More loans and credits to individuals and corporations has spurred demand for debt collectors
Riding the wave of increased borrowing by consumers and small businesses in the Ukrainian financial sector, industry players have found themselves launching new services, like collecting bad debts.
Competition among banks has made loans and credits more readily accessible to individuals and corporations. But the growth in lending also increases the amount of money that may not be paid back.
Currently top banks are managing bad debts themselves. But industry insiders say the demand for independent collection agencies will rise together with the number of loans issued. It will simply be cheaper to outsource such services.
Sequoia Credit Consolidation (SCC), one of the largest Russian collection agencies, is eyeing to open an office in Ukraine this month. SCC has operated in Russia since 2004 and managed nearly $150 million of bad debts, $120 million of which was retrieved for client banks.
SCC spokesperson Svetlana Leonova remained tight-lipped about her company’s plans on the Ukrainian market, but said her company is very interested.
There are domestic collection agencies.
Sluzhba Vykonannya Zobovyazan (SVZ), for example, began operations in April 2007. The company, whose name means “obligations performance service,” was created by a team of lawyers to serve banks, insurance, telecommunication, energy and other companies in need of debt-collection help.
Maksym Brul, general director of SVZ, said demand for his company’s services is growing primarily because banks are issuing more credits.
According to the National Bank of Ukraine, as of April 2007, Ukrainian banks had lent out Hr 165 billion ($33 billion) to legal entities and nearly Hr 80 billion ($16 billion) to private individuals.
The NBU reports that borrowers are delinquent for 1.5 percent of issued credits. Other estimates, however, claim much higher rates of 10-15 percent.
Brul said that the niche of providing effective multiple debt collection mechanisms was missing on the Ukrainian market.
Like other agencies, SVZ provides three basic types of services – soft collection (reminding debtors by phone or mail), hard collection (face-to-face meeting with debtor), and legal collection (court proceedings).
Brul said that more than $1 million will be invested into the agency to develop regional branch networks in large urban centers.
“Our target customers are banks, insurance companies, credit agencies, telecommunication companies, even energy and utility companies,” said Brul.
An agency will take between 10 to 50 percent of the money it collects, depending on the terms and size of the debt and the type of debtor.
The lion’s share of income for a collection agency can be generated via cooperation with banks. They are most prone to bad debts, and this trend is expected to continue.
“For a bank it is a question of reputation, because if a bank forgets relatively small credit debts, the problem may grow to [become] financial instability,” Brul said.
There are instances when debts are uncollectible due to the death or disappearance of a debtor, or for some other reason, he said. Normally 60-80 percent of debts are collected without the need to resort to legal proceedings.
Oleksiy Kushch, advisor to the president of the Association of Ukrainian Banks (AUB), said the amount of bad debt will continue growing because banks are placing fewer requirements on borrowers in an environment of tough competition on the market.
“Consequently, people are creating more schemes to fool banks and exploit the current credit boom [that started in 2003], submitting fake documents and income reports,” said Kushch.
The biggest problems for banks are consumer credits, like car loans, loans for household goods and personal effects. Mortgages are secured as banks essentially receive properties as deposits.
Kushch said that collection agencies use other independent collection agencies because sometimes the size of the debt is smaller than the cost to collect it.
According to the AUB, the share of bad debts is currently around 5 percent and it will grow together with increased crediting. In Russia, for example, where the credit boom began earlier, the share of bad debt is nearly 10 percent.
Fedot Yeremenko, head of the credit risk department of First Ukrainian International Bank, a Donetsk-based top 10 Ukrainian bank in terms of assets, said the Ukraine’s banking market is ready for independent collection agencies. He said that hard collection of non-deposit debts will be the most effective.
“Redeeming mortgaged debts is more efficient with the sale of mortgaged property, like a car or apartment,” said Yeremenko.
Yeremenko said that big and mid-size banks can currently cope with collecting small consumer debts on their own, as does the First Ukrainian International Bank. But banks may find it more efficient to use an independent collector for large non-mortgage debts.
