Cablegate: Consumer Credit Boom Fuels Economic Growth In
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UNCLAS SECTION 01 OF 04 BUCHAREST 001445
STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
STATE PASS USTR
USTR FOR LERRION
TREASURY FOR STUART
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID
E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: CONSUMER CREDIT BOOM FUELS ECONOMIC GROWTH IN
1. The consumer credit market is booming in Romania, with
lending institutions offering a wide and growing range of
products reaching a total volume of $4.7 billion in 2004.
The resulting shopping frenzy has contributed to an increase
in retailers' profits, as well as a jump in the country's
foreign trade deficit as consumers rush to buy foreign
goods. So far, in spite of consumer protection groups'
fears to the contrary, delinquency rates are low. However,
loan recovery firms are doing brisk business as the number
of the over-extended grows. Romania's first fully-
functioning private credit rating agency began providing
consumer data to lenders in April, and credit scoring will
begin in the short term. Rural consumers, considered high-
risk by lenders, have been left on the sidelines, unable to
qualify for most loans.
Banks Drive Credit Boom in Romania.
2. Consumer credit has been available in Romania since the
fall of communism, although hyper-inflation, high interest
rates, substantial collateral demands and economic
uncertainty limited the growth of this market. It was not
until 2002 when basic consumer loans and home mortgages
became commonplace, with the total loan portfolio for that
year in the low hundreds of millions of dollars. Consumer
lending momentum soared over the next two years in tandem
with Romania's increasingly rosy economic indicators. By
year-end 2004, total consumer lending reached $4.7 billion,
an increase of 6.5 times over 2002. This boom is indicative
of the pent-up consumer demand characterizing the product-
poor Romanian marketplace in the late 1990s and early 2000s.
Increasing competition among financial institutions has
lowered annualized interest rates from more than 100 percent
in the mid-1990s to as low as 17 percent today.
3. Loan products have grown in breadth and sophistication
over the past three years and today banks offer not only
basic loans, such as home mortgages, but also loans for
cars, home appliances, vacations and "personal needs". Real
estate developers expect approximately 80 percent of home
residences to be financed this year by mortgage loans. Home
lending is further expected to expand once the secondary
mortgage market opens allowing banks to offload risk. Use
of credit cards is also on the rise; by year-end 2004 total
credit card transaction volume reached $6.5 billion (up 46
percent from 2003), generated by 117.6 million transactions.
Slightly more than five percent of consumers currently use
credit cards, and a fifth of the population regularly pays
with debit cards. Consumers like the new product selection,
and surveys show that high numbers expect to enter into
credit agreements by year-end 2005. Loans for household
goods lead the pack in popularity with 5.3 percent of all
consumers planning to borrow.
4. The fast pace of lending has contributed to Romania's
impressive GDP growth, which stood at 8.3 percent last year.
The construction and retailing sectors have benefited in
particular. In the first quarter of 2005 retail sales
jumped 18.7 percent over 2004, demonstrating this trend.
However, some analysts fear short-term overheating. The IMF
points to a growing current account deficit linked to high
imports from abroad.
.While Non-bank Financial Institutions Follow Close Behind
5. Although slightly more than fifty percent of all
consumer loans continue to be generated by banks, non-bank
financial institutions (NBFIs), many of which operate in
close partnership with Romania's retailing giants, have
gained substantial market share within the last three years.
These institutions' high profit margins on electronics and
home appliance loans have made them popular take-over
targets, and several were recently acquired by Western
European and American investors. The rapid growth of NBFIs
prompted the GOR to pass law 289/2004 "Concerning Credit
Agreements", which requires them to acquire licenses and
observe consumer credit rules including pre-contractual
disclosure, annual percentage rate calculation, and
agreement to advance repayment. Previous to this law, NBFIs
were completely unregulated. NBFI's still operate outside
of Romania's banking regulations which limit total loan
6. Applying for credit in-store can take as little as 15
minutes and retailers are quick to encourage this extra
source of revenue. Romanian hypermarkets and home appliance
retailers currently average 60 to 70 percent of their sales
volume on credit, depending on seasonality and customer
base. Household goods, electronics and furniture see the
largest growth with an average purchase amount of 500 Euros.
Romania's comparatively low incomes require loan maturities
on consumer goods up to five times as long as those in the
Czech and Polish marketplaces.
7. Romanians have an overall cultural aversion to owing
money, and approximately seventy percent of borrowers pre-
pay their loans, an unusually high number. Many, in
particular the elderly, avoid credit due to their lingering
fear of financial institutions and distrust of contractual
agreements. Romanians tend to pay on time and delinquency
rates hover around three to five percent, which both NBFIs
and traditional banks consider low for a developing market.
Banks which carefully screen applicants according to income
level and credit history claim non-payment rates as low as
Debt Collectors Rush to Cash In
8. The credit boom has benefited debt collectors who saw a
300 percent growth in their consumer business in 2003. As
consumers take on more debt and are unable to pay, both
banks and NBFIs offload these delinquent payers to debt
collectors. The main market players use generally accepted
business practices, first attempting contact by phone and
mail which generates a success rate of around 40 percent.
If demands for payment are unsuccessful, the debt collector
brings the case to court. The vast majority of loans in
arrears, around 85 to 90 percent, are less than $1700.
Personal needs loans see the highest level of default,
followed by loans for consumer goods. Mortgages and car
loans have the lowest default rates, of around two percent.
Rural Dwellers Snubbed as High Risk
9. Rural residents have been left out of the lending boom
for a variety of reasons, including a lack of banking
branches and department stores in Romanian villages, income
from undocumented sources, such as farming; and greater
reliance upon foreign remittances transferred by relatives
abroad. State-owned Banca Commerciala Romana (BCR) claims
that it services ninety percent of the market, although the
bank's total rural market portfolio is merely $10 million.
Most NBFIs target cities with populations exceeding 50,000;
they view investment in poor, rural areas as unlikely to
generate required returns. The GOR has investigated
programs to promote crop receipts as collateral for bank
loans, but so far this initiative has made little progress.
Uneven Legislation To Conform with the EU
10. Legislation in the consumer credit sector is a mixed
bag; most laws are geared towards consumer protection, while
financial institutions remain frustrated by the absence of
strong penalties for non-payment of debt. There is no
expedited process within the legal system for financial
companies and cases typically take six months to a year to
be heard by a court. In addition to the Law Concerning
Credit Agreements, which protects consumers who enter into
credit agreements, the Romanian Parliament has passed laws
on data protection conforming to EU legislation. Commercial
banking norms have also been passed which stipulate that
down payments on goods must represent at least 25 percent of
the item's respective value. Additionally, total monthly
payments can not exceed 30 percent of the customer's net
monthly income, or 35 percent for home mortgages.
Interestingly, these income constraints have resulted in
employers bowing to pressure from workers to report full
income to the state, rather than paying under the table to
avoid payroll taxes.
11. However, gaps in legislation remain; NBFI's are not
subject to the same lending caps as banks, nor subordinate
to banking regulations or supervision. Commercial banks are
frustrated by this uneven playing field and seek to convince
the Central Bank to relax the lending restrictions, although
a change is unlikely. Clarification on laws pertaining to
overextended borrowers are also needed - no bankruptcy law
exists, nor is there any way for lenders to "fast-track"
cases of non-payment through the court system.
Consumer Credit Bureau to Track and Score Consumers.
12. Until very recently, only the National Bank of Romania
tracked consumer credit, although only bad debts exceeding
approximately $6,800 were recorded. The Bank began
collecting this data in 2000 upon request of the IMF, which
was concerned about a dearth of statistics on outstanding
loans. In response to the growing demand for customer data,
last year a group of 27 financial institutions, representing
95 percent of the credit market, founded a first-of-its-kind
private credit rating agency. As of April 2005, this group
succeeded in compiling a comprehensive database of both
positive and negative customer information from financial
companies, insurers, leasing firms, telecommunications
companies, and debt collectors.
13. Credit providers who are members of the agency and have
agreed to its system of reciprocity can now request
information on potential customers categorized into three
groups: "good payment history", "bad payment history" and
"overextended". The agency is now working with foreign
scoring specialists to hone the current data base and
develop a scoring system based on three years of positive
and negative data. The success of this agency, as well as
announcements of competitors that may enter the market, have
prompted the National Bank to begin scaling down its credit
tracking operations. The credit bureau's initiative has
brought cries of protest from consumer protection groups
concerned about data privacy. In response, the Romanian
Parliament established a National Supervisory Authority to
oversee the proper use of personal data and passed
legislation conforming to EU data privacy norms.
.While Consumer Protection Concerns Grow
14. Econoff met with representatives of the Romanian
Consumer Protection Agency (ANPC) who expressed concern
about a lack of consumer credit education and need for data
protection. They fear consumers falling prey to predatory
lenders who sprinkle their contracts with unfamiliar
legalistic terminology and pressure clients to sign. The
agency also cited examples of unscrupulous lenders
stipulating penalties of up to thirty percent of the total
value of a loan for delinquent payers. Consumers are
generally uninformed about the pros and cons of credit
products and the elderly and young are particularly at risk.
Bankruptcy laws do not currently exist for the overextended,
although the agency was unaware of debtors being sent to
prison for nonpayment. Another concern of the ANPC is the
possible inappropriate use of and access to credit rating
scores. With this in mind, the agency is now focusing on
supervision of NBCI's and citizen education via television
and press. The ANPC pointed out the general lack of
consumer education on lending and admitted that their 42
offices have just begun to understand and appreciate this
15. To assist the process of consumer education, Econoff
organized a digital video conference (DVC) in May between
the RCPA and representatives from the Federal Trade
Commission to address consumer credit issues and explain how
the Fair Debt Collection Practices Act operates in the
United States. The RCPA greatly appreciated the session,
and US Embassy Bucharest plans to request additional funds
for a speaker program to target RCPA branch offices
throughout the country.
16. Romania is developing a thriving consumer lending
market which is so far remarkably stable in spite of the
country's dearth of clear legislation and consumer education
in this area. This market has fueled job growth in the
retail and construction industries and allowed relatively
low income Romanians to acquire needed housing and
automobiles, further fueling the economy. To date,
Romanians have handled debt prudently overall, partially due
to their cultural aversion to owing money, as well as a fear
of unforeseen future financial instabilities. The creation
of the credit rating agency will assist lenders identify the
overextended and steer them away from high risk individuals.
17. More troubling is the uneven legislation which caps the
amount of total loans extended by banks, but places no
restrictions on NBFI's, creating an uneven playing field.
Data privacy is also a concern, as is the lack of education
for young consumers on the healthy use of credit. Data is
currently being collected for credit scoring purposes,
unbeknownst to the general public, although the Consumer
Protection Agency has recently taken an interest in this