Home Credit Group, one of the largest unsecured retail lending specialists in eastern Europe, is pioneering the model in China and Vietnam. Writer Philip Alexander

When central and eastern Europe slid into recession in 2009, there were predictions that the consumer lending industry, introduced in the region only in the past decade, would fail its first major test. Instead, specialist lenders using merchant point-of-sale networks to finance purchases of consumer durables imported high-technology models of credit risk analysis and combined them successfully with knowledge of the local markets.

Home Credit Group, part of the PPF investment vehicle founded by Czech entrepreneur Petr Kellner and active from his home market, through Ukraine, Belarus and Russia to Kazakhstan, was one of those success stories. Consumer lending is in theory a high-risk, high-margin business, but the group's non-performing loan rates, especially in Russia, actually remained lower than the average for conventional retail banks.

"Incumbent players, and we have been at the forefront, have really aggressively managed credit risk on all aspects, from underwriting to collection. We are seeing extremely positive profit and loss effects from this action coming through," says Alexander Labak, CEO of Home Credit.

Mr Labak brings a long background in consumer goods to the job, working for pharmacy giant Johnson & Johnson before moving into consumer finance with MasterCard. Having fine-tuned an unsecured retail lending model for emerging market conditions, Home Credit is now looking at a venture that could alter the whole profile of the business - by moving into Asia.

China pilot

Exploring consumer finance was a logical step for the Chinese authorities, given their stated desire to rebalance the country's economy toward domestic consumption. As with most financial initiatives in China, the China Banking Regulatory Commission (CBRC) has approached unsecured lending in a cautious way, licensing just four entities to conduct operations under heavy supervision. Home Credit is the only purely foreign-owned player among the four.

"We received the licence, I would say, due to our honest and constructive engagement with the CBRC. We had a long-standing dialogue on how consumer finance might best be organised in the Chinese environment, and we had some input into its regulation. The lesson for us is that this engagement is recognised positively by the Chinese authorities," says Mr Labak.

To date, the ticket size for individual loans is small compared to Home Credit's other markets, so scale is essential. Mr Labak says Home Credit is the only player currently operating in more than one region of China, with a scalable industrial model ready to roll out, and he believes the business could begin breaking even from 2011.

While the potential of the world's largest population is clear, the operating conditions are tough. Mr Labak says there is no high-quality credit bureau to provide details on repayment records of potential clients, and high levels of internal migration make arrears collection difficult. In addition, most Chinese mobile phones are prepaid rather than on contract, removing another potential source of credit information.

Home Credit can draw on experience gained in Vietnam, where a two-year pilot scheme earned the company a full licence. Already a market leader in motorcycle finance, the group is rolling out consumer durable and general purpose cash loan offerings.

"We are in a unique position in Vietnam, because local competition does not have the skills to run a large-scale operation managing a lot of credit risk. Foreign competition has not been very strong, and a number of players withdrew during the crisis. The Vietnam government is managing access to the market through the licensing process fairly tightly. Like China, we see Vietnam as a strategically advantageous position," says Mr Labak.

Funding challenge

If consumer finance in China follows the trajectory of other markets that Home Credit has operated in, then the central challenge will be finding the funding to meet potentially vast demand. While the transition to deposit-taking has been successful for Home Credit in Russia, even in that market wholesale funding remains important. In China, regulations require financing to take place onshore. For this reason, the group has established innovative funding vehicles with China Development Bank and the Foreign Economy and Trade Trust and Investment Company.

But the sheer size of the opportunity could dwarf Home Credit's existing eastern European operations. There has been speculation in the Russian media that PPF might be preparing to sell its presence there to a major Russian retail bank such as Sberbank or VTB. PPF is staying tight-lipped, offering only a written statement.

"While it is not surprising that Russian and international banks may be interested in investing in Home Credit Bank, as a matter of policy PPF Group does not comment on such rumours," it says. "PPF Group and its shareholders are highly satisfied with the performance of the entire Home Credit Group and therefore plan to continue fully to support its development plans. PPF Group also underlines that Russia remains a priority market in its investment strategy."

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