August 12, 2005

TVs, cars, homes: Russians learn to buy on credit

By Douglas Busvine

MOSCOW (Reuters) - It's Sunday lunchtime and shoppers in the IKEA furniture superstore in Khimki, a Moscow suburb, are lining up at the cafeteria after a hard morning at the mall.

There's a queue too at the booth by the restaurant entrance, as the half-dozen staff of Delta Bank's in-store sales team issue on-the-spot loans and credit cards -- so that people can hit the retail trail again.

"It's so easy and convenient," said Adelaida Ilyina, a woman in her 40s smiling after a successful application. She paid for this shopping trip in cash -- but next time it'll be on credit.

Russia's consumer finance boom has arrived, big time, and Delta Bank was one of the early entrants into a market which barely existed three years ago and is expected to double in size annually in the years ahead.

GE Consumer Finance bought Delta Bank last year in a deal worth $150 million to spearhead its thrust into Russia, which with China is a key growth target for the U.S. giant.

"A market with these many consumers will never open up again in our lifetime," James B. Cook, chief executive of GE Consumer Finance in Russia, told Reuters.

In a nation where cash is king and 70 percent of people do not even have a bank account, the idea of instant credit is revolutionary.

With memories still fresh of Russia's 1998 financial crash, it might also seem risky to offer a credit card to a walk-in prospect. But that is what Delta has done for 300,000 Russians.

"We can issue it at the point of sale within 15 minutes," says Cook, flourishing his own card, which has no name or number embossed on it, just a photo and signature. The format makes it easy to issue cards quickly.


The pioneers of the consumer lending boom -- Russkiy Standart, Home Credit and Delta Bank -- are grabbing customers in stores with quickie loans for TVs, fridges and sofas without having to support costly branch networks.

A recent survey found that a quarter of Russians took out a loan last year. But although personal lending grew by 107 percent in 2004 it totaled just $22 billion, or under 4 percent of gross domestic product, central bank figures show.

Czech-owned Home Credit and Finance Bank (HCFB), which came to Russia in 2002, expects consumer lending in Russia quickly to reach the double-digit share of GDP typical in Eastern Europe.

It offers point-of-sale loans averaging $400 -- above the typical monthly wage of $300 -- and sells so-called 'revolving loan' credit cards charging lucrative rates of interest.

"We would like to work with the mass market and middle class. In this country there is a potential market of 60 million," said HCFB Chairman Andrey Lykov, who aims to have up to a quarter of a million active cards by year's end.

Also in the fray is Rosbank, Russia's No.7 bank by assets, which is pushing its cards business after its $200 million acquisition of retail bank OVK in 2003.

Rosbank has 1.5 million cards issued -- although many are 'debit' cards on which customers keep cash balances. That will change, though, as 90 percent of Rosbank's personal loans have a credit card thrown in.

"Lending to retail clients is a priority," said Vladimir Golubkov, first deputy chairman of Rosbank's board. "By the end of 2005 our retail portfolio will reach the size of our corporate loan book."


As competition hots up and margins narrow in the 'white goods' sector, bankers are following the aspirations of Russia's emerging middle class and marketing car loans and mortgages.

Rosbank's 'Avtoexpress' product, offered in car dealerships and the bank's 560 branches, is selling well, said Golubkov.

Rosbank will launch a mortgage offensive in early 2006 to capitalize on a housing market Golubkov reckons is worth $4.5 billion a year in Moscow alone. "That is a very pessimistic estimate, and that's why we see such huge potential," he added.

Bankers say that, after years of delays, mortgage laws are at last adequate. Most Russians own their homes outright thanks to the 1990s housing privatizations, offering good security.

The main barrier banks face is a lack of long-term funding.

Rosbank plans to put $100 million of its own cash into mortgage lending, and then fund further growth in its portfolio by issuing mortgage-backed bonds abroad, said Golubkov.

State-owned Vneshtorgbank, Russia's No.2 bank, has also announced plans to issue a $100-million mortgage-backed bond by the end of this year.


Analysts are upbeat on the outlook for consumer lending, but warn that the market, born in the midst of an oil-fueled economic boom, remains untested.

"We have only been able to observe this market when the economy was doing well and personal incomes were growing," said Irina Penkina, banking analyst at Standard & Poor's in Moscow.

Russia still lacks the infrastructure to check out would-be borrowers, and banks will only be required by law to join credit bureaus which pool lending histories from September 1. But, so far at least, Russians are proving a decent credit risk.

"What we've found is that people do pay you back," says GE's Cook. "Russians do care about establishing a credit history."