With overdraft allowances, express crediting by card is practically identical to express crediting for purchases – the very riskiest form of crediting
Photo: Roman Yarovitsin
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Banks Tighten up Credit Requirements
Banking regulators have gotten their way. After they made a number of requirements for retail banking stricter, banks are beginning to be more selective in their crediting. Last Friday, VTB-24 bank announced that it will stop providing express credit on Visa Instant Issue cards with permitted overdraft. Analysts expect other banks to follow suit. In Moscow and Moscow Region, VTB-24 will stop issuing express credit this month. No explanation for that decision was given.
Experts think the bank's decision was due to the high risks associated with express crediting. With overdraft allowances, express crediting by card is practically identical to express crediting for purchases – the very riskiest form of crediting. “It's a risky product because there is no system for evaluating the quality of the applicant,” commented Oleg Skvortsov, deputy chairman of Absolute Bank. “The Visa Instant Issue card is given to the customer almost instantly and the only evaluation of the client's creditworthiness is made from databases available to the bank at that moment. Therefore, the limit on that type of credit is often very minimal.” In the case of VTB-24, that limit is 60,000 rubles.
VTB-24 is the member of the VTB group that specializes in According to Dengi financial weekly, as of October 1, 2006, the bank ranked fifth for consumer orientation, behind Sberbank, Russian Standard, Rosbank and Uralsib Bank. At that time, VTB-24's credit profile consisted of 27 billion rubles. VTB-24 bank grants express credit for consumer needs in the form of overdrafts on Visa Instant Issue cards issued for one year. That card differs from usual credit cards in that the application for it is approved in 30 minutes and there is no initial deposit required for it. Therefore, the interest rate is comparatively high (29% annually) and it has a high commission for the issuance of the card (550 rubles) and service fees (2-4% for cash advances).
Banks have historically covered high-risk credit products by applying high fees. But the changes in Federal Consumer Rights Supervision Service (Rospotrebnadzor) rules, combined with pressure through the courts from borrowers, have led to a lowering of the fees, thus in creasing banks' risk. Central Bank pressure on banks to reveal true interest rates will reduce demand for risky credit products.
Analysts say that, as a result of these factors, banks with a significant resource base and access to long-term funding will want to reconsider their activities. “Express crediting is becoming an unprofitable business for bank not only because of the risk of default, but because of the political element too – the tightening of the rules on all sides by state agencies,” noted Rusrating analyst Viktoria Belozerova. Dmitry Solodov commented that “The market is moving toward more civilized forms of crediting, such as the classical credit card.”
Svetlana Dementyeva
All the Article in Russian as of Mar. 12, 2007
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