Personal Loans Market In Poland - PwC

responsible for financial stability) which makedecisions about the future of that part of thefinancial market, as well as for other entities,such as commercial chambers or businessassociations. We do hope that this documentwill contribute to the discussions around thecurrently developed regulatory measures,which will allow the companies in the industryto operate in a competitive manner, whileensuring protection to their customers andpromoting stability of the financial system aswell as minimising financial exclusion in thesociety over a long term perspective.Report objectivesTo ensure reliability of the presented data andanalyses, certain rules were adopted duringdevelopment of this report. The aim was toensure that the report is: Independent – the report is prepared by anentity independent of the personal loansmarket, that is PwC; Impartial – the report presents the situationin the market without evaluating or judgingany of the market participants; Constructive – the study identifiessignificant thematic areas which may bevaluable from the point of view of potentialregulatory solutions in the personal loanssector in Poland.Certain assumptions used for the purposeof this report were consulted with selectedstakeholders concerned with operation of thepersonal loan market and its future regulation.Nevertheless, the final form of the report isa result of an independent decision made byPwC, and the purpose of consultations wasto verify whether the report covers majorbusiness, social and regulatory issues whichare important from the stakeholder’s point ofview. When preparing the report, PwC used anumber of market research techniques, whichare discussed in detail in subsequent sections.For the purpose of the report, PwC analysedthe publicly available data, conducted anindependent study of market practices used bycompanies from the personal loans sector usingthe Mystery Shopper technique, conducteda survey among personal loan companiesand performed qualitative and quantitativeanalyses on that basis, which contributed to thedevelopment of individual parts of the report.conducted the following studies for the purposeof this report: Qualitative and quantitative study of thePolish personal loan sector using a speciallydesigned survey addressed to tens ofcompanies representing an important partof the personal loan market and operatingin three segments discussed in the report(see Chapter 2.4). PwC received a dozenor so responses, including 7 completedquestionnaires (one questionnaire wascompleted by an industry organisation onbehalf of several companies); Qualitative and quantitative surveyaddressed to experts from PwC’s networkof companies, concerning, among otherthings, selected aspects of regulationsapplying to personal loan companies inselected countries (see Chapter 4); Mystery Shopper study conducted by athird party company for two personallender profiles in three market segmentsdefined in the report. The study consisted inapplying for a personal loan by individuals,reviewing the loan process and eventuallywithdrawing from the loan agreement(see Chapter 3). This enabled us to makea detailed analysis of the process in suchareas as communication concerning theoffer, terms and conditions of the loan, andthe current law.The subsequent parts of the introduction to thereport focus on a description of the market andmarket characteristics.To maintain a broad and balanced perspectiveon the subject of this report, PwC designed andPersonal Loans Market in Poland7

1.2. Objective scopeof the report1. uri COM:2012:0102:FIN:PL:PDF2. The arguments which are often usedin public debate are somewhat logicallycontradictory – entities referred toas shadow banks did not circumventbanking regulations as they did notperform activities that were restrictedto banks operating on the basis ofa banking licence; therefore, theiractivities did not violate the provisionsof the Banking Act (they did not collectdeposits).Lack of one common definition of the nonbanking financial services market often leadsto confusion and incorrect classification ofpersonal lenders. In public debate, personalloan companies are often classified under thesame category of enterprises as the so-calledshadow banks. On the other hand, lack ofprecise and accepted term of a shadow bank inthe market and in the literature on the subjectresults in misinterpretations of how the lendingcompanies operate. Therefore, for the purposeof further analysis, a detailed definition of thepersonal loans market against a broad categoryof financial services is especially important.The problem becomes more complex whenwe examine international regulations whichapply to the personal loans market. The term“shadow banking”, which is often used indiscussions concerning the non-regulatedsegment of personal loan companies, or morebroadly, the non-regulated financial market,means different things for different countries.(“shadow banking” is often translated intoPolish as bankowość równoległa). For instance,in the Anglo-Saxon culture, and to a largeextent in European Commission’s publications(Green Paper on Shadow Banking1), thesegment is defined as “the system of creditintermediation” that involves entities andactivities outside the regular banking system(including credit intermediaries, hedge fundsor SPVs). In countries with developed financialmarkets (especially Anglo-Saxon), the termvery rarely applies to companies from the nonbanking financial services market, limited tonon-regulated companies providing loans toprivate individuals.In the public debate in Poland, the terms“shadow banking”, bankowość równoległa andparabanki are used as synonyms, often in aninconsistent and imprecise manner. Thus,“shadow banking” is sometimes used to referto non-regulated entities (but often with highinternal credit standards) operating in Polandand being members of international bankinggroups. Such companies – which provide loansusing funds provided by the internationalparent rather than deposits obtained fromPolish customers – were often the targetof critical comments (and actions) of someinstitutions, being referred to as “grey bankingarea companies” or “shadow banks”, allegedlypursuing regulatory arbitrage2. These labelsare also used with regard to non-bankinglenders, which are classified as shadow banks,or parabanki. The definitions of both terms inthe public debate are vague and have generallynegative connotations.According to the European Commission’sGreen Paper on Shadow Banking, the term“shadow banking” also refers to (beside otherentities such as hedge funds, SPVs etc.) entitieswhich provide loans or credits and operateoutside the regulated banking sector, whichin practice means that the broadly understoodshadow banking can also refer to personal loancompanies.This report focuses on entities providing personal loans,which operate as partnerships or companies, funded underthe provisions of the Commercial Companies Code, andwhich do not finance their operations through customerdeposits.8Personal Loans Market in Poland

Chart 1. Financial services for private individuals in PolandDepositsEntities subjectto FSA’ssupervisionLoans and creditsBanksSocial Credit Unions(SKOKs)Personal loancompaniesEntities operatingoutside FSA’ssupervisionPeer-to-peerlendersShadow Source: Own work, PwCChart 1 illustrates the objective scope of thereport from the regulatory point of view.Activities in the sector of financial servicesaddressed to consumers were divided into twomain segments: deposit taking and extendingloans and credits using own funds.3. According to the definition includedin Article 4 of the Regulation of theEuropean Parliament on CapitalRequirements (CRR), which shall applyto all countries from the EuropeanEconomic Area, “credit institution” is“an undertaking the business of which isto take deposits or other repayable fundsfrom the public and to grant credits forits own account”.“Banking activities” are understood asperforming banking operations which mayexpose to risks the funds collected from broadlyunderstood customers3, entrusted to the bankon a repayable basis, which implicates the needfor strict regulation and supervision of suchactivities. In the current legal circumstances,the categories of entities subject to FSA’ssupervision include banks, SKOKs andcooperative banks as well as capital, insuranceand pension market operators and companiesproviding payment services.Entities that provide loans outside FSA’ssupervision include pawnshops, peer-to-peerlenders and personal loan companies, whichare the main focus of interest of this report.Due to significant differences between boththe pawnshop and peer-to-peer lender businessmodels and the loan provider model (theformer provides a loan against a pledge, whilethe latter relies on loans granted betweenpeers without any intermediaries), both thesecategories were excluded from further analysis.Personal Loans Market in Poland9

4. The Consumer Credit Directiverefers to assessing the credit status of aconsumer, while the Polish transpositionof the directive introduced the concept ofassessing the customer’s credit risk.The resulting scope of the study allows forfocusing on entities that conduct legitimateactivities consisting in provision of consumerloans, regulated by the civil law, including inparticular the Act on Consumer Credit, but notregulated by FSA or the Banking Act.In addition, the scope of this analysis includescompanies offering loans that are used byconsumers to meet their current needs orcover one-off expenses. Such instruments areusually of small value (compared to longterm loans extended by banks) and representa small percentage of financial servicesfor consumers. They are not subject to theBanking Act or regulated by FSA, thereforethey do not have to meet the detailed andstrict credit risk assessment and credit ratingrequirements (including those recommendedby FSA in Recommendation T); as a result,creditworthiness of their customers may, butneed not be lower than the creditworthiness ofbanking clients.10Personal Loans Market in PolandHowever, personal loan companies haveto adhere to the provisions of the Act onConsumer Credit (including the generalrequirement for credit risk assessment4) aswell as comply with the rules of conductingbusiness, including the requirements definedin regulations applied specifically to businessoperators, such as the Act on Personal DataProtection or the Act on Preventing MoneyLaundering and Terrorism Financing. All thoselaws have an influence on the customer serviceprocess and are a form of regulation.To sum up, the objectivescope of this reportincludes only personal loancompanies, i.e. entitiesextending consumer loanswhich do not take depositsand operate outside FSA’ssupervision in Poland.

2. Market and its participants2.1. Personal loansmarket in Poland5. J. Czapiński, T. Panek (ed.), DiagnozaSpołeczna 2013 (Social Diagnosis2013), Warsaw 2013 – a nationalpanel study of the living conditions andquality of lives of Poles, conducted by ateam of scientists headed by ProfessorsJanusz Czapiński and Tomasz Panek forover 10 years.6. Situation of Banks in 2012. TheReport. Polish Financial SupervisionAuthority, Warsaw, 2013.7. IbidemUnlike banks, companies that offer consumerloans are not subject to financial supervision.Moreover, they are not required to publishinformation other than required by law andconcerning their core business as businessoperators, e.g. they do not have to publishstatistics on the number and value of loans.Only some of the companies operating in themarket are members of industry organisations;other companies provide their services ona local scale and do not take part in suchinitiatives. As a consequence, it is impossibleto obtain full information on the size ofthe market. The range of operations of thecompanies can only be estimated.When comparing the banking market with themarket of personal lenders, one must be awareof certain natural information limitations anddifferences in business models. First of all,data concerning banks as regulated entitiesare monitored and published on an ongoingbasis. Personal loan companies, on the otherhand, are not subject to special reportingrequirements, and therefore have a high degreeof freedom in that respect. The banking sector’sstatistics include, among other things, detailedinformation on the total debt of householdsresulting from consumer loans at the end ofeach month, while personal loan companiesthat publish reports on their activities usuallyfocus on presenting the value of the extendedloans in a certain period, often on an annualbasis. Moreover, any comparison is madedifficult by differences in the average loanterm and average value of a single contract.All comparisons between the two markets areonly estimations, and the results depend onthe adopted approach, i.e. focusing on the salesvalue or on the debt level.According to the Social Diagnosis 2013 study5,ca. 0.7% of the total liabilities of Poles aredue to personal loan companies, while 97.0%are liabilities due to banks. The total value ofhousehold liabilities due to banks for the firstthree quarters of 2013 was ca. PLN 534-554 bnaccording to FSA’s data. Based on those data,the total debt to non-banking companies in2013 may be estimated at PLN 3.0-4.0 bn.According to our analyses, the companiesincluded in this publication contribute to ca.80% of the estimated loan value. The resultis a proof of a huge gap between banks andpersonal loan companies in terms of therange of lending operations in Poland. Thiswas also noted by the authors of the SocialDiagnosis, who wrote about exaggeratedmedia reports suggesting high indebtednessof the households to non-banking sector.The dominant role of banks in the consumerloans market is also stressed by the FinancialSupervision Authority6. At the same time, loansprovided by personal lenders as one of themethods of household funding have becomea complementary and important part of thefinancial services market from the point of viewof economic growth.The market size estimated above is close tothe values presented by FSA in 2013, whichestimated the total scale of operations ofpersonal loan companies at PLN 3-4 bn p.a.7The analysis of the value of loans extendedby companies which are members of theConference of Polish Financial Companies(Konferencja Przedsiębiorstw Finansowych wPolsce, KPF) during the recent few years leadsto a conclusion that the personal loan market ischaracterised with a stable growth, interruptedonly in 2009.By the end of 2008, the Polish market ofconsumer loans for private individuals (an areaof the financial service market operated bybanks) developed in a dynamic way. Between2008 and 2009, structural changes were madein the sources of consumer financing: consumerspending which had been financed throughloans was now funded from savings. Thisresults in a lower demand for loans and credits.Personal Loans Market in Poland11

Table 1. Debts of private individuals due to banks and personal loan companies in 2013(in PLN bn)Total household debts due to banks*543.2Household debts due to banks from consumer loans*122.7Household debts due to personal loan companies**4.0* Average value for Q3 2013 based on FSA’s data - aggregated monthly data for the banking sector.** PwC’s estimation’s based on the Social Diagnosis 2013 report and FSA’s data.8. Report on Consumer Finance Marketin Poland 2013, PwCThe increase in the value of loans in thenon-regulated market after 2009 may be theeffect of self-regulation activities of banks,which had to tighten their procedure andrestrict the supply of credits in the face ofthe global financial crisis. Additionally, FSA’sRecommendation T adopted in 2011 introducedstricter credit rating criteria (limiting the DtIratio), which may have caused migration ofclients of the lowest financial standing frombanks to companies operating in the nonregulated market. However, most probablythe increase in the value of loans provided bypersonal lenders is less connected to the newregulations than the organic growth of themarket.The number of loans granted by KPF membersgrew in a similar way as the value of theloans and was estimated at ca. 1 million loanagreements in the recent years. The number fellslightly in 2009 but has continued to grow eversince. Charts 2 and 4 show that the averagevalue of a single loan in the reported periodranged from PLN 1,500 to PLN 1,700 PLN andshow a small growing trend.For the sake of comparison, over 90% of cashloans granted by banks are loans for over PLN3,0008.Chart 2. Value of loans provided by companies – members of KPF (in PLN ce: Years 2007-2011: Rynek pożyczek niebankowych w Polsce (Non-banking loans market in Poland), KPF’s report;years 2012-2013: PwC’s estimates.12Personal Loans Market in Poland

Chart 3. Growth trends of consumer loans against growth of consumption and 06200720082009201020112012Consumer loans growth trend (current prices, year-on-year 100, right-hand axis)Consumption growth trend (fixed prices, year-on-year 100, left-hand axis)GDP growth trend (in real terms, year-on-year 100, left-hand axis)Source: Report on Consumer Finance Market in Poland, PwC, 2013Chart 4. Number of loans provided by companies – members of KPF (in 1,000 ource: Years 2007-2011: Rynek pożyczek niebankowych w Polsce (Non-banking loans market in Poland), KPF’s report;years 2012-2013: PwC’s estimatesPersonal Loans Market in Poland13

The value and number of consumer loans provided bypersonal loan companies represent a small portion of thetotal borrowing market. According to the estimates, both thevalue and number of the loans granted during years 2012and 2013 showed a growing trend.2.2. Personal loansmarket: customerprofile9. Cf. e.g.:1. “Problematyka Regulacji RynkuFirm Pożyczkowych w Polsce”(Regulation of the Personal LoansMarket in Poland), FundacjaRepublikańska, 2013.04.232. Białowolski P., “Rynek FirmPożyczkowych w Polsce” (Personalloans market in Poland), KPF,Warsaw, 20123. Biuro Informacji Kredytowej (BIK),“Kredyty Konsumpcyjne – spadki imigracje” (Consumer loans: falls andmigrations), Warsaw, 2013According to the Social Diagnosis data, thetotal number of Polish households having anytype of debt has increased to 37%. As manyas 88% of individuals (see Chart 5) declarehaving a debt with a bank. According to thedeclarations, personal loan companies are lastin the ranking of the most popular lenders,covering only 4% of the total borrowers.Considering the number of households inPoland (ca. 13.5 m), the overall percentageof indebted households (37%) and personallenders’ share in the household debt (4%),we may calculate the number of householdsindebted to personal loan companies, which isca. 200,000. This is not a lot, considering thatother market sources9 talk about ca. 1.5 m – 2m loans granted by such companies per year.This means that either the average loan term isvery short, e.g. 1-2 months (one household maytake several to more than ten such loans in ayear), or there is a strong tendency among therespondents to conceal the fact that they areindebted to such companies in social studies.When we look at the basic characteristics ofhouseholds with debts to personal lendersand those indebted to other institutions, thedifferences are not really significant. They havesimilar structure of education of their chiefincome earners and their places of residence.The only difference is that fewer borrowerswho are indebted personal loan companies(11% vs. 16%) live in the largest Polish cities(over 500,000 inhabitants).However, members of households indebtedto personal lenders estimate their financialsituation to be much worse than thosewho have debts with other institutions –approximately 50% report that they can barelymake ends meet (such a question was posedin the Social Diagnosis), while among otherdebtors the percentage is only 17%. This isobviously connected with the actual financialcondition of such debtors, which will bepresented later in this document.Chart 5. Percentage of the total number of individuals with loans and credits fromvarious types of lending institutions based on the Social Diagnosis 2013 teindividualsSocial CreditUnions (SKOKs)Personal loancompaniesSources: Panek, T., Białowolski, P., Kotowska, I.E., Czapiński, J. (2013). Warunki życia gospodarstw domowych. Zasobność materialna.Diagnoza Społeczna 2013 Warunki i Jakość Życia Polaków – Raport (Living Conditions. Affluence. Social Diagnosis 2013 of LivingConditions and Quality of Life of Poles – a Report). [Special issue]. Contemporary Economics, 7, 59-82 DOI: 10.5709/ce.1897-9254.99and own calculations based on the Social Diagnosis 2013 data available on: www.diagnoza.com14Personal Loans Market in Poland

The ratio of households with debts to personal loancompanies to the total number of borrowers is only 4%.Income of customers of personal loan companies and percentage of incomeused for repaymentsThere is a widespread view that customers ofpersonal loan companies have lower averageincome than customers of banks or otherinstitutions providing loan

2.1. Personal loans market in Poland 2.2. Personal loans market: customer profile 2.3. Business model of a personal loan company 2.4. Segmentation of personal loan companies 2.5. Amount and structure of loan costs 3. Consumer practices 3.1. Practices of personal loan companies with regard to customers based on the Mystery Shopper study 3.2.