It's a Tuesday morning in Moscow, and Konstantin Savelyev, a 29-year-old security guard, is shopping with his family at the huge IKEA furniture store at Khimki, north of the capital. He and his wife want to buy toys and bedroom furniture for Artyom, their 18-month-old son. But before making the purchases, Savelyev has to complete another task. He sits for 20 minutes in the office of Delta Bank, located inside the store, giving personal information to a sales assistant. She types the data into the bank's computer. After a few minutes, good news. He is approved for a Visa credit card with a $500 limit and an interest rate of 24% a year. Savelyev is pleased. "The amount you have to pay back is minuscule compared to what you earn, so it doesn't have a big impact on the family budget," he says.
Savelyev is just one of millions of Russians who have recently discovered consumer credit. According to the Russian Central Bank, retail lending to private citizens hit $15 billion by mid-2004, a 50% increase in six months, and up from just $1 billion since the start of 2000. Despite this phenomenal growth, Russia's consumer-credit market -- installment loans, credit cards, car loans, and mortgages -- is still in its infancy. Total consumer debt makes up just 3% of Russia's gross domestic product, compared with 75% of GDP in the U.S., and around 20% to 30% in Eastern European markets such as Poland. Just 1 in 100 people has a credit card, compared with 2.5 cards per person in the U.S. So far, Russians are snapping up cards and loans despite interest charges as high as 40% for installment loans and credit card rates of 25-30%.
A JUICY SLICE
That means big margins, and the international banks have taken notice. In late July, France's BNP Paribas paid $300 million for a 50% stake in Russian Standard Bank. Just two weeks later, GE Consumer Finance paid $100 million to acquire Delta Bank. "There is real consumer demand for the type of product we offer," says Dan O'Connor, CEO for Europe at GE Consumer Finance.
Both Russian Standard and Delta have built their businesses by offering instant credit to shoppers -- a segment that giant state savings bank Sberbank is too slow and bureaucratic to handle. Russian Standard, the pioneer, was set up in 1999 by Roustam Tariko, an entrepreneur who made his fortune in vodka. By mid-2004 it had made 3.2 million installment loans worth $1.4 billion. In the first half of 2004 the bank had a $59 million profit, with return on equity of 78%. "There wasn't any [instant credit] before, and people needed it," says Richard Hainsworth, director of Rus-Rating, a Moscow rating agency. For local banks, working with retailers is a handy way to distribute products: Only Sberbank has a big branch network.
Whereas Russian Standard initially focused on simple installment loans, a more recent trend is the co-branded credit card, such as IKEA's scheme with Delta Bank. "The market said loud and clear that this was the horse to ride," says Patricia Cloherty, chairman of Delta Private Equity Partners, which is selling Delta Bank to GE. Delta has issued 140,000 cards in the last two years and made $40 million in loans. Russian Standard has issued 1.1 million cards with $379 million in credit -- 77% of the market.
The bankers recognize the risks. Russians have little in the way of credit histories. Banks try to solve the problem through complex computer-based grading systems, which collate information on variables such as employment history, education, marital status, and income. Not all qualify: Some 25% of applicants are turned down at Russian Standard.
So far those safeguards are working. Default rates are tiny -- 2% to 3%. But analysts caution that the impressive repayment rates come at a time when the economy is booming and the consumer-credit binge has only begun. "I wouldn't be surprised if retail loans get into really big trouble in a recession," warns Irina Penkina, banking analyst at Standard & Poor's in Moscow. Russia already had one debt crisis in 1998, when the government defaulted. Let's hope it doesn't have a consumer-credit crisis the second time around.
By Jason Bush in Moscow