MFO Crystal: “Financial Institutions Should Focus on Business Loans rather than Consumer Ones”

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The FINANCIAL — Despite the tough economic conditions, the overdue loans of MFO Crystal are to remain below 2% in 2015. Crystal also expects to have 40% growth this year. Reducing the dolarization level remains the main challenge for the country. In this regard, financial institutions are recommended to focus on issuing business development loans, rather than consumer ones.

“An import-dependent small country with a relatively weak economy is more sensitive towards currency risks. Accordingly, it has particularly negative impact on ordinary citizens. Unfortunately we are vulnerable to such shocks in the future at a different frequency and magnitude. The most important lever is prevention and proper preparation for similar processes. When problems are not visible and things are developing relatively well, the majority of people do not like to think about the worst possible outcome and preparing for such an eventuality. However, that’s life, and it’s important to think frequently about potential risks and threats. All participant bodies: the state, financial institutions and consumers – should take their share of responsibility here,” Malkhaz Dzadzua, Founder and CEO of MFO Crystal, told The FINANCIAL.

According to Dzadzua, Georgia should achieve a significant reduction in the dolarization level. “Financial institutions should issue the main share of loans for business funding and income generating activities rather than consumer needs. Loans should be taken out in the currency in which one has their main income. We should enhance the level of financial literacy and its quality in society; encourage saving and not spending. Elements of effective teaching of entrepreneurship among young people should be promoted. More transparency, information sharing and communication with society are crucial. It should be explained how to manage our resources prudently and why cooperation is a better business model.”

In his exclusive interview with The FINANCIAL, Dzadzua gave his outlook regarding the financial market under tough economic conditions and the impact of the GEL devaluation on the sector.

“Crystal has always been characterized by a wide range of credit products on the market. We have always been focused on consumer needs and demands. The largest share – 32% – of loans is concentrated in agro-sector. It is followed by the service industry with 23%, trade – with 18%, and housing – 15%. The average amount of a loan is GEL 2,000 (nearly USD 900) and the average term – 18 months. Crystal is a rare example of an MFO company operating in Georgia, issuing loans for start-up micro entrepreneurs,” said Dzadzua.

Q. 2014 has been quite successful for Crystal. What’s your assessment of 2015, in terms of net profit, credit portfolio and number of borrowers?

A. Due to devaluation of the national currency and slight reduction of overall economic activity, the growth rate of the company has been reduced in the first half of 2015 compared to previous years. However, there are still positive trends. During the first five months of the current year the number of active borrowers increased by 15%. The credit portfolio, as well as net assets has boosted by 20% in the national currency. However, due to the local currency’s devaluation these growths equal zero when we convert them into USD. As for the net profit of the company, it is in line with projected parameters, and the return of assets (ROE) amounts to 5%.

Q. If we compare the current financial data with the prior-year period, how big is the loss?

A. 2014 was indeed quite successful for Crystal in terms of both financial and organizational growth. During the year the total assets of the company increased by 58%, amounting to USD 45 million. The credit portfolio was boosted by 52%, reaching USD 39 million. As for the number of active borrowers – they increased by 71%, exceeding 38,000 customers.

In addition, the company managed to maintain a good level of quality of its credit portfolio, with a high retention rate (close to 98%). As of the end of 2014, the volume of overdue loans amounted to just 0.95% of the total portfolio. Together with restructured loans, the total non-performed portfolio amounted to 1.5%.

The market share of Crystal has increased in line with this growth, amounting to over 8.5% up from 7.2%.

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The figures would be much more impressive if not the negative trends that affected the national currency at the end of 2014.

Q. Crystal has opened a new branch in Tskaltubo in 2015. What are your plans for network expansion this year?

A. During the past two years, the company has significantly expanded its regional network and increased the number of its branches from 16 to 29. Currently our company is operating in all the country’s populated regions. Crystal is run and operated from its headquarters located in Kutaisi (ant not in the capital) which is also a very rare practice among the large business institutions in Georgia.

We have already opened three new branches in 2015 – in Batumi, Akhaltsikhe and Tskaltubo. The company has sufficient resources and capacity to continue growth around the country. However, some external factors and challenges might force us to review our plans for expansion.

Currently Crystal employs more than 400 workers (with just 5 persons in the very beginning in 1998). It is one of the leading and largest employers in the region and industry.

Q. Due to the GEL’s devaluation, the third quarter of 2014 together with 2015 has been quite difficult for the Georgian economy. However, we recall a statement from one of the MFO companies, which said that financial institutions were the only beneficiaries in the existing situation. Was Crystal among those companies who received “huge profit” from the GEL’s devaluation?

A. In general, during currency fluctuations, especially a sharp devaluation, some try to get maximum profit from the existing situation with various speculative operations and manipulations.

I think that whatever is bad for customers cannot be good for business, if it represents a solid company focused on a long-term strategy. Any problems and difficulties being encountered by consumers are rapidly reflected in a company’s sales and financial results. So, it is meaningless to talk about any extra profit. When the financial conditions and solvency of borrowers worsen, this directly causes risk increase for financial institutions and costs incurred for this risk substantially outweigh any expected profit for the companies.

Q. What was the impact of the GEL’s devaluation on your company?

A. Over 65% of loans at Crystal are issued in the national currency. Accordingly, the majority of our customers were secured from FX risks. They did not face any significant problems in meeting their loan obligations. The company offered loan restructuring for those who had credit in a foreign currency and saw huge loss following its devaluation. It helped us to maintain borrowers repayment capacity at the normal level.

On another side, 90% of Crystal’s financial resources are attracted from international markets in a foreign currency. Thus, the company has experienced huge losses and just due to the devaluation, our liabilities have grown by 25%. It also resulted in a reduction of liquidity and capital adequacy ratios.

Q. Has the GEL’s devaluation increased the overdue loans portfolio of Crystal?

A. Despite devaluation of the currency and other negative external factors, Crystal manages to maintain one of the best results in terms of asset quality. As of June 2015, the total overdue loans measured just 1.9% of the total portfolio. This figure also includes problematic loans caused by devaluation, as well as restructured ones. Crystal is characterized not only for fast growth and high volume of sales, but also we are proud to have well-organized processes and efficient risk management systems. The principles of responsible lending provide for the stable development of the company and high loyalty of consumers and employees.

Q. During the peak of the currency fluctuation, one MFO refused to issue loans in the national currency. Meanwhile, Crystal has launched the campaign ‘Switch to Lari’, in which you have been offering the conversion of loans in a foreign currency into the national one. Why did you decide to take such a risky step?

A. Stimulating lending in the national currency has always been one of the main business strategies of Crystal. It is obvious that in this case the company assumes the overall FX risks. It means that we might have some financial loss for a certain period. However, it is more important for us not to load consumers with this burden. Compare to any financial institution, micro borrowers are always less secured and protected from such risks.

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Transferring FX risks to our consumers would cause more negative results for the company, than costs resulting from taking this risk on our own. As the majority of our customers have income in Lari, they would have found it much more difficult to manage a loan in a foreign currency and the increased repayment amount.

As a responsible company, Crystal assumes the main share of currency risks and never tries to maximize profit by damaging consumers’ interests.

Q. The Government has been actively subsidizing bank loans, mostly for small business and agriculture. This was a major segment of crediting for MFOs. Can we say that the subsidization of the banks lowered your competitiveness?

A. We do not feel any sense of real competition with state programmes, as their target group includes less micro-entrepreneurs and they are more focused on big businesses. Agriculture Vouchers were what the Government had been actively using in our segment. However, it has not reduced our competitiveness. In some projects we are actively involved and cooperating with the state, like the interest-free agro loan over GEL 5,000, agro-insurance and others.

Q. What are the negative aspects of loan subsidizing from the Government?

A. First of all we have to note that this system has a number of advantages. Many developed countries are employing such programmes. Using subsidies within reasonable bounds and appropriate selection of beneficiaries can create a positive effect. It can stimulate various industries, especially start-ups and commercially less-attractive regions and sectors. However, unfortunately such programmes frequently are also followed by negative side-effects. They cause excessively raised expectations; passivity of beneficiaries; market restrictions and limitations in free competition; increase of bureaucracy and disproportional expenditure of state funds. They also enhance the risks of corruption and nepotism. Number of applicants for a subsidy always far exceeds actually available resources, by the way funded by tax payers. It also de-motivates one to achieve real success.

Q. Technological development is changing everyday life. How do you try to integrate that and which remote services do you offer?

A. We all live in an era of rapidly increasing technological development. So, proper integration and its effective disposal greatly determine strength and competitiveness of a company. Crystal has always been characterized by an innovative approach and consumer-oriented services. Our internal systems are automated as much as possible. The loan procedures are carried out very quickly. Recently we have started receiving applications online. We are actively using social media for feedback. Through hot-line service, we carry out active communication with our customers. Along with loan services, we also offer other products like: remittances, money transfers, utility payments and others.

Q. What are the main competitive advantages of Crystal?

A. In a highly competitive environment, when 20 banks and 70 MFOs operate in such a small-sized market (less than 4 million people), it is difficult to achieve and maintain high competitiveness. However, with nearly 17 years of successful lending experience, Crystal is already one of the leading companies of the Georgian MFO market and is steadily increasing its market share, also at the expense of the direct competitors. The main competitive advantages of Crystal are: qualified and skilled human resources; the internal management systems; customer-oriented products; transparent, simple and rapid procedures; a minimal level of bureaucracy and formalities; diversity of products; international standards and responsible lending practices.

Q. What are your expectations of 2015?

A. 30% devaluation of the national currency and other negative macro-economic external factors will have its impact on the micro financial market in the short term. If these processes do not deteriorate any further and we switch to a more stable phase, business activities are expected to rise up and the economy will recover. Whereas previously average growth of the company was 55-60%, this year we expect to reach 40% growth, due to external challenges.

We do not expect an increase in the overdue loans. The strong internal system and quality of our portfolio assures us that it will be less than 2% for the current year.


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