Unsecured retail loans: risks and opportunities (summary)
Unsecured retail loans: risks and opportunities summary
In the case of non-secured consumer loans taken after 19 March 2020, the APR must not exceed the central bank base rate, plus five percentage points (currently 5,9%). Based on this rule several institution introduced unsecured loans having preferential interest rate.
We have made a non-exhaustive research about institutions have introduced these products as at on April 3. So far 4 out of the 11 institutions taken into account have come up with new products. According to our research, most of the institutions have not yet come out with preferential interest rate unsecured consumer loans, and all of the analysed institutions have temporarily suspended the sale of credit cards and overdrafts, typically until a new product is developed.
There are several questions about selling new consumer loans, including:
- The moratorium on payments does not apply to new disbursements, as it applies only to loans outstanding on 18 March 2020 24:00. As a result, it is beneficial that institutions offering such a product will be able to charge interest and fees on these loans as early as 2020.
- The banks have to think about the conditions of the loan. Most banks provide the preferential interest only for the legally prescribed period (currently by 31 December 2020), but there are also those who, maybe for business policy reasons, provide this interest for the entire term.
- The target group of the product should also be considered with regard to the risk costs. According to the latest statistics of MNB, the average interest rate on unsecured retail and non-financial corporate loans disbursed in February 2020 was 13.19%. By contrast, the APR ceiling is less than half of that, which significantly limits the wriggle room available for risk costs compared to previous products, so it is particularly important to keep risk costs low.
- In the current situation, there is a high degree of uncertainty, which makes it more difficult to apply effective credit assessment and credit monitoring as in the past. There are many aspects, for example, on the one hand, the stability of customer revenue is particularly important, and on the other hand, the data bias effects of a payment moratorium need to be addressed in the behavioural models.
Based on the above, we believe it may be commercially viable to sell preferential interest rate unsecured consumer loans, and new customers (especially due to the small number of players) may be reached, but caution should be exercised to limit the risks. It is necessary to analyse its profitability with appropriate methods, and it is particularly important to identify the appropriate target group and conditions and to develop and apply effective credit assessment models in the current situation. In developing credit assessment models, particular emphasis should be placed not only on past data, but also on the debtor's future prospects, for example by assessing the labour market sector and other economic prospects.
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