Responsible Lending to Lower Income Groups - Providing access of low income groups to housing finance

Transcription

1 Responsible Lending to Lower Income Groups - Providing access of low income groups to housing finance World Bank/IFC Conference Global Housing Finance after the Crisis Washington D.C., May Rainer Hartel Principal Financial Sector Specialist KfW Development Bank Financial Sector Competency Centre

2 Outline 1. Responsible banking What does this mean for banks and their clients? 2. Enhancing access to housing finance developing Armenia s mortgage market 3. Enhancing access to housing finance through unsecured loans experience of the Pro Credit Group 4. Conclusion

3 1. 1. Responsible banking - business strategy Sound business model - building up deposit, cash account and payment services to mass clients lending to enterprises and households graduation of clients Philosophy - Building a long term partnership with banking clients Know your customer and customer fairness policies - meet and understand client Minimize risk exposure based on debt service capacity (collateral secondary) Transparency of costs Sustainable returns Responsible banking is people intensive (staff training, customer interaction) Pricing of cost is relatively high compared with standardized mass products Excellent customer service essential to assure loyalty

4 1. 2. Responsible lending for housing - product design and customization Cash flow and debt service capacity Understand cash flow from cash and deposit account relationships Split investment in smaller units to match lower cash flow capacity Clients with stable income Reduce risk for borrower through Reasonable LTV ratios - LTV above 75% may be excessive Avoid currency mismatch between borrower s income and denomination of the loan Offer fixed interest rates However banks may not be able to refinance required tenor in local currency and pass that risk exposure to the client.

5 1.2. Pre-Crisis Survey - Many clients did not understand implications of exposure to foreign currency

6 2. Developing Armenia s mortgage market Armenia - Development of the Mortagage Market 3.0% 100 in % of GDP 2.5% 2.0% 1.5% 1.0% 0.5% in Billions of ARM Dram 0.0% Mortgage Loans in Dram bn Mortgage Loans in % of GDP

7 2. Armenia - Significant benefit especially for medium income households Loans denominated in local currency 20% 69% 62% FIs offering mortgage loans FIs offering tenor of >10 years FI using minimum quality standards Significant market development benefits Minimum quality standards introduced and accepted by the market Attractive revolving resource (currency, tenor and fixed interest rates) through external funding Financial market share doubled from 6 to 12 % in only 2 years Number banks offering morgages tripled Average LTV improved to 36% However market penetration is still low (2,7% of GDP) Average loan size at nearly 20,000 USD (5 times GDP per capita)

8 3. Housing finance through unsecured loans The case of Pro Credit Holding - Introduction Pro Credit Holding Based in Frankfurt, licensed as bank under German law controls and supervises 21 Procredit Banks Small Business focus 89% of loans < EUR 10,000 Regional Focus Eastern Europe, Latin America Africa Loans Deposits EUR 3.3bn EUR 3.0 bn PAR (>30d) 2.7% of loans CAR 16% Staff 19,250 Branches institutional shareholders include IPC (30%), KfW (16%), DOEN (16%), BIO (7%), FMO (6%)

9 3. Pro Credit - Housing finance through unsecured loans 90 PC Banks Operating environment - domestic credit in% of GDP Financial sector sophistication no condition for market entry Business model responsible neighborhood banking Emphasis on savings mobilization and lending to MSME 50 Housing loans 40 about 5% of group s loan portfolio 30 92% unsecured mostly to salary recipients 20 Focus - housing improvement 10 rapid growth in post conflict situation 0 Kosovo Serbia Bulgaria Albania Bosnia and Herzegovina Romania Macedonia, FYR Ukraine Moldova Armenia Georgia Ghana Mozambique Congo, Dem. Rep. of Bolivia Ecuador El Salvador Honduras Nicaragua Colombia integral part of new banks strategy

10 3.1 Pro Credit Group differentiated outreach adapted to local market conditions - strong deposit base supports housing portfolio PC Banks Housing loans (EUR mn, 2008) PC Banks Housing in % of total portfolio PC Banks - Loan to deposit ratios 80 25% 300% % 250% % 200% 150% % 100% 10 5% 50% 0 Kosovo Serbia Bulgaria Albania Bosnia Romania Macedonia Ukraine Armenia Georgia Ghana Mozambique Bolivia Ecuador El Salvador Honduras Nicaragua 0% Kosovo Serbia Bulgaria Albania Bosnia Romania Macedonia Ukraine Armenia Georgia Ghana Mozambique Bolivia Ecuador El Salvador Honduras Nicaragua Kosovo: largest bank in the country and prime mover in post conflict Serbia: Largest bank in PCGroup, salary payments through current accounts common Macedonia and Armenia: new banks who integrated housing in their business strategy Mozambique: PC Bank is one of the few banks that offer unsecured housing finance 0% Kosovo Serbia Bulgaria Albania Bosnia Romania Macedonia Ukraine Armenia Georgia Ghana Mozambique Bolivia Ecuador El Salvador Honduras Nicaragua

11 3.2 PC Housing Finance average small loan size even in middle income economies 4.5 PCBanks average housing loan and deposit size (2008) in EUR 1000) Adjusted to low medium income cash flow High housing loan portfolio quality post-crisis PAR >30d not exceeding 4% 3.0 pre-crisis PAR >30d about 1% Eastern Europe Exclusively home improvement High post conflict demand Many borrowers need limited funds for completing home improvement 0.5 Mozambique - micro housing improvement - Kosovo Serbia Bulgaria Albania Bosnia Romania Macedonia Ukraine Armenia Georgia Ghana Mozambique Bolivia Ecuador El Salvador Honduras Nicaragua El Salvador successful pre-cursor savings and loan product deposits housing loan

12 4. Conclusion Standardized mortgage lending processes valuable for improving outreach. Low-middle income households benefit from unsecured lending Long term customer relationship is essential Customers graduate from depositors and holders of cash accounts to borrowers Individual debt service capacity is key Neighborhood customers are generally good credit risk Universal banks can mitigate housing finance risk (credit and term risk) through exposure limits and portfolio diversification Issuing loans in foreign exchange has proven risky for the banks and borrowers. For low income households additional support is required to improve access to housing