Credit conveyor: why banks and their customer need it

Along with expansion of foreign capital, a bursting growth of consumer lending market has become one of today’s most significant processes in the home banking system. Growing competition forces bankers to more and more proactively develop new products and sales technologies, risk monitoring procedures and technological solutions.

“ZN” asked Olena DMITRIYEVA, Deputy Chairman of the Board, Ukrgasbank, to tell what the banks’ intentions are and what benefits their customers may have out of that.

“Olena Mykhaylivna, Ukrgasbank recently declared it was setting to implementation of a software complex to work with retail customers. As far as I know, introduction of such products is not only costly (amounting to hundreds of thousands of dollars), but also rather time and labor consuming.

Is the game worth the candle?”

“Implementation of such products is preconditioned with the objectives Ukrgasbank has to realize, as well as with current qualitative changes in the structure of its assets.

We have determined retail lending to be one of the main bank’s development priorities: in te previous year, consumer lending increased more than four times. This resulted in more than two time increase of specific share of retail loans in the bank’s loan portfolio: it has already become 27%. We plan to drive the indicator up to 40%.

As for the bank’s market positions, being the 25th largest bank in the retail lending banking system at the beginning of the previous year, we became the 19th at the end of it. In the current year, we plan to become one of the 15 largest market operators, and to enter into and to get fixed within the top ten leaders within the following five years.”

“But virtually all of your competitors belonging to the category of large banks have at least the same ambitious objectives...”

“In order to reach competitive advantage, retail banking services should be rendered with maximum quality, at low cost, and rapidly. Today’s market feature is that under conditions of growing competition on it reduction of the cost of loans and acceleration of decision making process is only possible at the account of introduction of the most up-to-date innovative technologies.

Technological solutions must allow standardization of retail lending operations within the bank’s system and automation of the entire loan granting procedure: from receiving applications to making decisions and transferring money. Besides, they should contain not only elements such as scoring borrower estimation system and the system of their verification through the bank’s own “black lists”, but allow obtaining of the information from the credit bureau and introduce debt collection systems.

Only powerful information systems make complex solution of such problems possible, they are sought for by the banks the most active in retail banking. We have chosen a rather known software product. The complex includes the automated application processing and document execution system Decision Manager and the debt collection system Debt

Manager. The following international financial groups are the users of such systems: Citibank, UniCredit Group, OTP bank, Raiffeisen Bаnk, Credium.”

“What specific benefits does introduction of such systems grant the bank and its customers?”

“Such automation allows building of a lending process in the form of a conveyor. With minimum involvement of the bank’s experts, loan applications pass all the necessary stages of analysis, and decisions on whether to grant a loan is made within 20 minutes. And only minimum package of documents is required to be provided by a customer: his passport, identification code, and his income statement.

And then the system enables adjustment of information flows so that to allow the most efficient collection of overdue debts, as well as to encourage prudent borrowers by increasing their credit limits and reducing their interest rates. A specific free of charge service of informing customers of their current loan indebtedness via SMS and e-mail will be provided within operation of Debt Manager.”

“Lending product line banks offer now grows so fast that sometimes customers are rather confused to figure out advantages and disadvantages of some types of loans. What services will you sell?”

“Credit cards and mortgages will primarily become lending products to be sold with the help of the information system. Further, we plan to automate other types of loans from the bank’s retail product line. To increase effectiveness of introduction of the information system, we have engaged developers of the software, which is now used with the bank, to cooperate. Primarily, they are the processing center “Ukrkart”, based on which issuance of credit cards is effected.

Surely, Ukrgasbank has already had a card loan portfolio. Automation of decision making process will allow selling credit cards to a wide range of customers.”

“Beside price, rapidity and quality of the very services, it also is required to have effective channels to sell them...”

“After finalization of the project (indicatively in July of the current year), Ukrgasbank expects to implement such credit conveyor throughout the entire branch network of the bank encountering almost 200 points of sale. By the end of the year, the bank will establish 100 more mini points of sale equipped with the most advanced banking technologies specially for retail lending. Also, sale of lending products is expected to be effected via remote access channels: Internet, mobile communications, banking self-service POS.”

“And what about sales networks? Many retail lending market operators strive to have their maximum presence on this very market. Often, people make spontaneous decisions on even large purchases – encountering the “magic” of sympathetic merchandise...”

“We plan to locate ourselves only in the largest shopping malls. In the places where we could open mini-POSs that could be able to service not only retail customers, but private entrepreneurs and small enterprises.

As for spontaneous buyers’ decisions, we, at least until credit bureaus have adequately operated, have no intent to grant loans without having the borrowers’ income statements. Thus, the bank will minimize its own risks. We are not planning to expand our customer base with borrowers taking thoughtless and spontaneous decisions. As a rule, such customers find themselves less scrupulous payers.

But the bank’s customers who are the holders of its credit cards and who enjoy the reputation of conscientious borrowers will have possibility to buy goods they like right on the spot. As I said, we will stimulate them by means of increasing of their credit limits and reducing their interest rates.”

“Will actual current interest rates of such type of loans be interesting for thinking customers? Abstracting from loans granted without submission of income statements, which often cost borrowers 80-100% per annum, the average cost of security-free consumer loans is 40-45% per annum. Why are they so expensive?”

“Free cheese may be found in a mouse trap – this is understood and well-known to everyone. Determination of the cost of a loan should be based on the cost of money in the economy, as well as on provision for loan impairment risk and the bank’s expenditures on its granting. Plus profit, which the financial institution charges for itself.

Let us make a calculation together. The cost of money must be at least a little higher than the country’s level of inflation – say it is 12%. Plus about 20% - being the loan impairment risk for security-free consumer loans. Add operational expenditures and an interest margin – that totals to the expected profitability, which the bank charges for itself. By the way, the interest margin of Ukrgasbank is very low, that is why the actual interest rate is lower than that of the market you have pointed out.”

“Serious reduction of operational expenditures is impossible, and the margin as you say is not so high. That means that under conditions of growing competition within the banking industry significant reduction of interest rates will not happen, will it?”

“You are right; interest rates on consumer loans may be significantly lowered only because of, first, considerable decrease of inflation (at least to five percent per annum); second, because of decrease of banks’ credit risks. This will only happen after lenders’ rights in the part of collection of overdue loan indebtedness are duly protected, as well as after commencement of adequate operation of credit history bureaus and collection agencies professionally engages in the working with trouble debtors.”

“And what could be the level, to which the interest rates may so be lowered to? Could you make a prognosis?”

“An example of Czech Republic may be given here. We studied the experience of introduction of information products there. Naturally, we were curious about interest rates for retail customers. Now, their card loans within security-free consumer loans cost their customers from 18 to 25% per annum. Along with that, the cost of mortgage loans in Czech Republic does not exceed 3% per annum.

Minimum 15% difference is a charge for extra risk, which, as we see, is just 5% lower at an average than that of our country. For that reason, consumer loan interest rate dynamics will therefore mostly depend on inflation in Ukraine.”