The Growth of Emerging Market Debt
This time, it’s personal
Consumer credit in emerging markets is primed for growth. With rapidly growing economies and an attendant rise in consumerism, these markets are teeming with potential credit card customers. Indeed, emerging markets may be a major source of credit card companies’ growth in the next decade as Western markets attempt to recover from the economic crisis. The U.S. market – by far the world’s largest, with 700 million cards in circulation and a total outstanding balance of $775 billion – is expected to be squeezed as legislators enact new regulations on companies that are expected to result in increased fees and greater difficulty obtaining credit.
As card issuers search for new markets to shore up flagging margins, China and its billion-plus potential customers would seem attractive. But the Central Bank’s recent moves to pump the brakes after a sizable injection of liquidity suggest that an expansion and acceleration of the money supply through credit growth likely would be forbidden. Card issuers might instead want to look at other emerging markets for lucrative opportunities in the near term. Four such countries with favorable economic prospects and demographic trends are India, Russia, Mexico, and Turkey.
To uncover some of the challenges and opportunities facing banks and card issuers abroad, Ergo sought insights from on-the-ground experts from our network in these four countries.
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Expert 1: Director at an Indian ratings agency
Low credit penetration, but paucity of credit history data
“Like in any other emerging economy, the opportunities [in India] are linked to: fairly low credit penetration, fairly disparate income levels, and the phenomenon that credit levels are scanty, but are building up. Ultimately this means a large part of the economy is deprived of credit. The opportunities are enormous. The primary challenge or risk is credit history, because the history has been built up only over the last few years; credit scores are a relatively recent phenomenon and no one knows if the data is high quality. I would reckon that the credit data would cover less than 10% of the potential customer base, so we just don’t have enough data on potential customers.”
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Expert 2: Macroeconomic and banking analyst at a leading Russian investment bank
Relatively unleveraged economy
“Russian banks are overwhelmed with liquidity. In Russia, we have the problem that we don’t have long money – we pretty much don’t have pensions and insurance, so long-term lending is a big problem. With deposit rates above inflation, all banks are seeing an inflow of retail funding and they’re eager to lend; but this is likely to be short-term lending – banks are trying to extend their credit card portfolios. As of now, most retail lending in Russia consists of ‘personal loans’ – i.e., applying for a loan in a branch office. But to give you some sense of the market, the total retail lending market is 9% of GDP in Russia – the Russian economy is not very leveraged. And of that 9%, credit cards constitute around 4-6% of retail lending, so this is really a small market. There are a lot of potential opportunities in the longer run.”
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Expert 3: General Director of a financial services consulting firm in Mexico
Market opening, but NPLs and recovery present challenges
“About two years ago, only the banks [in Mexico] could give out credit cards. The federal government introduced new legislation for banking and now non-banks can issue credit cards. Retailers are some of the new actors in the credit card space. But with this growth in credit, there have been some financial problems. We have seen increases in the NPLs (non-performing loans): from December to January the NPL rates increased from 3% to 3.5%. There is a very important challenge on the legal side: when you try to recover these NPLs, it is different than it is in the States. It is very difficult to recover the funds. That is an important challenge.”
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Expert 4: Leading expert on credit card market dynamics in Turkey
Favorable demographics with increasing revolver ratios
“We have about 21 credit card issuers in Turkey right now, and six banks have roughly 90% of the market. In Turkey, people are using more credit cards than in European countries – even in small transactions people tend to use credit cards. There are 70 million people in Turkey – this is a quite lively market. The average age is quite low, about 26, so it increases the prospects for credit card issuers. These younger people are more likely to use cards, and get more credit. Additionally, if companies come to Turkey, they are likely to get access to neighboring countries. Garanti, for example, is going to Romania and even China. In Turkey, even though there are 40 million cards and it seems saturated, there is still a huge likelihood that the revolver ratio is going to be increasing.”
Insights from the Ergo Network
Looking Ahead
As the financial sectors in emerging markets develop and deepen, consumer credit will be a major growth opportunity for banks and card issuers. Policymakers in these countries likely will see the benefits that consumer credit can bring, particularly with respect to GDP growth through increased consumption. Indeed, restrictions on foreign investment and entry likely will be relaxed, and as in Mexico, governments may empower more entities to issue credit. When adapted to local conditions, the innovative use of credit cards – for consumers, small businesses, and perhaps even for microcredit – could be enormously profitable.
Yet as banks and card issuers see the tantalizing profit potential among the new global middle class, they must judiciously manage their risk. With a dearth of credit history available to them, foreign companies will need on-the-ground insights to reduce the opacity of these markets, and to mitigate the risks of NPLs.
Ergo has access to hundreds of experts relevant to banks and credit card companies evaluating emerging market opportunities – from traders and investment bankers to government regulators.