05BUCHAREST1445 / 2005-06-27 12:59:00
Embassy Bucharest
                UNCLAS SECTION 01 OF 04 BUCHAREST 001445 
 
SIPDIS 
 
STATE FOR EUR/NCE - WSILKWORTH, EB/IFD 
STATE PASS USTR 
USTR FOR LERRION 
TREASURY FOR STUART 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL 
STATE PASS USAID 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EIND, EFIN, RO, Credit 
SUBJECT: CONSUMER CREDIT BOOM FUELS ECONOMIC GROWTH IN 
ROMANIA 
 
 
SUMMARY 
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1.  The consumer credit market is booming in Romania, with 
lending institutions offering a wide and growing range of 
products reaching a total volume of $4.7 billion in 2004. 
The resulting shopping frenzy has contributed to an increase 
in retailers' profits, as well as a jump in the country's 
foreign trade deficit as consumers rush to buy foreign 
goods.  So far, in spite of consumer protection groups' 
fears to the contrary, delinquency rates are low.  However, 
loan recovery firms are doing brisk business as the number 
of the over-extended grows.  Romania's first fully- 
functioning private credit rating agency began providing 
consumer data to lenders in April, and credit scoring will 
begin in the short term.  Rural consumers, considered high- 
risk by lenders, have been left on the sidelines, unable to 
qualify for most loans. 
 
Banks Drive Credit Boom in Romania. 
----------------------------------- 
2. Consumer credit has been available in Romania since the 
fall of communism, although hyper-inflation, high interest 
rates, substantial collateral demands and economic 
uncertainty limited the growth of this market.  It was not 
until 2002 when basic consumer loans and home mortgages 
became commonplace, with the total loan portfolio for that 
year in the low hundreds of millions of dollars.  Consumer 
lending momentum soared over the next two years in tandem 
with Romania's increasingly rosy economic indicators.  By 
year-end 2004, total consumer lending reached $4.7 billion, 
an increase of 6.5 times over 2002.  This boom is indicative 
of the pent-up consumer demand characterizing the product- 
poor Romanian marketplace in the late 1990s and early 2000s. 
Increasing competition among financial institutions has 
lowered annualized interest rates from more than 100 percent 
in the mid-1990s to as low as 17 percent today. 
 
3. Loan products have grown in breadth and sophistication 
over the past three years and today banks offer not only 
basic loans, such as home mortgages, but also loans for 
cars, home appliances, vacations and "personal needs".  Real 
estate developers expect approximately 80 percent of home 
residences to be financed this year by mortgage loans.  Home 
lending is further expected to expand once the secondary 
mortgage market opens allowing banks to offload risk.  Use 
of credit cards is also on the rise; by year-end 2004 total 
credit card transaction volume reached $6.5 billion (up 46 
percent from 2003), generated by 117.6 million transactions. 
Slightly more than five percent of consumers currently use 
credit cards, and a fifth of the population regularly pays 
with debit cards.  Consumers like the new product selection, 
and surveys show that high numbers expect to enter into 
credit agreements by year-end 2005.  Loans for household 
goods lead the pack in popularity with 5.3 percent of all 
consumers planning to borrow. 
 
4. The fast pace of lending has contributed to Romania's 
impressive GDP growth, which stood at 8.3 percent last year. 
The construction and retailing sectors have benefited in 
particular.  In the first quarter of 2005 retail sales 
jumped 18.7 percent over 2004, demonstrating this trend. 
However, some analysts fear short-term overheating.  The IMF 
points to a growing current account deficit linked to high 
imports from abroad. 
 
.While Non-bank Financial Institutions Follow Close Behind 
--------------------------------------------- ------------ 
5.  Although slightly more than fifty percent of all 
consumer loans continue to be generated by banks, non-bank 
financial institutions (NBFIs), many of which operate in 
close partnership with Romania's retailing giants, have 
gained substantial market share within the last three years. 
These institutions' high profit margins on electronics and 
home appliance loans have made them popular take-over 
targets, and several were recently acquired by Western 
European and American investors.  The rapid growth of NBFIs 
prompted the GOR to pass law 289/2004 "Concerning Credit 
Agreements", which requires them to acquire licenses and 
observe consumer credit rules including pre-contractual 
disclosure, annual percentage rate calculation, and 
agreement to advance repayment. Previous to this law, NBFIs 
were completely unregulated.  NBFI's still operate outside 
of Romania's banking regulations which limit total loan 
amounts. 
 
6.  Applying for credit in-store can take as little as 15 
minutes and retailers are quick to encourage this extra 
source of revenue.  Romanian hypermarkets and home appliance 
retailers currently average 60 to 70 percent of their sales 
volume on credit, depending on seasonality and customer 
base.  Household goods, electronics and furniture see the 
largest growth with an average purchase amount of 500 Euros. 
Romania's comparatively low incomes require loan maturities 
on consumer goods up to five times as long as those in the 
Czech and Polish marketplaces. 
 
7. Romanians have an overall cultural aversion to owing 
money, and approximately seventy percent of borrowers pre- 
pay their loans, an unusually high number.  Many, in 
particular the elderly, avoid credit due to their lingering 
fear of financial institutions and distrust of contractual 
agreements.  Romanians tend to pay on time and delinquency 
rates hover around three to five percent, which both NBFIs 
and traditional banks consider low for a developing market. 
Banks which carefully screen applicants according to income 
level and credit history claim non-payment rates as low as 
0.5 percent. 
 
Debt Collectors Rush to Cash In 
------------------------------- 
8.  The credit boom has benefited debt collectors who saw a 
300 percent growth in their consumer business in 2003.  As 
consumers take on more debt and are unable to pay, both 
banks and NBFIs offload these delinquent payers to debt 
collectors.  The main market players use generally accepted 
business practices, first attempting contact by phone and 
mail which generates a success rate of around 40 percent. 
If demands for payment are unsuccessful, the debt collector 
brings the case to court.  The vast majority of loans in 
arrears, around 85 to 90 percent, are less than $1700. 
Personal needs loans see the highest level of default, 
followed by loans for consumer goods.  Mortgages and car 
loans have the lowest default rates, of around two percent. 
 
Rural Dwellers Snubbed as High Risk 
------------------------------------ 
9.  Rural residents have been left out of the lending boom 
for a variety of reasons, including a lack of banking 
branches and department stores in Romanian villages, income 
from undocumented sources, such as farming; and greater 
reliance upon foreign remittances transferred by relatives 
abroad.  State-owned Banca Commerciala Romana (BCR) claims 
that it services ninety percent of the market, although the 
bank's total rural market portfolio is merely $10 million. 
Most NBFIs target cities with populations exceeding 50,000; 
they view investment in poor, rural areas as unlikely to 
generate required returns.  The GOR has investigated 
programs to promote crop receipts as collateral for bank 
loans, but so far this initiative has made little progress. 
 
Uneven Legislation To Conform with the EU 
----------------------------------------- 
10. Legislation in the consumer credit sector is a mixed 
bag; most laws are geared towards consumer protection, while 
financial institutions remain frustrated by the absence of 
strong penalties for non-payment of debt.  There is no 
expedited process within the legal system for financial 
companies and cases typically take six months to a year to 
be heard by a court.  In addition to the Law Concerning 
Credit Agreements, which protects consumers who enter into 
credit agreements, the Romanian Parliament has passed laws 
on data protection conforming to EU legislation.  Commercial 
banking norms have also been passed which stipulate that 
down payments on goods must represent at least 25 percent of 
the item's respective value.  Additionally, total monthly 
payments can not exceed 30 percent of the customer's net 
monthly income, or 35 percent for home mortgages. 
Interestingly, these income constraints have resulted in 
employers bowing to pressure from workers to report full 
income to the state, rather than paying under the table to 
avoid payroll taxes. 
 
11. However, gaps in legislation remain; NBFI's are not 
subject to the same lending caps as banks, nor subordinate 
to banking regulations or supervision.  Commercial banks are 
frustrated by this uneven playing field and seek to convince 
the Central Bank to relax the lending restrictions, although 
a change is unlikely.  Clarification on laws pertaining to 
overextended borrowers are also needed - no bankruptcy law 
exists, nor is there any way for lenders to "fast-track" 
cases of non-payment through the court system. 
 
Consumer Credit Bureau to Track and Score Consumers. 
--------------------------------------------- -------- 
12. Until very recently, only the National Bank of Romania 
tracked consumer credit, although only bad debts exceeding 
approximately $6,800 were recorded.  The Bank began 
collecting this data in 2000 upon request of the IMF, which 
was concerned about a dearth of statistics on outstanding 
loans.  In response to the growing demand for customer data, 
last year a group of 27 financial institutions, representing 
95 percent of the credit market, founded a first-of-its-kind 
private credit rating agency.  As of April 2005, this group 
succeeded in compiling a comprehensive database of both 
positive and negative customer information from financial 
companies, insurers, leasing firms, telecommunications 
companies, and debt collectors. 
 
13. Credit providers who are members of the agency and have 
agreed to its system of reciprocity can now request 
information on potential customers categorized into three 
groups:  "good payment history", "bad payment history" and 
"overextended".  The agency is now working with foreign 
scoring specialists to hone the current data base and 
develop a scoring system based on three years of positive 
and negative data.  The success of this agency, as well as 
announcements of competitors that may enter the market, have 
prompted the National Bank to begin scaling down its credit 
tracking operations.  The credit bureau's initiative has 
brought cries of protest from consumer protection groups 
concerned about data privacy.  In response, the Romanian 
Parliament established a National Supervisory Authority to 
oversee the proper use of personal data and passed 
legislation conforming to EU data privacy norms. 
 
.While Consumer Protection Concerns Grow 
---------------------------------------- 
14. Econoff met with representatives of the Romanian 
Consumer Protection Agency (ANPC) who expressed concern 
about a lack of consumer credit education and need for data 
protection.  They fear consumers falling prey to predatory 
lenders who sprinkle their contracts with unfamiliar 
legalistic terminology and pressure clients to sign.  The 
agency also cited examples of unscrupulous lenders 
stipulating penalties of up to thirty percent of the total 
value of a loan for delinquent payers.  Consumers are 
generally uninformed about the pros and cons of credit 
products and the elderly and young are particularly at risk. 
Bankruptcy laws do not currently exist for the overextended, 
although the agency was unaware of debtors being sent to 
prison for nonpayment.  Another concern of the ANPC is the 
possible inappropriate use of and access to credit rating 
scores.  With this in mind, the agency is now focusing on 
supervision of NBCI's and citizen education via television 
and press.  The ANPC pointed out the general lack of 
consumer education on lending and admitted that their 42 
offices have just begun to understand and appreciate this 
problem. 
 
15. To assist the process of consumer education, Econoff 
organized a digital video conference (DVC) in May between 
the RCPA and representatives from the Federal Trade 
Commission to address consumer credit issues and explain how 
the Fair Debt Collection Practices Act operates in the 
United States.  The RCPA greatly appreciated the session, 
and US Embassy Bucharest plans to request additional funds 
for a speaker program to target RCPA branch offices 
throughout the country. 
 
Comment 
------- 
16.  Romania is developing a thriving consumer lending 
market which is so far remarkably stable in spite of the 
country's dearth of clear legislation and consumer education 
in this area.  This market has fueled job growth in the 
retail and construction industries and allowed relatively 
low income Romanians to acquire needed housing and 
automobiles, further fueling the economy.  To date, 
Romanians have handled debt prudently overall, partially due 
to their cultural aversion to owing money, as well as a fear 
of unforeseen future financial instabilities.  The creation 
of the credit rating agency will assist lenders identify the 
overextended and steer them away from high risk individuals. 
 
17. More troubling is the uneven legislation which caps the 
amount of total loans extended by banks, but places no 
restrictions on NBFI's, creating an uneven playing field. 
Data privacy is also a concern, as is the lack of education 
for young consumers on the healthy use of credit.  Data is 
currently being collected for credit scoring purposes, 
unbeknownst to the general public, although the Consumer 
Protection Agency has recently taken an interest in this 
issue. 
 
DELARE 

            
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