Currently, leasing reforms are set to be launched in Russia and it is expected the industry will be supervised by the Bank of Russia while leasing companies will be suggested to join a state register of entities involved in leasing, to be granted non-bank institutions status. Their accounting will have to meet financial reporting international standards with benchmark capital at RUR 10 mio (USD 175,000) first and RUR 20 mio by 2020. The goals of the reform were explained to Invest Foresight by Sergei R. Moiseyev, Adviser to First Deputy Governor of the Bank of Russia.
– Why is there a need for a regulation now at all? Why a benchmark capital is required? What is the need to interfere with the companies operation? Will all that accelerate market development?
– The leasing market reform goal is improving leasing companies’ transparency, independence, and investment attractiveness thus increasing their share of contributing to the development of Russia’s economy producing sectors. At the preliminary stage we have interacted a lot with counterparties of leasing companies such as auditors, rating agencies, creditors. The main assumption was the market’s low informational transparency and its subsequent insufficient credence. It is a loose market now where leasing companies, not-for-profit foundations and cooperative entities operate. The present-day reporting by leasing companies does not provide solid data on their actual financial standing therefore damaging leasing business investment attractiveness. Besides, leasing activity is quite often a shelter for non-leasing operations which is ruinous to market’s repute and credibility. Industry’s investment attractiveness and rate of return will only improve should professional lessors gain a clear legal status while their accounting principles meet international standards.
Minimum capital requirement is a protective function in respect of investors and counterparts. If entrepreneurs have no real capital and their business fails, they can easily abandon their company and register a new one instead, having contributed RUR 10,000 as its registered capital, whereas a minimum capital requirement does not allow to simply dump a company since there will be a respective liability of its owners and managers. A benchmark capital is also a protective buffer against occasional losses and in case a customer fails to meet the payment obligations, the company does not become insolvent and may adequately withstand such a blow. In Europe, by the way, leasing companies have to have the same benchmark capital as banks. We are not ready yet for a market shake-up of that kind and therefore it is intended minimum capital will be RUR 10 mio for now and RUR 20 mio in 2020. If compared to other financial markets participants in Russia, leasing companies will have to meet most favorable and least burdensome minimum capital requirements. We anticipate the long-term effects of the reform will bring about lower costs of leasing companies’ financing and hence will have a positive impact on the leasing prices for the end users.
– May it be assumed that draft reform expects to cause collapse of few hundred smallest companies?
– One should be cautious when playing with figures. Our reform is not aimed at reaching whichever target numbers of the companies operating in the market. It anticipates instead that there will be certain requirements toward leasing companies and those who meet such requirements will be put on the register of the Bank of Russia so that they may continue operating while those unwilling or unable to cope with the requirements will have an option of switching specialties and going into rental business.
According to the data of the Federal Financial Monitoring Service, about 3,000 entities are or have engaged in leasing business in Russia. The Federal Antimonopoly Service has made a research into them and discovered that most of the entities do not exist since long, they have been abandoned by the owners or underwent a winding-up procedures, even though they are still on the register of legal entities. Somewhat 600 entities declare being involved with a leasing business in Russia, according to the Federal Antimonopoly Service data; of those, 224 companies have share capital below RUR 10 mio. We have carefully examined them to see what terms and conditions could help them during the transition period, and discovered that one third of the companies are inactive, they do not make new contracts or collect lease payments. Another third has a negative capital which means their losses have resulted in deprivation of such companies’ own resources. Finally, a quarter of the companies are not market players since they service a single customer each, and such a customer is often an affiliated entity, therefore their performance is not exposed. The only economic reasoning behind functioning of some minor companies is tax and other sorts of optimization, or grey market revenues legalization. Any other leasing companies will certainly have a chance to be on the register once they meet the requirements, as with a reasonable profitability and in a situation when a company directs a share of its revenue to its capital top-up, within a few years’ time a leasing company can smoothly elevate its capital to the level required and keep operating.
It should be appreciated, the number of the market players and the market qualitative development are two issues apart. For the state, the key indices are price formation and market volume and efficacy. Neither will experience a set back because to the reform due to the fact that the companies with corporate capital below RUR 10 mio make up a 2% to 3% market share. According to the assessment by Expert RA Rating Agency, in the first half of the running year the leasing portfolio grew by 14%, in other words, a possible drop in the number of companies will be offset by the increased volumes. The fact that the number of the market players and the quality of the market are not interrelated is well demonstrated by the performance of the microlenders. In 2016, 1,700 microlenders were taken off the register, whereas the number of their customers increased by 60% and the volume of the loans by 30%.
The market’s aggregate volume will most likely grow as major grey market lessors come to light. From the leasing economics viewpoint, it is scale and technology that matter. For a large company it is cheaper to gain its market share, easier to diversify its assets, it is more efficient in risks management, has a broader customer flow, and accumulates its competence faster. Therefore, for the end user the price of its product is lower, and that is why large companies grow at a faster pace than the small ones.
– Why do you bother about financial standing of leasing companies? In case they go bankrupt, their owners are the only ones who suffer since the companies, unlike banks, do not have any depositors.
– True, there are no depositors, but the liabilities of the lessors are composed of obligations, loans and sublease products which means that the main lenders of the industry are banks, pension funds and, to a lower degree, insurers. In some cases the ultimate risk holder is Finance Ministry or Central Bank. Hence, insolvency of leasing companies, as well as of any other financial intermediaries, may have a negative impact on their creditors whose risks may in turn be transferred onto individuals or the state.
By Konstantin Frumkin