What are the latest figures showing the decline in Russian’s credit health really telling us?
As shown in the data released today by FICO and the National Bureau of Credit Histories, Russia’s leading credit bureau, Russian borrowers’ credit repayment delinquencies rose again in July 2013. After a year and a half of rising delinquencies, the country’s FICO® Credit Health Index (a measure of the percentage of loans and credit cards delinquent by 60+ days) stands at 104 points, down from 115 in January 2012, to stand at the lowest level since January 2010.
While the decline in the index is real, the pattern may not be what it seems, according to my colleague Evgeni Shtemanetyan, who directs FICO’s operations in Russia. He note, that lenders are granting more unsecured consumer loans and credit cards, which have higher delinquency rates. In fact, the delinquency levels on the types of loans that dominated lenders’ portfolios before — such as auto loans — are stable or decreasing.
So the increase in delinquency doesn’t mean the patient is sick and getting sicker. In fact, it’s a sign of healthy credit growth. In a market with new “credit consumers,” the trend is to first focus on acquiring health and security, with products such as auto finance and mortgages. As those demands are satisfied, the need changes to “indulge yourself” with more unsecured credit to support travel and entertainment or compulsive buying. This has been observed in many markets, and there is no reason for panic.
All the same, risk managers need to make sure this healthy growth doesn’t turn into an unhealthy bottom line down the road. Proper origination practices — with fraud control at the application stage, limit management and behavior prediction — are a must. Don’t forget that these customers are not credit experts, they are credit newcomers. Delight them, prepare to act as a credit coach, use mobile contacts to inform them and deploy pre-collection techniques to help them avoid trouble.
And, above all, savor the moment. In FICO’s experience, this is a unique moment in a credit market on the road to maturity. It’s like watching your children grow — you will never have this moment again.