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INVESTMENT: Giving Credit
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Michal Skocil on how Home Credit is lending to Tianjin’s consumer boom 

By Mark Gao

altChina’s purse strings are opening, and Home Credit is helping that process along. The leading foreign provider of consumer credit, Home Credit, is consolidating its fast growing Chinese operations in Tianjin, with several hundred back office staff to be based in the city’s business district over the next two years. Head of Operations in China, Michal Skocil, says Home Credit hopes to bolster strong growth across the country by securing a national operating license as well as permits to finance other product categories, such as furniture. The firm’s current customers are mostly purchasers of electrical appliances and mobile phones at Tianjin outlets of leading appliance retailer Suning.

Home Credit is part of the Prvni Privatizacni Fond (PPF) financial services group, founded in 1992 as the brainchild of renowned Czech financier Petr Kellner, to cash in on the privatisation of then Czechoslovakia’s socialist economy. Today, Home Credit operates in seven countries.

Tianjin is one of the cities where the Prague-bsaed firm is licensed by the China Banking Regulatory Commission (CBRC) to offer loans: it partners with Suning to provide credit to locals purchasing electrical appliances. Shoppers at Suning may have noticed the firm’s presence, announced by posters and a desk at each checkout. Home Credit started looking to China in 2004 and after a considerable amount of time doing market research, the company opened an office at the Beijing Lufthansa Center. In 2007, Home Credit started its business in Guangdong and Chinese regulator granted Consumer Finance license to it in Tianjin.And up to now, Home Credit has branched out to 40 cities.

Over 300 of the firm’s 5000 staff are now based in Tianjin, and with the business growing between 10% to 15% a month, the outlook for further expansion looks good. Home Credit’s average loan is CNY 2,200, explains Skocil. He says that by offering small, point-of-sale loans, Home Credit is “not competing with banking products… we’re servicing a completely different segment.” He adds that by helping consumers make their purchases, the firm is assisting policymakers achieve the goal of shifting the Chinese economy away from exports towards more domestic consumption.

Home Credit loans have been a hit with upper and lower income brackets. “We target different groups of consumers: if you go to Tianjin, you see a difference in downtown, suburban, or rural store purchases. "We are in both,” says Skocil. Mobiles, computers, and electrical bikes are the top three items which the firm finances in Tianjin, the latter being predominant in rural areas.

Cost of credit

Home Credit charges 30% to 35% for credit. Skocil explains a typical purchase; “The customer looks at the phone in the shop window and he can’t afford it. He looks at installments. The phone will cost CNY 2,000, or 2,300 or 2,400 by installments. But the extra payment in a mortgage is much greater over 20 years so you can’t compare it with a mortgage.” Typical Tianjin mortgage credit rates range from 4 to 5%.

Home Credit customers shopping at a Suning store in Tianjin fill out paperwork and can expect a decision on their loan application within 30 minutes – the time it takes Home Credit to verify the customer’s ID and credit history. Also, a down payment of 20% is required of customers for each purchase.

Home Credit overcame initial skepticism about the viability of its business model in China. “In 2006 we kept hearing ‘Chinese people don’t borrow money’.” Six years later, the firm has one million customers in China, 65,000 of them in Tianjin. “If you came to China 15 years ago you’d hear Chinese people don’t need cars but look today, you can’t drive because there are so many cars in Beijing!”

Tianjin retailers have embraced the Home Credit concept since it drives sales. “It’s easy to sell the idea to retailers… This is valuable for them, as some consumers wouldn’t otherwise be able to afford it.”

Gaining the trust of regulators has been crucial to the firm’s success in China. “It takes time and trust... Small local companies were offering forms of consumer credit before the firm’s arrival here, but not necessarily in a transparent way. Thus is did more damage to the industry.”

Competition

Today Home Credit has several local competitors. While the state-owned banking sector prefers to offer large loans to the state industrial sector, municipal lenders in Beijing and Chengdu have both entered the consumer finance sector with third party partners. Indeed, Home Credit gets some of its own domestic funding from Chinese banks.

Regulators in Tianjin were open to the Home Credit model, partly because the city has a track record of piloting forms of finance such as venture capital and funds. “We were trying to find a way, so we talked to the regulators, and people in Tianjin, about doing something new.” Skocil said the firm found in Tianjin the “proper mindset” and local support, “hence we applied for the license there.”

Home Credit also has the advantage of a long track record globally. “When regulators look at us they see the biggest privately owned company in Central and Eastern Europe. They see our core competencies and one of them is to underwrite risk.”

The right people

Finding good local talent has been crucial to Home Credit’s success in China, where consumer credit is a relatively new concept. “We identified key people to manage processes and analyse data. We have to be very careful. China is very big, thus wrong can be very wrong.”

It’s also crucial to have Chinese people running departments and marketing. They know how people here think “you can’t just copy-paste from somewhere else directly to China.” Research and cultural awareness are equally crucial. “The mindset in China is you don’t borrow money. For instance, in the case of a young couple, you have to understand who makes the spending decisions, and how you approach it.”

Consumer credit in China is a youth-focused business. “Look at our customers, more than 80% are less than 35 years old. Over 40's in China are not typical consumer finance customers, but as the population ages, the under-35 year olds in 10 years won’t stop borrowing. With more education about consumer finance, this will increase more.”

As for bad loans, Skocil says these are less than 5% of total lending. Also, he stresses, customers who don’t pay on time are not necessarily bad loans. Some of the negative feedback about consumer credit comes from people who simply don’t want to repay, “and this you’ll see everywhere”. Given there’s lots of small transactions involved, finely calibrated processes are vital. “At certain dates you call the customer and then remind them payment is due on a certain date.”

China’s size and a more fragmented retail scene make the country a slower growth story than Russia, where Home Credit partners with Eldorado. Over 40% of goods are bought on consumer credit in Russia, where as at Suning, it’s not so big. Penetration is also higher in Russia, given Home Credit has access to hundreds of retailers nationwide. You can’t do this when in one city there are 1,500 Suning outlets and you are in ten of them.

An advantage of China is that there’s not much ID fraud. Also, Chinese ID's are well protected against faking, “it’s very hard to alter compared with other markets like Russia.”

Changing pattern of purchases

It’s obvious that Home Credit will expand its business by growing the categories of products it finances. Furniture financing, for instance, will possibly come online in the next year. Consumer credit firms may also be ultimately permitted to do automobile financing, predicts Skocil. Two years ago, telephones accounted for 100% of Home Credit financing in China; now it’s 60%, says Skocil. In the company’s top market, Russia, the top three categories for loans are medical care, travel, and education.

Home Credit will no doubt be encouraged by signs elsewhere that China is liberalising the finance sector in order to stimulate the economy. A pilot program to begin in April to privatise the finance to business sector, suggests China is allowing private lenders and microfinance schemes to operate as an alternative to the state-controlled banking sector which continues to focus lending on the state sector. Confined for now to the famously entrepreneurial southeast coastal city of Wenzhou, the pilot allows registered private lenders to operate loan companies targeting small and medium-size enterprises.

The Chinese market for consumer finance will be huge, predicts Skocil. “After a year in Tianjin we have grown by more than twofold. I don’t want to grow faster.” Skocil believes China will be a top-two market for Home Credit in two years, “if we get national rollout.” Profitability is a long-term project and will come when the company is at scale. You need a big investment infrastructure…while making absolute profit, the loans are small, so you need scale. But also you can’t give big loans if they can’t be paid back. It’s very important that this is a responsible lending concept, so we have to try to help the customer make the right decision.”


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