Russian Debt Collectors Put On a New Face

More and more Russians are borrowing -- which means an increasing number of people are not paying back their loans.

That's where a man like Yevgeny Bernshtam comes in. Bernshtam's Sequoia Credit Consolidation is one of the two Western-style companies which set up shop within months of one another last year in anticipation of mounting unpaid loans.

While debt collection in Russia was once associated with broken kneecaps and cigarette burns, both Sequoia and Financial Debt Collection Agency, or FASP, are using more subtle methods -- from surprising debtors at their workplace to appealing to their parents.

"Our work has nothing to do with tough guys carrying baseball bats," Bernshtam said. Developing a "civilized" market for dealing with defaulting creditors is the common, self-proclaimed goal of both companies.

In the coming years, on the back of a growing economy and rising income, retail lending is expected to continue growing at spectacular rates.

Consumer loans currently equal to less than 2 percent of the country's economy, compared with 72 percent of gross domestic product in the United States and 51 percent in Western Europe, said Alexander Khandruyev, head of Banking Finance Investment consulting group and first vice president of Russia's Association of Regional Banks. The Association of Russian Banks is slightly more optimistic and estimates that consumer loans already account for 2 percent to 4 percent of the country's GDP.

Khandruyev, however, added: "Considering the current rate of growth in consumer lending, [individuals' total debt] is likely to reach 20 percent of the country's GDP in three years."

Last year alone the volume of consumer lending jumped 50 percent compared to 2003, reaching 616.5 billion rubles ($22 billion), according to the Central Bank's figures.

As an increasing number of people choose to live on borrowed means, market watchers warn that the good track record of borrowers will get muddled.

"The consumer credit boom will unavoidably lead to an increase in the number of bad credit," said Alexander Gorin, partner and managing director of Accenture in Russia.

Experts estimate that 10 percent to 15 percent of all consumer loans currently go into default, but banks cover their losses by charging higher interest rates, Khandruyev said.

Building on Western experience, Sequoia and FASP use computer systems to find what they say is the most effective, legal way of convincing forgetful borrowers to pay up.

The system allows collectors to segment all debts they are trying to recoup by the loan's size, its time in default and various borrower characteristics, and suggests the best method for retrieving the creditor's cash, said Daniel Zelensky, Russia and CIS region manager for Experian-Scorex, which built the system for FASP.

"It's often about finding a painful callus that we can step on," said Yelena Dokuchayeva, Sequoia's general director, explaining the rationale behind the agency's work.

"For one segment, a phone call is enough, while others should be taken straight to court," said Dmitry Belavin, deputy director of financial services at Accenture, which provided Sequoia's IT system.

Telephone conversations, letters and visits to the debtor's workplace are among the tricks both agencies use to get borrowers to repay. FASP's consultant Alexander Morozov said that phone calls to the borrower's parents had also proven effective.

Sequoia collects about 60 percent of the debts it takes on, Bernshtam said, and both FASP and Sequoia are already working with over $10 million debt assets each. "Banks do not risk anything. They've already lost the money when they hand over the [problem] debt," Bernshtam said.

Sequoia and FASP charge commission only on the funds they recoup. The fees begin at approximately 25 percent, but vary according to the loan's time in default and other factors.

The business of Sequoia, FASP and their likes can be expected to continue blossoming given that collecting meaningful data about borrowers' track records in Russia remains difficult.

Credit bureaus, which lower lending risks by collecting and sharing individuals' credit histories and whose services are used by every major bank in the West before extending individual loans, will not become legal in Russia until this summer.

However, old habits die hard, and many local companies operating in the same sector remain skeptical about the tools of Sequoia and FASP. Sticking to the proven methods -- molded in the days of infant capitalism of the early 1990s -- remains the best way to accomplish the task, they believe.

"No computer system can compete with the 'human touch,'" said Sergei Rakhmanin, general director of RosBusinessActive, a company with over nine years of debt collection experience.

RusBusinessActive uses psychological pressure and "a wide range" of other tools to recoup approximately 80 percent of debts with which the company works, Rakhmanin said.

"Our goal is to make a debtor want to pay back," Rakhmanin said, declining to provide further detail on the company's methods. He stressed, however, that none of them are illegal. "Some conflicts are solved with one phone call," said Andrei Sorokin, RusBusinessActive's deputy general director.

Perhaps the knowledge that the company once specialized in preventing hostile takeovers in the mining and metallurgy industry -- a notoriously dangerous occupation of the 1990s -- is enough to convince bad borrowers to reform.

While consumer lending remains in its infancy in Russia, both RusBusinessActive and the likes of Sequoia and FASP can be expected to operate successfully retaining their separate client base.

The Western operators do not set a minimum amount for debts they retrieve. The majority of debtors they encounter are members of the growing lower middle class. "Inexperience with financial tools often leads them to be late with payments," FASP's Morozov said.

Local institutions have been cautious in embracing the new debt collectors' services, Sequoia's Bernshtam said. "The first to begin working with us were foreign banks," he said.

Banks remain the largest part of the client base for both Sequoia and FASP, which also work with insurers and businesses outside the finance sector.

RusBusinessActive, meanwhile, appeals to a very different client base and would not bother with debts under a couple of thousand dollars.

Some banks avoid debt collectors altogether and prefer to deal with problematic debtors in-house.

"It's possible that with market growth, the need to cooperate with outsourcing agencies will emerge," said a spokeswoman for Home Credit bank, which lent 19,508 million rubles ($698.7 million) in loans last year. "For now, however, the bank can manage with its own resources," she said.

Borrowers were late in repaying 0.08 percent of the bank's total credit portfolio, according to Home Credit's June 2004 figures, but the bank's internal collections department recovered 93 percent of all debts that were late, the spokeswoman said.

"So far, there were no unresolved cases [concerning bad faith borrowers] in the bank's history," said Alexander Koloshenko, head of retail banking at Raiffeisen that also only uses an internal collections department.

The rate of late payments was less than half a percent of the total credit portfolio at Raiffeisen, which lent $375.25 million to individuals last year, Koloshenko said.

Nevertheless, Sergei Donskoi, an analyst with Troika Dialog, believes that the debt collection business has great potential. "As the market becomes more saturated, [defaulting borrowers] may cause problems for certain banks," he said.

RusBusinessActive's Rakhmanin said that as long as getting debt payments on a court order remained difficult, he would not get worried about competition from new collection agencies."There will be enough room in the market for everyone," Rakhmanin said.