Why prohibit MFIs would be a mistake

On the background of reduction of consumer crediting in 2015 loan portfolio of microfinance institutions (MFIs) grew by 25% (by data “Expert RA”) and have exceeded 60 billion rubles In comparison with Bank lending market, the portfolio of which is 11.2 trillion rubles (as of 1 January 2016, these Frank RG), MFO looks like a dwarf.

But if you look at the markets in real terms — by the number of issued loans, they are comparable: in 2015, banks have issued about 20 million loans (excluding credit cards), and MFO — about 10 million loans during the same period.

So, MFI is an expanding market with multi-million dollar client base. However the market is very little reliable information, but around it a lot of emotion.

Quite often you can hear the opinion that the market the MFI is in principle not necessary that this money-lending business, lending to socially not protected citizens under the hundreds of percent per annum is criminal. I agree that the average rate, which in some segments exceed 600% (Central Bank data), are impressive. But for the sake of fairness it should be noted that for many categories of loans, the average rate is much more moderate 40-60% per annum. And upon closer inspection, the MFI companies do not seem “fat cats”. Where did “leak” a percentage?

Largely they eat, transaction costs on the loan. For example, in the segment of long-term loans, which are the closest to non-earmarked Bank loans, the average loan amount is 20-30 thousand rubles, and the average period of about 10 months (data by the company “Home money”). The cost of raising and customer service is 2-5 thousand rubles, or about 20% of the issued amount. Which translated into annual rate turns into 30-35% (don’t forget the body of the loan is gradually repaid by the client, i.e. the interest is calculated on the reducing monthly).

Much more expensive and the cost of raising resources (funding) to MFIs. It is about 20%, and it’s 2 times more expensive than the cost of funding for banks.

And the risks assumed by MFIs, significantly higher Bank risk. There are several reasons: MFIs operate in the poorer social segment. Because borrowers of the MFI’s customers, who can not get a Bank loan. In addition, expensive technological solutions unavailable MFIs — they have no money for large-scale search engine information on borrowers from international developers. So they work with less effective tools, which, of course, leads to increase of credit risk.

MFI did not disclose the figures of losses due to defaults on loans, but it is not below 15-20% even in the best companies. In the end, by the most rough calculations of the cost of the loan (excluding expenses of the head office) is 70-80%. Add to that the cost of back-office, investments in business development, forming “pillows of safety”, the profit of the shareholder. Thus obtained and 150% per annum.

The shorter the period and smaller the loan, the more will be the costs related to the issuance and maintenance of credit in relation to the body of the loan. It’s mathematically and leads to an impressive 500-600% per annum. From the client perspective these percentages represent overpayment of loan for 1000 RUB 5000 RUB, taken to paycheck. Expensive, but quite capable.

Whether such a market? It is difficult to give an assessment. I don’t think we all represent the reality of people who need to paycheck to intercept 5 thousand roubles, to buy a pair of shoes for 2.5 thousand rubles in installments or take on six months, 20 thousand rubles for urgent car repairs.

But I am sure that strict regulation is better than prohibition. Even when it comes to the most marginal markets. The stability of the rules of the game and control of their execution by all parties will lead to the formation of a structured market with strong players who are under the pressure of competition and the requirements of the regulator will be forced to raise business efficiency. And that, ultimately, will cause a decline in the price of loans.

Recently in a conversation with one of the Belarusian financial officials I raised the subject MFI. I will remind, in Belarus the activities of non-Bank credit organizations is prohibited. Now, my interlocutor spoke about the MFI as follows: “In Russia the financial market of Belarus watch as a testing ground for advanced ideas. Indeed, we have a lot of good decisions, there is something to be proud of. But the ban MFI I think the error. Banks will not contact loans to $100. The demand for microloans is. We and the market destroyed. Do not repeat our mistakes”.