The Polish personal loan market

At the end of last year the level of customers’ debt in respect of personal loans amounted to almost PLN5bn (EUR1.16bn). This amount doesn’t seem excessive and corresponds to less than 3 per cent of the total value of bank customers’ liabilities due to consumer credit (PLN183.4bn). According to data from the Credit Information Bureau (BIK), in 2018 this form of financing was used by more than 570 thousand customers, who took out 2.7 million loans for a total amount of PLN7.2bn. Personal loans are mainly used by individuals (78 per cent), while other entities taking advantage of this type of financing include micro- and small enterprises.

Personal loan companies complement banks’ activities by providing access to financing to households and small businesses with lower credit ratings. According to a report of the Centre for Strategic Thinking, this sector employs 20 thousand people working in more than 400 registered personal loan companies, but the market share of the five the largest ones reaches 70 per cent. In the years 2016-2017, the sector of loan companies paid approximately PLN140m per year of corporate income taxes and approximately PLN20m per year in respect of the so-called banking tax.

The personal loan companies utilise three basic forms of customer service. The model based on home visits still dominates (it accounts for approximately 40 per cent of the value of granted loans), although its share decreases year by year. Meanwhile, there has been a rapid growth in the sales of online loans, whose share exceeded 35 per cent of the total value of financing granted in 2017. This is also the result of hybrid services — some loan agreements are initiated online but only finalized during a home visit or a visit to a physical branch.

Differences between non-bank and bank borrowers

One can hardly regard the customers taking out personal loans as “underbanked” or affected by banking exclusion, because the data of the Credit Information Bureau indicate that only 24 per cent of the customers of loan companies were not repaying both, a personal loan and a bank credit at the same time. Therefore, the vast majority of these customers incurred debt in both sectors. However, it’s worth pointing out that the credit rating of people who use personal loans is at least 25 per cent lower on average than that of bank customers. This means that some customers may reach for the services of the non-banking sector, because larger bank credit is unavailable to them. Another reason why customers take out personal loans is the easy and quick access to the funds, enabling them to satisfy ad hoc spending needs. This is further facilitated by loan comparison tools, online brokers and shopping portals. These observations primarily apply to the younger generation — people under 30 years old account for 28 per cent of the customers with financial liabilities towards personal loan companies. Among those who do not have bank loans but only have personal loans from non-bank institutions, 43 per cent are young people.

These liabilities towards non-bank lenders are primarily loans for relatively small amounts. In 2018, the average value of a personal loan amounted to PLN2,633 and in the case of bank credit the average amount was seven times higher. A similar situation is observed in the case of indebtedness — the average level of customers’ indebtedness towards loan companies is PLN8,800, while in the banking sector it exceeds PLN25,000. This is largely due to the differences in the loan terms. The average duration is 6.5 months in the case of personal loans and 45 months in the case of a bank credit. One phenomenon of the personal loan sector is that customers repeatedly take out, in a short period of time, several loans and are repay several loans. Meanwhile, bank customers repay less than two credits on average. This constitutes a certain barrier to the development of the lending industry, which mainly services the same group of customers and is largely failing to find new borrowers.

The repayment rate for personal loans is lower than in the banking sector and in the SKOK cooperative savings and credit unions. In 2018, personal loans with arrears in repayments accounted for 23 per cent of the overall value of the loan companies’ receivables. Meanwhile, delinquent loans accounted for 13.5 per cent of receivables in the case of banks and 19 per cent in the case of cooperative savings and credit unions. It seems that the poor quality of the loan portfolio may primarily concern smaller businesses. This is confirmed by the example of Vivus, the fourth largest company in the personal loan market in terms of value of loans granted. According to the company’s president Ewa Wernerowicz, only 3 per cent of the customers’ liabilities are not being repaid, and the level of loan fraud reaches only 0.4 per cent of the value of provided loans. Personal loan companies have different models for verifying the credibility and creditworthiness of their customers. It is true that more and more of them use the databases of the Credit Information Bureau, provide banks with data on the repayment of liabilities, and utilise economic information offices. However, they still don’t have access to the Polish Resident Identification Number database or the ability to verify the incomes of borrowers.

Financing non-bank borrowers

It is also becoming increasingly difficult for the non-bank loan companies to raise capital to finance their business activities. A large number of these entities (35 per cent) rely on equity. They also make use of credits and loans, including those obtained from the banking sector (32 per cent). Another source of funding is the placement of bonds on the capital market — at the end of 2018 the indebtedness of personal loan companies in this respect amounted to PLN 380 million. However, as a consequence of the insolvency of GetBack (Polish debt collector), the problems of investment fund societies, and the new regulations concerning bond issues, the ability of non-bank loan institutions to acquire capital has been significantly reduced. This may be the main reason why the personal loan companies are recording worse sales results this year. Consequently, personal loan companies are exploring the option of raising capital abroad, including crowdfunding platforms like the Latvian Mintos, where 10 Polish loan companies acquired capital in the amount of EUR250m.

In recent years the sector of personal loan companies has been undergoing gradual professionalization. The entities operating in this sector are required to register with the Polish Financial Supervision Authority and their activities have to be conducted in the form of a joint stock company or a limited liability company, with a minimum share capital of PLN200,000. The law also defines the maximum amount of non-interest costs of loans per year and throughout the entire lending period (currently 25 per cent of the entire loan amount and 30 per cent for each year of the contract duration). Poland’s Office of Competition and Consumer Protection (antimonopoly authority) has the legal instruments to inspect loan companies, e.g. to determine that certain clauses in their loan agreements are illegal. Meanwhile, the institutions representing the loan sector entities are implementing the principles of good market practices. Andrzej Roter, the president of the Conference of Financial Companies, points out the cooperation with local government organizations, seeing it as the beginning of an ethical market ecosystem. The customers’ applications submitted to the Ethics Committee of the Conference of Financial Companies, in which they ask the organization to examine whether the activities of financial entities are in compliance with the principles of good practices, are also presented as proof of the effectiveness of self-regulation.

Personal loan sector in the world

Compared with the lending markets existing in many other countries, the Polish personal loan sector could be seen as a niche market. Such markets are particularly well-developed in the United States, the United Kingdom and the Scandinavian countries. Non-bank loans are used by more than 17 million Americans with lower credit ratings. According to data from Transunion, the value of such obligations exceeds USD120bn. The offer of unsecured online loans (including the so-called marketplace lending) is growing especially rapidly. In 2018, the share of technology startups, or fintechs, such as the Lending Club, Avant and Prosper in the loan market (25.8 per cent) was higher than that of banks and credit unions.

Meanwhile, the British personal loan market (which accounts for more than a half of the personal loan market value in Europe) provides nearly 30 per cent of the total value of consumption financing to customers in the United Kingdom. According to a report of the British Financial Conduct Authority (FCA) this amounts to nearly GBP200bn. The report also indicates, that 61 per cent of the residents have at least one consumer loan, and that the British market of personal finance includes over 30 thousand companies. The market is subject to regulation (registration and licensing requirements). A unique feature of the British lending market are companies offering peer-to-peer loans, which are practically non-existent in Poland. One such company is Zopa, which has thus far provided more than GBP4bn worth of loans to more than half a million consumers. The company received a banking license in 2017.

The situation in the lending market is also interesting in Sweden, where the traditional banks have been forced out of the market of financial services for individual clients by specialized loan companies that are primarily operating online. According to the McKinsey report, lending companies accounted for around 60 per cent of the country’s consumer finance market in 2016. They have tripled their market share over the past 15 years, and captured 35 per cent of consumer loan volumes previously controlled by the banks. Their success was based on high-quality analytics and operating models based on artificial intelligence. These advantages allowed the loan companies to reach new market niches, including both individual customers as well as SME. These solutions also allowed for a simplification of the loan granting process.

The situation on the personal loan market in Germany and Slovakia is different. In Germany the activity of loan companies is subject to restrictions and only slightly more than a dozen such entities operate on the market. Their share in consumer financing is negligible. As a result, some companies, like the Hamburg-based Kreditech, adopted a strategy of international expansion. The company is active in countries such as Mexico, Russia, India, Romania and Poland. At the same time, the sector of alternative financing — crowdfunding and peer-to-peer lending — is growing.

Meanwhile, in 2015, Slovakia harsh restrictions were introduced on the market of short-term loans. This included both administrative measures (licensing by the National Bank of Slovakia, prohibition of cash loans), as well as limits on the costs of loans (no higher than twice the average market interest rates). As a result about 80 per cent of the loan companies have withdrawn from the market and their total number has fallen to a dozen or so. The remaining entities have focused on higher amounts loans and with longer lending periods. Short-term financing is now virtually inaccessible.