MICROFINANCE MARKET: 2021 OUTCOME AND DEVELOPMENT PROSPECTS

In the meantime, the high level of borrowing and the aggravation of geopolitical risks in 2022 force the Bank of Russia to draft further restrictions on the limit of the credit total cost and the amount of indebtedness. New restrictions will encourage microfinance institutions to put in place a more careful choice of clients and develop long-term financing tools.

A total of 1,288 microfinance organizations (MFOs) operate in Russia, including 37 microfinance providers (MFPs) and 1,251 microcredit organizations (MCOs).[1] The level of concentration in the microfinance market in 2021 demonstrated an uptick, returning to the indexes of early 2020 and remaining at a relatively low level compared to the banking sector: the top 50 concentrate 73%, the top 100 concentrate 85% of the total MFO portfolio.

In 2021, the growth of key performance indicators of microfinance organizations continued, the total loans originated in the past year amounted to Rb624 bn, the total portfolio at the end of 2021 reached the value of Rb328 bn, an increase amounted to 31.6% for the year. The last year financial performance improved markedly, the net profit of MFOs in 2021 surged by 85% compared to 2020 and, according to our estimates, amounted to around Rb30 bn. About 90% of the cumulative growth is accounted for by 32 largest microfinance organizations, most of which showed 100% growth.

The increase in the total portfolio is primarily due to the rapid development of the online loans to individuals’ segment, as well as a shift in focus of many large lenders towards longer-term products.

Owing to the active digitalization that began during the pandemic, the portfolio and volume of issued online microloans soared by around 100% last year. Overall, over 70% of all micro-loan agreements were concluded remotely during the year.

The share of long-term Installment loans (including POS-loans[2]) in the structure of disbursements hit the maximum for the entire history of the market. The introduction of digital technology has increased the share of online loans in the long-term segment.

The share of loans issued to SMEs in the total volume declined – from 24% to 19%. In general, the demand for loans from small and medium-sized businesses remains at a high level.

Loan rates for MFOs did not change much during the year, as shown in Fig. 1.

* Here are the daily interest rates.

Fig. 1. Share of contracts concluded in a certain interest rate range* in 2020–2021

Source: Bank of Russia website. Trends in the microfinance market in 2021. URL: https://www.cbr.ru/analytics/microfinance/mfo/mmt_2021/

The quality of portfolios compared to 2020 has not changed in general. An uptick in the share of NPLs with 90+[3] days past due in MFOs' portfolios was recorded, while the level of "short-term" past due debt (for loans issued in the current quarter) declined. On average, the NPLs with 90+ days past due regarding online companies is higher than that of offline companies.

The share of NPL 90+ days past due at the end of 2021 was 29.5% (+0.6 p.p. relative to 2020). The stable level of arrears was largely triggered by the sale of debt: the volume of cession in 2021 amounted to about 3% of the total portfolio. During 2021, 220 MFOs sold their debt (about 18% of the total number of MFOs), but the bulk of the debt (over 60%) belonged to a small number of MFPs, classified as large and medium (about 30 companies). The level of overdue debt depends on the debt load of the borrower – the share of contracts with PDL[4] over 80% in the structure of the aggregate consumer portfolio accounts for 47%.[5]

During 2021, the structure of funding of microfinance organizations underwent significant changes: the share of funds raised from individuals was 16% (a decrease of 6 p.p. over the year), funds raised from legal entities (excluding credit institutions) - 39% (a decrease of 14 p.p.). In the meantime, the share of funds raised from banks increased - in the total structure of raised funds it reached 45% (up by 20 p.p.); in absolute terms the volume of bank participation went up by 2.5 times. The number of MFOs that attract financing from banks remained stable since the beginning of 2020 (around 40).

On average, the ratio of raised funds to the volume of issued loans during 2021 was in the range from 14 to 21%, i.e. the MFO market was more focused on working with their own funds.

Due to the aggravation of the international situation and increased sanctions pressure on Russia, the microfinance market will undergo serious reforms. Back at the end of 2021, the Bank of Russia planned to tighten regulation of microfinance organizations, including putting in place of criminal liability for illegal lending. Since the beginning of the year, the number of citizens' complaints against MFOs has surged by 74%.

The planned changes in the legislation regulating consumer lending will contribute to further transition of companies from the PDL to the Installment segment, the tightening of MFO scoring models and the departure of inefficient participants from the market. In particular, the draft law submitted to the State Duma proposes to put in place the following restrictions:

– Reducing the limit on the full cost of credit from 1 to 0.8% per day (from 365% to 292% per annum);

– Reducing the maximum amount of payments that MFOs can demand from a debtor from 1.5 to 1.3 of the loan amount (in addition to the original loan amount)[6].

The draft amendments to limit the marginal rates of consumer loans was criticized in the Duma – there were proposals to reduce the rates to 0.5%. According to market participants, it may be unacceptable for MFO[7]: profitability will go into negative territory, for many of its participants work in this market will become unprofitable, a large number of players will abandon it, the remaining will try to change the business model.

In the long term, the microfinance market is set to undergo major changes due to digital transformation. New regulatory norms of the Bank of Russia related to the reduction of maximum rates and tightening of loan scoring will force businesses to look for opportunities to reduce costs, otherwise it will be difficult to avoid negative profitability. A way out of this situation may be the emergence of new, primarily large fintech companies capable of offering technological solutions to the problems, such as loan scoring using machine learning and predictive analytics instead of increasing the interest rate on the riskiest customer categories. The implementation of Bank of Russia projects in the digital sphere (biometric identification, marketplace) will also contribute to the gradual transformation of the microfinance market.

[1] According to RF CB data as of 05.04.2022.

[2] POS (point of sale) – a type of consumer credit issued directly at retail outlets.

[3] NPL (non-performing loans) – the volume of loans in the bank's loan portfolio for which the terms of the loan agreement are not met. As a rule, loans fall into the NPL after they are overdue for more than a certain period, usually 90 days.

[4] Debt load ratio (DLR)– the ratio of all payments on credit obligations of the debtor to its income.

[5] On loans of up to Rb10,000 MFOs may not calculate DLR.

[6] URL: https://www.cbr.ru/Collection/Collection/File/39665/review_mfi_21Q3.pdf

[7] URL: https://www.rbc.ru/newspaper/2022/02/17/620cc9979a7947ee36fc8013