Remote banking service and lowering interest rate. What are expectations at the market of micro-loans?
Milestone event at the end of March, which separated the microfinance market into micro-finance companies (MFC that are able to operate issuing on-line loans) and micro-credit companies (MCC), became an important landmark, predicting the next round of the evolution of this sector of the economy. As the key lines of development we can identify Key areas include consolidation, IT-based management, segmentation and development of new markets of money.
As a result at of it at the beginning of the second quarter of 2017, there were less than 20 microfinance companies in the country compared to several thousand organizations involved in microfinancing.
The market micro-loans actually is the copy of the banking sector, where, according to the Frank Research Group, 90% of the mortgage market in the country is controlled by fifteen banks (while the two main banks with state involvement control about 70% of the market). A similar pattern in general is observed in the segment of lending to private customers – 74% of the market is controlled by fifteen banks with a similar share of the market in the hands of the same two banks.
The similar picture (the only exception is predominance of the state owned segment) can be observed in most European countries, and there is the reason for that.
The organization of a large-scale crediting process requires significant investments in information technology and marketing that few companies can afford. This is what we are observing and shall continue to observe in the sector of micro financing. The gap between key players and the rest of the market will increase, in spite of the fact that positioning order in the top ten might vary.
As the market consolidates, to the great extend this process is stipulated by new technologies, we shall continue to witness the trend movement of sales channels to the Internet.
According to experts, over the past 4 years the online micro-crediting share o has increased from zero to 20-30%. At the same time, we noticed that Central Bank and the Government are actively promoting remote identification in all the sectors of the economy. As the legislation improves, technological infrastructure is developed (the course for implementing biometrics is obvious), and also changing behaviour of customers, who swiftly move their intake of services to the Internet, one can expect the similar course in micro-financing shall prevail.
However, remote lending will remain available only to the largest companies that can insure the application of the latest modern means of scoring and access to technologies. It is indicative that among the 19 MFCs (as of March 31, 2017), in one way or another, only 10 companies operate in the Internet, that means so far only 53% of the total number of the companies.
Development of technology and consolidation will stimulate the new money markets’ development, so necessary for further growth of the market and decrease of lending interest rates for customers.
We shall see the tendency of increasing availability of remote banking for MFCs as well as the forthcoming product oriented players concentrating on alternative lending (including factoring and leasing financing) in general, but with the emphasis on micro-financing.
As the regulation basis improves, including the formalization of reporting process (for example, the transition to the Unified Chart of Accounts), the strengthening of capital adequacy requirements (plans for more rigid reservation of arrears amounts, especially for MFCs in the area of unsecured lending) and compulsory Auditing, the industry will become more transparent for institutional creditors. With the increase in the transparency of the sector, one can plan the increase of the Banks’ interest to financing alternative lending companies.
You can also observe the increased attention of institutional investors to the MFCs.
Last year, Baring Vostok Capital Partners, one of the largest private equity funds in Russia, invested in MFC Revo Technologies, which focuses on POS-crediting.
Reviewing European and the US market, you can observe a number of multibillion-dollar credit funds specializing in the market, which defined in Russia as the market of microfinance: Victory Park Capital, GLI Ranger and others. We can expect the emergence of similar credit funds that will provide liquidity for the microfinance market in Russia.
Alongside with the development of interest in microfinance from institutional investors, parallel to reduction of interest rates and increase of accessibility for consumers, one can expect diversification from the point of view of business models presented in the country.
At the moment, the largest MFCs are concentrated in a narrow range of verticals with the emphasis on lending to small and medium-sized businesses and on unsecured consumer lending. Nevertheless, global experience suggests that there are much more models, so you can expect specialization in particular customer-, product- and functional- segments. Without doubt, secured lending that is at the moment more concentrated in offline shall surely be further developed.
In general, the improvement of regulation and technological changes dramatically influenced and transformed the key trends in the microfinance market.
The market has already become more transparent. Increasing transparency has already created a foundation for attracting additional capital to the market, which will accelerate rates’ reduction and increase of the market.
Consumers already receive and continue receiving services of high demand, being fully protected by Law and the market regulator.
This strongly pronounced consumer demand is highlighted by the rise of the new business models on the one hand and export of technologies abroad.