Expert opinions, FINANCE

Private loan demand on the rise: What to expect?

The microloan sector has been recovering faster this year than bank lending. In Q4 2022, the market may partly make up for the lost growth during the year. The demand for loans is on the rise due to anticipated inflation and approaching New Year holidays. Expert RA estimates that microfinance organizations may have boosted their portfolios by up to 30%.

The external events in February and late September paralyzed financial markets but not for too long. The market took about two months to adapt to the new conditions. During that period, microfinance organizations issued limited loans under tougher requirements.

Since February, market players have taken a conservative approach to issuing long-term loans and loans for business purposes. Returning customers prevailed among the applicants approved for large amounts. Some companies launched incentive schemes for their clients throughout the year. They were cautious about working with new customers, including due to the worsening quality of loan applications. As a result, the market growth was primarily secured by short-term loans. The loans of this type are usually taken out to cover urgent expenses and paid back in due term.

Another factor that ensured speedy recovery of the microfinance market was the inflow of bank clients, known for strict financial discipline when it comes to maintaining loans. Banks toughened their lending policies causing higher rejection rates. Meanwhile, microfinance organizations offered lending conditions similar to what banks required.

Overall, flexible credit risk management, lower dependence on the key rate and short average payback term for microloans allow microfinance organizations to promptly revisit their lending policies. There were no mass defaults. Delayed payments remained within the acceptable range of 25–30%.

Borrowers are also showing restraint when it comes to taking out loans, in addition to slightly better payback discipline in the conditions of high turbulence. People take out loans mainly to address immediate matters and make sure to pay back their loans timely, to avoid debt buildup as any additional expenses may be painful for their personal budgets.

Whats next

The microfinance market is expected to grow in 2023, although amidst higher regulatory burden. Starting January 1, 2023, the Bank of Russia may introduce macroprudential limits to restrict unsecured loans and mortgages. For customers with a high debt burden and borrowers wishing to take out an unsecured loan for a very long term, it may mean lower accessibility of borrowings. Currently, this category of borrowers with banks and microfinance organizations already makes up a small share.

Additionally, a bill limiting the microloan daily interest rate from 1% to 0.8% may come into effect in 2023. The bill is currently under review at the Russian State Duma.

The macroeconomic environment will continue to put substantial pressure on the microfinance market. Some companies will have to adjust their scoring models, create new products and recalibrate their customer relationships ‒ that is, go an extra mile to adapt to the new regulatory and economic realities. The companies that fail to promptly automate loan issuance and scoring can no longer cope with the regulatory burden and may leave the market in 2023.

Competition for a quality customer will grow. When the economy is unstable, it only makes sense to build up the lending portfolio by serving quality customers.

Reducing the average loan amount remains one of the most effective measures to impact the quality of loan issuance. We predict that microfinance organizations will continue to adjust their risk policies towards shorter-term products and pursue an even more conservative policy with respect to long-term loans. At the moment, there are no prerequisites for relaxing credit scoring rules. With the economy and geopolitics going through uncertain times, microfinance organizations will strive to minimize the risks of bad debts.  

It will become more difficult to take out long-term loans. New customers may also face challenges. The rejection rate increasing across all lending segments, borrowers will feel higher responsibility for fulfilling their payment obligations and make sure to pay back their loans on time and avoid debt increase.

By Igor Smirnov, CEO of the Creditter microlending organization

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