China - a consumer finance challenge

Giving a small loan to Chinese people in 2nd tier cities may be understood as a challenge. Han people used to be closed behind a wall protecting them from very militant Mongolian hords, as they were a problem since 10th century (we can see their movement up to Europe by current Hungary and Finland). This thread was coming from North and West (today parts of Russia, Inner Mongolia in China, Mongolia, Kazakhstan, Tajikistan...). On the east they were meeting Japanese people, that overtake Chinese alphabet and culture. On South East they were facing a sea and sea pirates (today Phillipines). On South a strong nation of India did influence China in religion, but until this years there is not a good relationship between China and India (prove of that is the coalition between Pakistan and China, enemy of my enemy is my friend principle). On south they also met nations of Vietnam, Myanmar and Laos. They did strongly influence this culture and use it as depending states. Only difference was Thailand, as their independence was kept for long time even by paying a big tributes.

In long Han history we can see the discovery of money and banking system. Export of certain products through Silk road. But normal people were closed and even in last centuries rules by foreign power.

Last years (since 2004) we can see the first time an average person being able purchase products he doesn't necesarry needs and enjoy his life. Social stability allows people to forget about everyday saving up to maximum. Even Chinese people are very careful about their money, new generation would like to enjoy them. And this is maybe a first time in their history.

Therefore any consumer finance is facing two challenges:
a) big demand, as having a loan is not considered as something bad anymore
b) growing NPL, as the culture of the loan a payback is still not introduced and understood (especially by credit cards, where loan appears to be never paid back).

Finance changing the world

Finance is representing the value exchanged between two or more subjects. We can compare it to energy in the nature or blood in our body. By its setup finance doesn't bring any value in terms of new road, new bread, new car or new service. It is a mean of exchange.

Finance itself doesn't need to be in terms of cash. Many people exchange cash foe finance and finance for cash. Finance can be also in terms of state bonds, traded equity, gold, diamonds....and anything else that keeps the value and is relatively small to make exchange. Finance is often connected to money, as by electronic transfers it became much easier to realise transactions.

Economy itself needs a mean of transaction. Well known formula describes Price value * Economical output = Monterary base x Velocity of the money.

This equation tries to describe the substance. If we care about the growth of the economy (and we dont focus on equal distribution of the wealth) we have to increase the velocity of the money and monetary base. Of course the price will react and go up, as the increase of the velocity and base will immediately cause the price to raise, but in medium term we will see economy growing, as people will get to mew ways of payment and will get use to it and trust it.

In the above equation we keep everything else constant. We dont focuse on education, quality of production, interest of people to produce more, time.... on the other hand we can see, that for a developing economies could a limited amount of money together with bad velocity decrease the economical output.

Consumer finance and new means of payment are changing that. They provide new amount of money not before accessible to people in poorer countries. They give them chance to grow, but expects payback in return therefore stimulating the investment with return and proper management. They also allow much smaller transactions do quicker without logging to crazy complicated Internet bankings, where u spend 5 or more minutes just to make transaction happen. For all this current banks are not ready. Current banks will take same time to approve loan for 100 or 1000. And they will not care for loan of 1 or 10 as the approval process is rigid and slow with too many conditions. Reason for being so is RWA, risk weighted assets, where they shall not overcome 8% - rule set by BASEL I and onwards. (very simple look). How can than a bank approve a small loan with RWA of 12%? It will cost them so much capital, that it will be unreasonable to provide the loan.

Consumer finance and not so developed economies are the place with NPL over 10%. Sometimes reaching 12%, in some cases of internet landing up to 50%. For this types of companies is not worth to ask for banking licence, as it will kill them in their balance sheet.

On the other side every loan or group of the loans can be divided. Imagine one single loan of 100. The probability of first 30 to be not paid from 100 if smaller than last 30 of the same 100. This is how loans work. If we divide the loans given to first 30 and last 30 we can put risk of first 30 to bank, additional 40 to consumer finance and rest 30 to risky investors. Than we will be able to fulfill the BASEL criteria and still provide more risky loans to less developed part of economies.

Payment systems by Samsung / Apple / Dash

I observe in recent year the growth of the payment systems, called SamsungPay, Dash... I it amazing how the role of the small payments change from having cash in your pocket, to use Visa or Mastercard over Visa Wave up to this new systems. There is a change in using of the currencies too. Where Mastercard, Visa ... did use the home currency of the card issuer (or other internationally traded currencies) the new systems does not always keen on being so. It is also due the fact, that Eurocard is backed by German banks, as Mastercard is used in European banks and Visa by Amrican banks (originally). And than the settling currency was EUR or USD. The new payment systems allow to use ecurrencies, their own Bitcoins, Coins or whatever they call them. This approach is a dramatical change especially to governments and central banks. One day our employees will ask the salary in Bitcoins instead of Indonesia rupiah. It might be far fetched, but not impossible. Once people will see the universal value in other than local currency, once they will trust new ecurrencies more because they have better ability to pay for food, be liquid or keep value (in this order) will than the state or central bank of that country fail? we can see the same happening in Zimbabwe or Serbia, where American dollar or Euro takes the position of value keeper. We are witnesses of the evolution on the market happening infront of our eyes. I look forward to the moment of new IPO for a small company to happen in ecurrency. It will be purely challenging.

Trust / Risk / Return (Asia)

Many of the senior financial books will describe a triangle between liquidity, risk and return. It is an additional to risk and return approach well known from our lives and experience. In this short article I would like to describe following square:

Trust - Liquidity - Risk - Return

I observe in Asia.

Adding trust to the equation is about description who I have information from, how I can be sure the information is correct and how many people before can confirm me the promised equation.

Many times was proven, than decrease by one unit of the trust can increase amount on invested money by x-times. This is due to familiarity of the approach from investor, trust he has and can confirm from 3rd sides. Trust is also build due to marketing, presentation of the company or the achievements of the management. And Asia is a great example of it.

Asia is not anymore a poor part of the world, where only few rich people have enormous cash to invest. For such a countries u need a good relationships. Asia is much more about developed financial models, top advisors u need to pay certain amount of cash to prepare your company for investor. It is due to less certain market in comparison to Europe. There are still many small companies running around with big investment ideas, fake companies and directors stealing money from small investors. Fresh married people will put their deposit to a great investment with hope of big returns. And than money will be gone.

Consumer financing / online collection / banking

Banking itself is a base stone for any economy due to the constant flow of value between various subjects. Therefore it settles down all receivables and payables with customers and suppliers respecting the value of money they received. It is crucially important to keep this function in the system and grow it. Therefore banks, as a trusted institutions, bring stability and growth to the system. Different systems of banking, providing of payment solutions and settlement can be observed over the world. It gives additional stress to people coming outside the system, as European and Asian payment habits are different (German to Singaporean for example use of checks).

Therefore any off banking systems need to keep this function. Being able to accept deposits and keep them safe is crucial. People can trust the institution and institution itself has to be stable within state, as state relies on it. After this is achieved we will look inside the function of giving loans and protecting the value of the assets from the position of the institution.

Therefore settle down payments. Focus on this and open yourself to new ways of financing. Usually every loan can be split between different parts and the less risky ones shall be covered by the deposits of the clients. 

Unbankable consumer and his need (Asia)

Following my observation there is a great need to build a middle class in non-Russian Asia. Many of the nations do not share the wealth between their people. It is also much harder, as the nations are not consolidated. Many parts of Indonesia, China or India are not 100% discovered. There are no proper roads build, no train reaches the place, plane connection is hard and inconvenient.

Solution to such issues may be a cell phone, where a simple device connected over applications as FireChat (building the network between people without having internet) will allow people to communicate and start to grow economy by posting advertising, short messages, updates, send or receive money...

Flow of the money is important. It settles every second the relationship between two parties making them able to save, invest, borrow or transact.

Connected together with consumer finance on a super small scale will allow to open a new business, as competition, bring new products. In the end to make the island economics interconnected and growing.

Other non-bankable clients are the ones too far to reach for a bank. Opening a branch is not really cheap. Adding educated bankers, selection process, head of branch, system. This all costs money. Also there is a chance, that your own branch will be causing additional NPL to you, as bank, due to mismanagement risk. And for every cost u incure u need at least 20 deposit or loan, as 5% income may be reasonable. Therefore a branch with at least 3 people will need to a strong base. Usually a big business around, strong cash flow, deposits.... And this is so hard to achieve in underdeveloped areas.

All comes to handling with cash costs. Make whole process less people dependant and more automatical, leave cash as a last resource collected by 3rd parties as a cell phone operators, booth stands.... will than offset the expensive part of bank.

Early collection - NPL prevention & predictions

"No touch collection" is important in developing countries as Indonesia, as India and in many others. By "no touch collection" I understand any way the creditor or him appointed company does not face the debtor.

Facing the debtor brings many challenges,  naming few of them:
a) costs
b) pressure on effectivity
c) miss management by 3rd party
d) distance to travel
e) avoidance
f) legal problems
g) inconvenience for debtor
and so on

In current era of social connectivity, cell phones, messages, applications, online card payments, databases the debtor may be contacted by various means and various ways. U may even make debtor happy by reminding him gently he is overdue without almost any costs. Some may suggest, that focusing on contacting debtor before he/she will become one will decrease %of NPL before the loan is given. Patterns, as the ones by a debtors denying to pay even they have an option to do so are also common. And this debtors than make much harder for the new ones to receive loan.

Therefore we can classify different moments of the unwillingness:
a) not being able to pay at all
b) not willing to pay even being able to
c) not being able to pay due to the lack of cash
d) 3rd party default

It is amazing to find out, how even 1% of additional "no touch" collection changes the classification of the financing portfolio. Why is that?

Given an example of loan for one year, amount of 100, interest rate of 30% p.a..... usual consumer loan

P&L income from the loan is around 15, as the installment is paid monthly. Whole loan is 100, therefore exposure is 6times bigger than the income (100/15+). Final profit of the financial institution may be around 1-2. Therefore a bad collection, especially "no touch collection" can shift the final profit easily to negative numbers (loss) or exceptional profit (100%-50% increase). As every shareholder is focused on ROE than increase in return by 50 or 100% changes the ROE dramatically and therefore allows to attract more funding, or make the investor more open to additional risks.

Retail loan advantages & challenges

Providing of retail loan is the way to change the ability for the low incomer to invest in their future. Purchase motorbike, smartphone, small place to sell food, pay one or two months rent for UBER services, buy a solar system to have a light, pay for doctor, send child to simple school, pay for unexpected funeral, escape the bad employer....

Once managed properly in less developed countries it will give the opportunity, that was always missing.

The small loans shall not seek an support from government or local municipality institution, as it might bring more instability to the system by rigid criteria that would be so hard to fulfil. It might be, on the other hand, looking for an NPL support or support by providers of the service/goods by offsetting NPL to certain level. Consumer financing might be a competitor to marketing, as we don't need to persuade to sell the thing to people, we are allowing them to buy it. And than than we can save on marketing costs.

NPL .... the main reason and challenges

Calculating an NPL (non-performing loan) ratio seems to be a critical moment for any institution, financial one foremost. Non-perming we call once the payment term for the loan is not met. Therefore we focus on a date of the payment, as the main criteria to describe a loan to be non-performing.

Usually we stuck with following ideas:
a) is the non-perming a loan immediately even 1 second after midnight?
b) is a partial payment of the loan disqualifying it from being non-performing?
c) can an other non-cash income ne considered as a payment?
d) what is the normal ratio of NPL?
e) can we discover NPL befote they happen? meaning we can predict the failure of the payment and act in accordance with it?
f) is certain amount of NPL good or bad for our P&L? (in terms of fees and additional service like insurance)
g) can a NPL loan be a loan where the debtor is unable to pay due to the new conditions in economy (Indian case)?
i) does the NPL approach vary due to cultural or religion approach?
j) can be an NPL offset later, years after it occurred?
h) can a steady cash flow influence oir ability to control NPL?
i) can the financing institution receive offset of the NPL initially by giving loan by 3rd party? (credit card case....)
j) can NPL allow the government to effectively control the industry? (consolidation banks)
k) is the qualification of 90 or 180 non-performing portfolio the same over the world? (China & EU case)

Main financial principle in Asia

It is amazing to see, how much is the life in Asia controlled by cash. Cash in form of deposit, in form of bank account, but also in form of cash on hand, or in sofa. It is reminding to the European that cash may be the one to make difference. Being there you would ask yourself what it is caused by. Financial institutions are much volatile. Do no keen on simple financing. Mostly SMEs suffer a lot. Normal people would have a credit card, where bank earns 3 to 5 percent once paid. You also pay yearly for having the card. Overdraft is not usual. Collection of the debt is more hard collection oriented, if collected. Differences between rich and poor are getting bigger. And being poor is not the same we understand poor in Central Europe. Taxes are lower, social setup is much lower and differences in education are big. Even once educated it is more about memorizing. Not about real life usage. I get reminded of old Chinese Confusions. U need to do what shall be proper even it doesnt reflect the need of the student or real life. India may be example of it. Indonesia with 13 million credit cards too. Please dont forget that some people have 3-4 cards. On 250 million market.

And governments try to control poor by currency. Rich understands that holding local cash is just another way of indirect taxation. And local governments doing crazy things, devaluation, poor support to R&D, education for money, focusing on large economies usually former colonists.

Maybe the new are of non-banking banks, of external guys jumping on a market will open an option to change that. Even it seems more like another way to make poor poorer. Allow them to overpay something they would be not normally able to have.

I look forward to new nations using this ability. I am always very humble to see that worker building road in Malaysia.

China - one union, many states

Investing in China is a challenge. Once u decide that market may be good, u find people and resources, your main question will be: "How will I get my resources back, once the business will be profitable?". In this respect is China not the best country to give you one shot, simple and reasonable answer.

As my former boss said: "Find out how will get out of business before u get in to the business". And he was right, especially in China.

There are following main points you can observe in there:
a)China likes the money get in, but once it is approved.

b) China doesn't allow you to invest inside China in form of 100% loan by mother company. Simply said, money can not flow to China as a loan from mother company only, it needs to be at least 66% of equity. And equity means your money is stacked. This money could not be withdrawn easily, like loan may be.

c) even u achieve to send your money to China as a loan it is not automatically allowed to withdraw your money out of China, once u decide to pay back the loan. There is a public organisation called SAFE to get permit from. And this is tricky.

d) do not expect all of your costs to be accounted in operation and therefore decreasing your tax substance. This is additional type of taxing on your sales.

e) be carefull on the rate you might get once money send to China and send outside china

f) focus on income tax, dividend tax and cash withdrawal tax. It can come to 50%.

g) build a second option/second way. Do not show off and keep safe and simple

It might be a great business to invest in China. Merge with others and ask questions.

India - December 2016

Essay:
Recent development in India is bringing one question forward: "Is Mr. Modi a literate leader with little business experience?". I am afraid to know the answer. Meetings of different leaders he posts on social media is really nice and great. Almost every week one religion leader or another speech. What I am missing is the support to businesses to export. "Make in India", what does it mean? Does it mean that meeting more and more politicians will make country successful? Or demonitazing of economy will make Indian's business stronger to export? Or foreigners to invest? How many times we see Mr. Modi to meet with small and medium enterprises? Have Mr. Modi been in banks in India? Did he ask for a small loan, go to branch of the bank?

I am afraid we might see an action from a book of science fiction. We see the fight with black money by contacts of rich people to keep their wealth. Instead of making people safe to invest and grow the trust of Indians u punish them. Make all less stable and less predictable. Following my own experience this is now how u grow for the people.

Consumer Finance

Pricing-costs approach

Pricing of consumer financing in developing countries could be calculated as a sum of:
a) NPL (non-performing loans, usually being overdue more than 90 days for every part being overdue).... a good company will try to keep it under 10%
b) administration costs, where it depends on marketing costs, costs of early collection, bonuses to retail stores (where goods are sold or money provided), salaries and bonus models for employees, office rent and controlling & risk provision costs (very different, around 30-40%)
c) COF...costs of funding (by this type of investment u have to consider 20% plus)
d) currency volatility (once u provide loan in volatile ccy it might be calculated as additional costs)....for this time we avoid this.

Therefore the final costs may reach up to 70% for a loan given for one year. We may try to decrease such a costs to minimum mainly focusing on admin costs. Challenging will than be how close to customer we would like to be & how long our customer would like to wait for a loan to be approved (thus how many documents we will need...). The above given numbers are for reference.

Costs for the client
It needs to be clarified are real costs for the client to receive such a loan. To cover the costs we can not simply say that the customer needs to pay 70% for his loan as extra interest costs. Therefore for one year loan in amount of 100 will the costs be 70. Once we confirm, that loan is paid as annuity (therefore instalment and interest every month for 12 months) we will come to conclusion, that this type of financing will charge 35%plus as extra costs. Therefore additional 35 units to obtain financing to cover costs.

Is it a lot?
Having the experience from sale business it is normal to purchase product for 100 and sale it for 400 to final customer. This os common for products as a toys purchased in China. It needs to be preordered, transported to Europe, stocked, sold to customer and received payment from customer. Whole process takes around 8 months, 20-30% of the products are not in good quality and 10% of customers will have payment problems.

If customer pays 35% extra on goods seems now as a cheaper choice for overtaking the risk.

Why banks charge lower?
Bank have additional ways to earn on customer for a 1 year 100 annuity loan and also lower costs to acquire the customer. Reason for being so is the limited locations of the banks. Also focus on higher loans and therefore decreasing the % of the admin  costs. Condition to send your salary on account where loan is given. Approval fee. Insurance. Monthly balance letter fee. Fee paid by salesperson for usage of credit card. Time to approve loan.

Will be consumer finance replaced by banking?
My opinion is that not. The most important in the model of consumer financing is to be close to customer. Much closer than bank wish to be. Especially with all the Basel II and Basel III limits. Consumer finance is willing to invest more in acquiring the customer. Whole process is more expensive. Also consumer financing is willing to overtake more risks. Banking can not as it is not allowed by Basel. Consumer financing heavily depends on collection. Especially on early collection success, so loans do not touch 90 plus.

Hong Kong - visit report

Establishing company in Hong Kong seems to loose all the advantage. There is no advantage foe tax purpose, as the same deal u can get in Singapore. Amount of foreigners dramatically decreased. Local people speak now more Mandarin than English. And the advisors u meet look rather hungry for new business. Business setup is old and stable, no progress. Advantage for R&D is so far from Singapore and it is obvious nobody gets it or trusts it. Cash flow to China is hard and so much limited. Standards fall down and people are more rude than used to be.

1997 in HK was 1968 for Czechoslovakia

Hong Kong - do finance

Recently I travel to HK with the strange feeling. It is turning from financial headquarter to tourist one. A new Macau you would say. I am observing the change happening. Observing prices, people and approach. I sense business is more and more hungry for a great ideas. I might be wrong. We will see this time ....

A nice poster on Jakarta airport

China - short term operating business challenges

Being incorporated in China may incur few challenges. Let me focus on financial ones or ones related to controlling.

Invoice issue
You may hear from your related supplier the sentence: With invoice for 100 or without for 70. It makes all accounts messy. Very messy I can tell u.

China is different - also for accounting
Do not be messed by this sentence. It is not true. Just ask for a good old accounting journal and spend your time. You may need google translate, but u can crack it. Ok, ok! They use accounts 1XX for the bank,  2XX for A/Rs and A/Ps. 3XX is for equity. But no big surprises. Only that one type of accounts is for costs and sales....5XX.

Nothing to be worried about. Keep asking your accountant. As long as the credit and debit side SUMs correspondent you are ok :)

Tax avoidance
I would describe it as a big one concerning it is social country. It is a big surprise. I sense it might be over optimised. I believe no need.

You stupid foreigner
It is so often to meet accountants with a small experience telling you how something works. And than you start to question them. Good deep in the issue and make them responsible for the words.  Once the voice become quicker, once they remind you that they need to go home be careful. It usually means u will need to spend much more time with them that day.

Lots of luck in China!
It is country worth it.

Credit cards in Indonesia (market & collection)

1. general data about market in Indonesia

2. usage of credit cards

compare

India & Indonesia

India - challange of the financial system

Working on an Indian financial market I might declare following statements:

a) it is too expensive for the developed financial company to start operation

Office
.... as the good quality rent costs a fortune together with deposit
.... as the local air is so bad u need an air purification
.... as the energy effectivity of buildings is bad

Company setup
.... it takes too long
.... it has crazy rules + local advisors are useless offering you only all in equity solutions. I am not willing for every EUR I invest in country to invest as equity
.... lot of "It works like this in India it works like this over the world non-senses"

Banking
.... very bad shape. Few banks, literally few. For an economy like India to have a handful of whole India banks owned by government and the rest of the banks to be local government or municipality owned. One new licence since 1996! This is so backwards for a country of the India size
.... lazy bankers testing you what u take as normal and squeezing every cent u have unless 10% is left in their pockets
.... no being able to hold the foreign currency on you account but immediately to  change it to Rupiah. And for what rate? For EUR you loose around 5% if you dont pressure your bank to fix the rate before money arrives!
.... every foreing incoming transaction to be documented
.... loosing value of Rupiah in time
.... very hard withdrawal of money out of India

b) running the company
.... 80% people doesnt have bank accounts
.... 80% of transactions happening in cash
.... sudden withdrawal of 500 and 1000 notes from economy as happened on 8.11.2016
.... piles of cash in the homes of  rich not being deposited....thus not being able to reinvest
.... borrowing on behalf of pledge of property only
.... 5 people in bank to do simple transactions
.... bad transportation (need 2 hours to get on a meeting on average)
.... no sense of time and urgency
.... keeping the bankers jobs for the family members, no competition
.... BOI saving bad debts by purchasing them...not solving the situation unless it is very bad
.... not a proper debt collection (touch or no touch wise)
.... huge variability within the country in languages and writings

c) controlling the company
.... "I am going to close you" approach to get things done
.... "not thinking about the numbers" unless it really affects me
.... "low life expectations"....people in India suffer and are ready to suffer
.... nobody cares approach
.... family foremost, no need to care of neighbour
.... tax avoidance

Therefore I would like to Mr. Modi to continue his effort. Open financial system to new subjects. Let the system change. Increase the confidence in state as itself and decrease the scare of the state officials. Make a new better rules to allow investments to India. Distribute wealth between people and make them socially more aware.