ProCredit Bank’s Victor Ponomarenko says that the financial industry needs to improve loan risk management and due to the absence of credit history bureaus each bank must develop its own systems to insure loan portfolio quality.

Victor Ponomarenko is ProCredit Bank’s Deputy General Manager in charge of Accounting, Treasury, Budgeting and Controlling. He joined ProCredit Bank in March 2004 as Head of Business Client Development. Prior to that, since 1997 he worked for IPC micro­lending projects, mainly for the Micro­lending Program in Ukraine. Mr. Ponomarenko is a CFA charter holder and a member of the CFA Institute. He says the number of bad loans in the commercial lending sector is probably higher than government estimates, and that the interest in foreign acquisition of Ukrainian banks has waned.

KP: What is the state of the consumer lending market today? How has ProCredit Bank’s expansion in 2008 compared to the previous two years?

VP: 2008 is quite encouraging in terms of expansion and business development potential for our bank, but there are a number of challenges. Some of them are new to us.

We are observing a strong demand for banking services from businesses who successfully learned how to operate and develop regardless of what political situation or pressure is out there in the country.

KP: The National Bank of Ukraine says that overall 16 percent of consumer loans are non­performing. Is that true? If so, how much bad debt is ProCredit carrying?

VP: You will not find an exact number or any reliable statistics regarding bad debt in consumer lending.

First, the official statistics only cover banks, while some of the active lenders in the consumer lending market are non­banking institutions. Secondly, inconsistency in methodologies of reporting bad debt does not give a true picture.

Given that this market is completely immature and consumer lenders typically have short­term objectives, i.e. they aim at disbursing a loan rather than disbursing an adequate loan according to a borrower’s financial capacity to repay. I am convinced the level of arrears is higher than the National Bank’s figure.

The level of true bad debt may not even be obvious today because borrowers so far have been able to refinance, but this will create many more problems in the medium or longer term, or in times of tougher market conditions or credit crunch. And do not forget that the general public’s understanding of financial aspects is relatively low, and people get easily manipulated by advertisement of zero­cost loans or opportunities to buy everything now.

I am amazed to see how superficial or ignorant some representatives of the business and financial community are, even the press, who nominate certain consumer lenders and people standing behind them as the best, most innovative, etc. and not being able or willing to analyze the market development.

ProCredit Bank disburses loans to businesses, predominantly to small and medium enterprises. A relatively small portion of our portfolio consists of loans disbursed to individuals with the purpose of renovating apartments or houses. Our credit analysis and decision­making process are different from those used in consumer lending, therefore from the standpoint of our target customers and credit technology, we are not part of the consumer lending market.

As a result, we are in a completely different situation with regard to bad debt ratios. The level of arrears at ProCredit Bank – total amount of loans for which any payment is overdue 30 or more days – has never deviated far from 1 percent of the total loan portfolio, which is a low and acceptable figure.

KP: How does the industry manage loan risk? How does ProCredit do so? How is the credit rating system progressing in Ukraine?

VP: It is difficult to give one answer. Overall, the industry still needs improvements with managing loan risks. The absence of well­functioning credit history bureaus makes controlling the debt of borrowers very difficult, especially for consumer finance. I believe it will take another two or three years before we see progress in this area.

ProCredit Bank has been operating in such an environment for years and small and medium enterprises were historically considered a gray zone. But, our ability and understanding on how to work with this segment and to analyze borrowers from the credit­worthiness standpoint has always been our advantage and mechanism to control the quality of our loan portfolio. At ProCredit Bank, we set a goal to analyze a customer, understand the customer’s need, and develop a relationship rather than to find a customer and disburse a loan or sell any other product. This requires a lot of training and creating a culture of constant learning within the institution. In general, it is nothing too sophisticated, but very complex to implement.

KP: How has inflation effected lending this year?

VP: Of course inflation has an impact on the consumers’ behavior. As a result of higher inflation last year and this year, many people start to spend money because it seems unreasonable or complicated to save money without losing value. So inflation boosts the demand for consumer loans and spending in general.

But to project whether this will lead to a significant increase in volumes of consumer loans, we need to take into account limitations that will be caused by liquidity issues.

KP: Is there a credit crunch? Has the money supply dried up?

VP: This year we observe a shortage of money resources in the market, therefore it is not going to be easy for the banking sector to satisfy all financing demand.

Although, such a situation also creates favorable conditions for those banks which are able to secure funds from abroad, and these are the main banks owned by foreign banks. So if no other restrictions regarding foreign debt are imposed, we would expect an additional money supply during the year from that source.

KP: What trends do you see in the consumer lending market?

VP: The consumer lending market continues to be an attractive segment for many banks and investors. For the foreseeable future, it will be actively developing unless some unexpected market and economic downturn takes place.

KP: The previous two years saw many foreign banks buying Ukrainian banks and market share? Has this slowed down? Why?

VP: This year there has certainly been a slow­down with acquisitions, but interest is still out there. One of the reasons for such a slow­down is that in general any hype does not last too long, and the past couple of years were years of high excitement.

Of course, the overall tight world financial market plays a significant role, and many foreign banks who may want to invest in Ukraine are busy with other issues.

Source: http://kyivpost.com/