Uruguay Needs to Grow its Credit Market

The financial lending market is an extremely competitive at the high number of companies operating in the local market, which benefits users to achieve better conditions in the products they consume, said Martin Guerra, founder and current general manager and shareholder Minority Soon!, a non-bank credit manager. Since February 2007 Advent Group owns a majority stake in the company, which owns a portfolio of $ 65 million, has 36 own branches, more than 400 outlets across the country and employs 400 people with an average of 25 years of age. It has over 150,000 users with current loans or operating with Visa Pronto!, On a base of 400,000 customers at some point, obtained or applied for a loan. Below is published a summary of the interview.

“The deposits now exceed by far the largest claims in the Uruguayan banking system, as reported by the BCU. What reasons attributed the restriction of bank credit?

“The requirements of banks to lend to their customers are much more demanding than those of non-bank financial institutions in regard to the income of applicants. The credit manager working with a market segment, comprising 75% of the workforce, or about 1.9 million people, with monthly incomes that are below 15,000 pesos liquids. As willingness to pay rests with the customer in the credit market, banking on this type seeks to provide customers with higher incomes. This policy causes the bank credit to Streamline consumption in the segments between A and C1 (high-class households, medium high and medium), although in some cases, applicants also supports C2 segment (N.del R. : Households who have to cover their needs for food, clothing, housing and only a few amenities). However, Uruguayan consumers with medium high and high emotions are not culturally into debt.

- What explains the behavior of the more affluent sectors of the population?

“His strong resistance to debt is attributed to the legacy left by successive economic crises, especially those generated by several massive devaluations suffered by the country in recent decades. These people prefer to defer the purchase of a new motor vehicle or repair a home to take a bank loan or finance the balance with your credit card. In late May 2009, all private banks in Uruguay on their balance sheets were added about $ 8 million of loans for the purchase of vehicles, which is a lower figure. Something similar happened with home loans and loans with credit cards. For example, the public with greater purchasing power using the “plastic” like almost half pay in cash because in 90% of cases is a credit lasts only until the expiration of the statement.

- Why is not attractive to consumers with good incomes to buy a home through a bank loan?

“We all know stories about debtors Banco Hipotecario del Uruguay (BHU) have paid several times the price of housing from the phase shift in the value of the Unit Reajustable in long-term debt. Those experiences, among other things, discourage the demand for loans to purchase homes. Therefore, all banks combined had paid only $ 165 million under the heading mortgages for the purchase of real estate on their balance sheets in late May of 2009, which represents roughly the value of ten towers built in Pocitos.

- Is not this relationship could be attributed to higher volume of deposits that credit conditions required by the BCU for banks to grant loans on the local market?

“That’s not an inconvenience for the consumer credit market to develop. The obstacle lies clearly in operating costs. A loan product is just beginning to be profitable for banks when the transaction has a minimum volume to which a person can not access or low-income. In Uruguay, banks can only point to a very small market of 500,000 individuals theoretically eligible, but even a proportion of that segment does not meet the conditions required to obtain consumer credit.

Strategies

- What these high operating costs due to severely limit the levels of banking in Uruguay?

“Surely human capital is one of the higher costs that have the banking business, but also affect other factors. For example, the rigidity of working hours of banks will not provide access to process a credit to the people who work in conditions of dependency. In contrast, non-bank financial institutions are very broad and schedules also fail to engage through its call center services a cordial link to any interested in obtaining credit at lower amount. While some banks also use this tool, the actual training of bank employees, generally aged over 40 years as cumbersome bank processing, it facilitates operation with lower middle income consumers.

- Can call centers make a difference in the supply of consumer credit?

“Yes. In the case of call center soon!, Whose plant has two hundred positions and where some 130 people working simultaneously, are processed between 500,000 and 600,000 monthly incoming and outgoing communications. The traffic is very intense, especially early morning and late evening when you can connect the potential customer. This is a very dynamic service is provided by people, usually students from twenty years old on average, those working in shifts of four to six hours, and whose profile is completely different to the banker.

- What otherwise treat non-banking credit institutions to differentiate themselves from banks?

“Any careful observer easily noticed differences in the presentation of local banking and the non-banking finance companies. While the banks maintain a formality in its style of architecture that can overwhelm a person of limited resources, financial offices meet all the basic standards of neatness and cleanliness, but have developed very ambitious in what is refers to the quality of equipment and decoration. This approach yields a rapprochement with the reality experienced by customers in the mainstream segments of the Uruguayan population.

Risks

-One and a half ago the then president of the Central Bank of Uruguay, EC Walter Cancela, cautioned against over-indebtedness of firms and households by greater aggressiveness of banking credit in their placements in the domestic market. However, the union leadership said the sheer AEBU risk lay in the financial institutions not controlled by the BCU. Do you think that warning is justified?

“There is a danger from that standpoint. When comparing the ratio of debt, excluding housing and automobiles, the GDP of Uruguay to the rest of Latin America, is easily seen that our country has much to grow in the credit market. The same is true when checked the share of private consumption versus the volume of purchases made with “plastic”. Yes I agree that lack of instruments to be more accurate at the time of analysis on this variable because there are no reports on a positive basis in Uruguay, as there are in many countries that provide insight into whether the applicant is or has open credit cards and what amounts financial institutions are exposed. This absence takes away important information when considering the possibility of granting a credit.

For that reason, companies reporting-as, for example, the Clearing-Reports are attempting to obtain official approval for all financial actors can provide them with details identifying the debt situation of individuals. To have that information, the risk of debt distress that Cancela said economist could be controlled more effectively. However, in that sense, there are still cultural barriers, operational and possibly related regulatory banking secrecy.

Growth

- How many management companies operating in non-bank credits the local market?

“In the formal market, they work a hundred firms contributing to the Fund Banking, which is mostly regulated by the Central Bank. This monitor only the companies involved in the financing of goods and services, such as issuers of credit cards and certain types of cooperatives. Where the financing of the loans in cash, the law requires that these managers do not necessarily need to be controlled. The BCU also oversees the activities of credit unions.

- What is the current status of non-bank credit market in Uruguay?

“The market is in a time of marked growth, especially after some fears that there were a retraction, which fortunately did not materialize, due to the outbreak of the international financial crisis. From July this year, it became clear a change in customer expectations, which returned to borrow the usual pace.

- What other reasons attributed the sustained growth of consumer loans granted by non-banks?

“In that sense, the most important factors are impacting on the public-in particular the lower middle income people and low-to borrow given the good prospects of maintaining the current level of real wages, which grew significantly in recent years and declining unemployment. The sector’s growth has been helped by the achievements of successive governments to formalize relations, from the creation of the mechanism of Labor History at the BPS, as the official receipt of salary is the main element that provides for non-banking financial company to establish the risk to which you are exposed to a loan. The financial lending market is an extremely competitive at the high number of companies operating in the local market, which benefits users to achieve better conditions in the products they consume.

Terms

- What are the characteristics of consumer credits granted by non-banks?

“In the case of Pronto!, The average amount of credit extended is about 8,500 pesos, with a period of fourteen months. The maximum amount awarded reaches $ 100,000, which may be payable in the best case, even in twenty-four shares.

- What age are placed in interest rates effective administrators who handle credit?

“Interest rates for personal loans from nonbank financial institutions generally fall in the threshold for the BCU, which today is at the heart of 70% annually. The levels are quite similar across companies. In contrast 90% of personal loans of the bank has the possibility of deductions from wages or debit the current accounts of the applicant, which, among other factors already identified, to enable the claim are larger amounts. The lower risk associated with this type of loan, and the highest capital involved in such loans, determine that the interest rate is considerably lower, reaching about 40% annually.
Amount not given formal banking sector more transparent

- What is the volume of consumer loans in Uruguay?

He estimated that the consumer credit market and nonbank bank moved about $ 1,510 million in 2008, according to a study by Deloitte. That figure was derived from the sum of the loans made by nonbank financial companies, both those covered by the BCU as unregulated voluntarily reporting data, which totaled $ 422 million, BROU which contributed U.S. $ 688 million credit cards $ 127 million, loans from private banks on automatic discount redeemable at salaries that were $ 207 million and other loans totaling about $ 66 million.

- Could you estimate how big a informalism credit laws?

“That data is extremely difficult to calculate because there is a wide range of informal loans. A sector is the commonly called “Cock Bank, whose trading volume is virtually invisible because they operate outside the regulated market. The other sector comprises retail commercial enterprises to finance their own credit sales. Usually we try to have some idea of the dimensions of the informal market so diffuse through the survey technique. Some results indicate that the amount of such loans could represent between 50% and 100% of the volume traded by the formal non-bank financial institutions, so it would total between $ 200 and $ 400 million.

- How does this informal operational development financial institutions regulated?

“The non-banking financial activity often is challenged by business practices drawbacks. But these operations are generally undesirable carried out by non-formal. Fortunately, the formal sector is becoming more mainstream and therefore more understood by the very government regulation, which previously threatened the profitability of companies with formal credit. This has allowed the public to demand consumer credit more transparent operating in environments with greater certainty as to their rights. Perhaps the growth that this sector has recently obey that customers have seen that can handle their debt in an orderly and safe manner through these companies. It is hoped that the seriousness exhibited by the formal banking financial sector leads to a greater number of users to transfer their debt progressively from the informal to formal.
Rate of default in repayment of personal loans is between 3.5% and 8%

- How do you decide the authority to grant a loan application to a new client?

“As the financial loans granted to one firm, the granting of a loan is based on a combination of risk models, called” credit scorings, which are related to behavior, the ability to pay and the reports required the applicant, plus the information that the person brings to the company at the time of application. The entire process is done automatically via intelligent rules that provides the company’s computer system and determines the granting or otherwise of credit and its conditions. Its duration does not exceed four minutes. If the application is approved, the system also sets the ceiling to the amount paid and the maximum term to which the customer can expect. Then the process of signing documents is completed in about fifteen minutes.

- How do you ensure the non-bank financial institution credits the payment of whose beneficiaries do not provide collateral?

“One of the myths of this activity is that the risk is at the time of granting credit. While the company has sufficient information based on established rules, the determining factor for the customer to pay or not is the relationship established the day after you received the loan. That requires designing strategies for customer contact and set up different actions depending on their consumption behavior or pay. For example, when customers are late in paying the fee, you are notified immediately and the call was reiterated many times as necessary based on the promises you make.

- How many people does soon!?

“Soon! manages a portfolio of $ 65 million and employs four people. When comparing the volume of assets with the banking institutions, our business would seem inefficient because most banks operating in the local market is several billion dollars in their portfolios that are managed by a roughly similar number of employees, depending on each bank. What happens is that the type of transactions in non-banking financial market requires very intensive in all strategies to approach the customer, which is reflected in the very high cost level for this business given all the human capital involved in the operation.

- What are the recovery rates of consumer credits granted by non-bank financial institutions?

-The rate of failure to repay loans on the personal credit managers is in the range from 3.5% to 8%. In the case of Pronto!, The percentage of uncollected loans is currently 5.5%, a figure very similar to that registered in the banking institutions in the consumer loan segment. The difference is that transactions in non-bank credit market are much more risky because any major problem that may arise in the labor market or wage levels have a much stronger impact among people with lower incomes.
Factsheet

Martin Guerra, Uruguayan, 45, is general manager of Pronto! since its inception in 1997. He founded this personal loans manager along with his previous venture partners, BGV Servicios Financieros SA, which was director and founding partner with 20 years of age.

He has developed his career as an entrepreneur and manager of various non-banking financial companies, such as changing Cologne, among others.

translated from an editorial in el pais by jorge rebella