means that there was no emphasis on customer knowledge and his ability to repay the money.

The financial institutions which had a too loose risk policy and followed an aggressive policy to gain market share at any price now fatal face losses in some cases, virtually canceling their previous earnings. But there were exceptions, which prove to be more resilient to harsh crisis and even manage to make profits and take advantage of opportunities created by the others weaknesses.

One of these exceptions is Provident Financial Romania, which has always followed a credit policy based on close knowledge of clients. A responsible lending strategy that could now become a model for others, as a better understand of customers became the first concern of all credit institutions in their attempt to cost cutting.

Responsible lending to people, especially in times of crisis, is the biggest concern of Provident Financial Romania, unsecured loans market leader in Romania, says its new general manager, Ivo Kalik (foto).

Provident is part of the International Personal Finance, a British group which in 2006 introduced a different credit concept into Romania: home loan. It gives small loans, on short term, available within 48 hours in its clients doorstep, who then pay their installments weekly, also from their own home, on a schedule established with Provident agents.

Company's business model, based on a very close relationship with its customers, has existed for 130 years since it was launched in the UK, and proved to be successful around the world, from Mexico to the Czech Republic and Romania.

Before deciding to be approved a loan, a customer is always visited at home by an Provident agent, who checks his income. Home visits gives the credit company a unique perspective on customer behavior based on events taking place in a particular area: for example, if a local factory is about to close, it can quickly adapt the credit policy for those working in that factory.

"I think we all need to behave very responsibly with customers, to understand their needs and fit our loan products accordingly. This is a part of our policy of responsible lending," adds Provident Financial Romania general manager.

The problem is that customer needs are now much lower than before the crisis. Consumers continue to be very cautious, that is why Provident must be very careful to adapt its credit standards to new realities. "They carefully calculate their income and expenses and we, as a responsible lender, constantly monitor the situation to ensure that lending standards follows their revenues," Ivo Kalik says. In other words, if revenues are lower and more uncertain, then the credit must also be reduced and become more prudent. "We want to make sure we take the right decision when granting loans to customers, so they do not exceed their repayment capabilities," he added.

"I think the whole financial industry should take this approach, to ensure not to overdebt customers so that we can help them successfully manage their individual or family incomes," said Kalik.

Lessons from the crisis

Let's see how the crisis has changed Romanians behavior about contracting loans and managing budget and what lessons they learned. Provident general manager: "The crisis has taught us to be more cautious, to cherish more our work, to look more closely at the future, to offer our children a proper education that will create opportunities for the next generation. So I thing we should be more careful about the future. Regarding expenses, we need to look very carefully before we put aside every penny. Before, maybe we were careful about 2 Lei, now we look at every Leu and try to spend it more efficiently. "

At the same time, reducing income led people to drop unnecesary expenses, such as holidays, resuming to basic needs such as medical, education, home improvement. These are, in fact, the main destinations of loans granted by Provident.

Not only a close relationship with clients secures the Provident success, but also the specific loans granted by the British company. "Our credit product is simple, transparent and flexible, which is what clients appreciate the most about a loan," says Ivo Kalika. Simply because it is an unsecured loan, that requires no downpaiment or to prove the money destination. Transparent, as you know from the start what you have to pay for the loan, without hidden fees. Flexible, as it fits all the needs: the loan value can be increased if the first loan is repayed in time. When a client gets in trouble, he can get an installment delay, without penalty.

"There is a continuing demand for loans, even in these times of crisis, but people want to be more informed before deciding to borrow, to understand very well the conditions: how much money he can borrow, for what period, which are the costs, how much he must eventually repay. And our product is exactly what people need: a transparent credit, meaning no hidden costs, easy access, and the money can be used for any purpose, "adds Ivo Kalika.

Provident lending standards continue to develop and change, according to customer behavior. "In the new economic environment, lending conditions have tightened slightly to maximize positive impact on the consumer, to enhance repayment ability and not to indebt them. The first loan a customer gets is lower, and we allow him to borrow more after he repays the first loan, as he is proving his ability to pay ," says the general manager of Provident.

There is a minimum income requirement for credit, depending on its value. So, it is taken into account about 40% of the disposable income of the client in order to repay a loan. "It's a safety margin that we take, because ultimately it makes no sense to borrow somebody who can not afford to repay the loan, it is good neither for the customer nor for us." Around 7% of Provident customers are employed, the rest being retired or entrepreneurs.

Ambitious plans

After 6 years of presence in Romania, Provident has invested over 140 million euros and has served over 500,000 Romanians. "Our success is a proof that our services are highly appreciated by consumers, customer satisfaction is very high and we have ambitious plans for the future. We are always considering the economic environment in the country, so we are cautious at this point, but we have very ambitious growth plans in Romania." In fact, Romanian market is the youngest among the ones in which the Provident is present, so the company hopes to achieve its full development potential over the next 2-3 years, when it will cover the entire country and attract over half a million active customers.

In more mature markets like the Czech Republic or Slovakia, Provident is present for 10-15 years. The company is already quite popular in Romania, but there are still areas of the country that it does not cover yet. Provident is present in 85% of urban areas and in the coming years is to fully cover all cities in the country. But Provident business model is ideal to serve the population of rural areas, where access to finance is limited, so in the future it is expected that also the population of these areas can have access to this type of loan.

"Our business model has proven very resilient to changes in the economic environment, as it has been proved by the Provident group performance in recent years. Several factors contributed to this success. First, we can react very quickly to change our credit conditions and adjust them, when the economic situation changes in any way. Then, it is the Provident feature, with almost 30,000 agents throughout the group, who visit clients at home each week, allowing us to take decisions according to the changes experienced by them. During the last year we had 12 million visits to Romanian customers, "says Ivo Kalik.

In addition, he said, Provident has a policy to understand the difficulties its clients can face, allowing them to defer payments, at no additional cost, when they have problems. The company can offer customers the ability to repay their loans in a longer period than initially planned, so that they can get rid of debt without disturbing their budget.

On the other hand, customers are aware that if they repay on time, they will be able to get new loans, which is very important for them. Most clients have received at least 2 credits, there are many clients who have 10 loans in the last 6 years, so they know that paying on time is a condition to get a new loan in the future. "We concluded from the customer behavior that Romanians are responsible when they borrow money and pay their debts, even when they have financial difficulties, that they finally manage to overcome with our help," adds Provident director.

This successful business model has enabled Provident to achieve its financial goals in time of crisis, reflecting changes in the economic environment. After investments of 140 million euros in the first six years of activity in Romania, Provident was able to make a profit of over 4 million last year, according to international financial reporting standards.

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