O. Kuzina, The State University-Higher School of Economics Credit card market in Russia

1. O. Kuzina, The State University-Higher School of Economics Credit card market in Russia

2. Market statistics on bank cards • By the end of the first quarter 2005 • Number of cards • 43 mln cards, number of cards per capita 0,4; 36% of adults have bank cards • In 2001-2004 annual growth rate of the number of bank cards was 50% • VISA is in the lead with 18 mln cards, • MasterCard - 11 mln • Number of transactions • 176 mln, 90% of transactions are cash withdrawals • Volume of transactions • 19 bln. dollars

3. Types of plastic cards available on the market • Prepaid cards • Debit cards without overdraft • Debit cards with overdraft • Revolving credit cards The term ‘credit cards’ is here used for 3 and 4 (debit cards with overdraft and revolving credit cards)

4. The number of credit cards Number of credit cards - 2 mln, difficult to estimate, some of them are issued but not activated

5. Which banks issue cards in July 2004-Jan. 2005 The largest plastic card issuers • Sberbank (one third of the market), • The Bank of Moscow, • Gazprombank, • Vneshtorgbank, • Alfa-Bankand others One third of all plastic cards are issued in Moscow region. In the period of our survey only 30 banks did issue “credit cards” (out of 1500 banks in Russia) Only 2 banks from them were not Moscow banks. The biggest state bank Sberbank still have not issued a revolving credit card.

6. Growth of credits given to individuals,1998=100% In 2005 volume of credit to individuals was almost 22 bln of dollars, 6 times bigger than in 1998

7. The collected data Secondary data – from the Central Bank and Goskomstat Primary data - 13 interviews with bankers from different Moscow banks Either heads of the departments of risk management or vice-presidents of those banks The period of interviewing:July 2004- Jan.2005 Non-random sampling (self- selection) from those 30 banks which did issue credit cards at that time. However, we have managed to get a variety of banks in our sample.

8. Sample description

9. The procedure of applying for a credit card • Application • Questionnaire (1-2 pages) • Documents • Passport and any other document • Official income confirmation from the employer • Other documents (a copy of work-book, or certificates of accumulated wealth) • How long does it take to make a decision and issue a card – from 20 min (Deltabank) up to 10 working days in Citibank

10. What are the credit limits? In commercials banks advertise the following limits: • Citibank - 25 000$ • Bank of Moscow, BIN bank, MDM-bank, Alfa-bank, Impexbank, Raiffeizenbank, Rosbank – up to 10 000 $ or euro • Deltabank, Zenit – up to 3 000$ • Masterbank – up to 5000$. However, it is very difficult to get these limits. It depends on the level of personal income of an applicant (white as well as grey). An average income in Moscow is 700$. Revolving credits - 200% of monthly incomes Debit cards with an overdraft - not more than 100% (50-90%)

11. How much does it cost for a consumer? Annual percentage rate – may be more than 50%, and banks try not to make it always clear for their clients .

12. The main problem - Uncertainty How to differentiate who is going to be a good client?

13. What are possible solutions? • To give cards to regular customers – the majority of population do not use banks • To ask for a deposit – money deposit does not make sense, non-financial pawns are not interesting for banks which are not pawnshops • Guarantors – who is going to guarantee the guarantors? • To implement different restrictions (small credits for small periods of time) – high costs per credit, not efficient • Good borrowers are paying for bad ones – the problem of “adverse selection” and growing rates of bad loans in the long distance

14. Strategies of credit checks in Russian banks and pressures of the market • All banks in our sample aim their credit checks to minimise defaults • The main methods: expert judgments, systems of rules, point systems usually in combination • Scoring is not usedthough some banks consider their point systems to be scoring. Banks have not got enough statistical data for real scoring on their own • The main aims of credit card program are: • either providing credit cards for their clients • or increasing the market share • Those who want to increase their market share employ the strategy of high APR. • However, high rate of return attracts new banks. The growing competition reduces the APR and the periods of making the decisions, but not the risks.

15. Why overcrediting may occur in Russia? • If good borrowers compensate for bad ones banks do not have incentives to collect debts – cheats are not confronted • In the absence of credit bureaus banks do not have information about other present credit obligations of applicants. The better the applicant’s characteristics are the higher his/her chance to get credit – the problem of overcrediting of good clients • When the real APR is 1.5 higher than advertised borrowers can reject to pay back since borrowers feel themselves cheated

16. Why do credit bureaus not function? • The law on credit bureaus was passed in December, 2004. It was supposed to take effect in September 2005, but failed. • What are the main obstacles? • One big player (Sberbank) • Banks do not trust each other • Borrowers do not trust bureaus. Only 30% of borrowers agree to send their credit information to bureaus, the rest either refuse (40%) or do not know (40%) (Survey, September 2005) • Russian banks do not want foreign bureaus to play the leading role on the market

17. Conclusions Market is now growing and many banks are focused on increasing market share. The strategy of “good borrowers paying for bad ones” which in the initial stage was successful has becoming outdated since the competition for market share forces banks to reduce the APR. The attempts of a single bank to hold on to high APR aggravates the problem of adverse selection and results in the growth of defaults. The scoring methods of credit checkscan be utilised if the institute of credit bureaus becomes implemented. However, this process is delayed due to the low level of institutional trust among banks and market concentration. If nevertheless the institute of credit bureaus begins to work it will be one of the rare examples when rational calculation which is based on trust in institutions rather than individuals or networks finds its way into Russia. Otherwise the overcrediting of households seems to become unavoidable.