Banks extensively unload SME bad debts
Banks extensively unload SME bad debts
According to experts, small and medium companies NPL will reach 15% in 2014 total loan portfolio.
There is a big chance that SME companies that fail to keep the proper consistency in paying off their debts will now have to deal with collector agencies. Banks started massively writing off the non performing loans generated during crisis.
According to research by «Sequoya Credit Consolidation» (part of Evgeny Bernshtam’s Adela Financial Retail Group), total share of bad debts transferred to collector agencies increased by over 12 times from 0.4% to 5%.
Even though SME NPL growth rate has gone down by 152 times from 91.3% to 0.6% since the recession year of 2010, lately bad debts surged forward, totaling around RUB 388.6 bln in a RUB 4.3 trillion total SME loan portfolio. 2012 results were RUB 386.5 bln and RUB 3.7 trillion respectively. With that, the research says its too early to say that SME lending market is stabilizing. According to Sequoya research, the referred tendency derives rather from the massive write-off of debts accumulated during the crisis of 2008-2010.
— Generally it takes about two year before banks can write bad debt off their balance sheet (in particular, bad debt collection impossibility certificate must be obtained prior to the write-off). 9 % of loans disbursed to small business entities in August 2013 turned non performing. By the end of the year this value may reach 12%, when some of the earlier disbursed loans also become non-performing. In 2014 this rate may increase to 15-17% due to economy stagnation both in Russia and in the rest of the world. (Elena Terekhova, Deputy CEO for Sales and Promotion, Sequoya Credit Consolidation)
Regions with highest SME NPL rates are Moscow (20,3%), Central, South, and Privolzhsky federal districts (16%, 13,9% и 11,9% respectively).
— The majority of small businesses are registered in Moscow, and around quarter of all the SME loans belong there. Besides, pending the upcoming 2014 Olympic Games in Kazan (South Federal District), an immense number of construction and trade SMEs emerged in the last years, driving up the loan debt volumes.
Banks have a growing preference in transferring SME debts to collector agencies on a pre-litigation stage to avoid litigation expenses and to keep customer loyalty. These way credit institutions try to draw customers back into payment schedule and to avoid another bound write-off.
— 90% of all the SME non-performing loans transferred to collection agencies in 2011 – 2012 had already been under court trial proceedings, while now banks tend to deal with the debts without applying to arbitrage, which drives up the total volume of debts transferred to collection agencies.
— For a variety of banks selling SME bad debts is a relatively easy way to clean up their loan portfolio quality, to reduce reserve expenditures, and to upgrade the ratios. Borrowers sustainability is a critical issue here – most of the SME companies are hard to assess using standard scoring procedures, since small companies tend to cook the books and to fraudulently ease their debt burden. — SMP-bank First Deputy CEO Alexander Levkovsky says.
SDM-Bank CEO Maxim Solntsev says, that a great number of banks build their SME lending business using same approach as in retail lending. Therefore small companies’ debts then get transferred to collection agencies just the same way as individual debts.
According to Solntsev, oftentimes small business loans are granted against a guarantee of an individual. This first of all relates to regional trading companies. That is why in case of borrower’s default the banks have to apply to collections agencies.
Credit institutions are not ready to commit a great deal of resources to collect bad debts through court proceedings, since those proceedings can last for months. Not that many banks can also afford keeping a considerable in-house pool of bad debt professionals.