Consumer Credit Market in Romania - A Paper Overview

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1 CONSUMER CREDIT PRODUCTS IN ROMANIA Laszlo Gyula Florian, Partium Christian University, Romania ABSTRACT Consumer credit is defined in many countries as credit destined to finance any purchase other than property. The first part of this paper covers the main characteristics of Romanian consumer credit market vis-à-vis of consumer credit market at EU level. We point out to the dangers of consumer credit products, arguing that confronted with rising prices and a lower purchasing power, borrowers are likely to alter the way they use a credit, which will increase the costs of credit and finally lead to impossibility of borrowers to service their debt. Of course, informing customers about the true costs of these products is one solution, which can mitigate the phenomenon. The second part of this paper advocates the usage of quantitative studies in business. We use conjoint analysis to assess the preferences of consumers for credit card products. Keywords: consumer credit, conjoint analysis, product management 311

2 CONSUMER CREDIT Consumer credit covers loans granted to households for a specific purpose and loans granted for general use. Whereas the consumer credit for a specific purpose is granted subject to the constraint that the credit will be used to purchase a certain product or service, in the case of consumer credit for general use there is no agreement between lender and borrower as regards to the products to be financed by the loan (Balaguy, 1996). As opposed to mortgage credit, in general consumer credit does not require collateral (Constangioara, 2010). In fact US laws define consumer credit as credit for households, regardless of its usage, that is not based on collateral. Under this approach consumer credit can be used to buy property, as long as the loan is not guaranteed by collateral (Consumer credit in European Union, 2000). Nevertheless distinction between the two types of credit granted to households is blurring because the consumers are increasingly using the cheaper mortgage credit to finance the purchase of goods or assets other than property assets. Consumers might also arbitrage between consumer and mortgage credit due to taxation issue in US and some EU countries (Netherland, France and Italy) borrowers can deduct the interest paid for the mortgage loan from their taxable income (Consumer credit in European Union, 2000). In 2008, the European Commission adopted a new Consumer Credit directive, aiming at facilitating the creation of an internal consumer credit market across European Union while at the same time leveling the consumers protection across the European Union. The deadline for transposition of the directive in national legislation of member states was June THE MAIN CHARACTERISTICS OF THE ROMANIAN CONSUMER CREDIT MARKET In analyzing the state of the Romanian consumer credit market we will follow the contextual indicators proposed by the Consumer credit in European Union in 2000, measuring: (a) the relative importance of consumer credit and (b) market structure and competition The relative importance of the market This is why it is estimated that at EU level consumer credit supplied by banks amounted in 2008 to 884 billion euros. Since there is scarce data on lending by OFIs (official sources does not provide such data) and taking into consideration that OFIs play a central role in consumer credit in countries such as France, Italy, Netherlands and UK 312

3 then we can argue that the size of the EU consumer credit market is much larger. Mercer Oliver Wyman Report (2005) estimates that the size of consumer credit market at EU level amounted to 1236 billion euro. Out of the 884 billion euro consumer credit granted by banks, Romanian consumer credit market amounted in 2008 to billion euros (2.2%). The relative size of the market (as a percentage of GDP) shows strong discrepancies across EU. While countries such as Slovakia, Hungary, Estonia, Lithuania, Netherlands and Luxembourg have relative small market for consumer credit (under 5% of GDP), other countries such as Cyprus (25%), Poland (22.7%) and Romania (13.7%) present a deeper relative development of the market. It is worth noting that Romania, a new member state of the EU presents a relative development of the market on a par with that of much more mature western economies. The relative high penetration of consumer credit in Romania reflects a high level of indebtedness which could pose a systemic risk because the lower purchasing power of Romanian and the deficit of national prudential legislation (Constangioara, 2010). The crisis started in 2008 halted the increase in consumer credit in all EU states. This was valid also for Romania. Romanian Central Bank (RCB) does not provide information on consumer credit. Yet information of private sector loans is available (Figure 1). Figure 1 shows that contraction of private sector loans (and thus of consumer credit) begun at the end of 2008 and continued until September 2011 when the annual dynamics entered positive territory reaching 3.3% at the end of 2011 and 4.2 % in June 2012 (RCB Financial Stability Report, 2012). Yet by reference to 30 Sept the real growth rate of credit to the private sector remained negative (-5.4 % in July 2011 and -2% in June 2012). Figure 1 shows consistent discrepancy between credit to private sector denominated in foreign currency and that denominate din national currency. While the former presented a positive trend throughout the investigated period, the later shows a -20% relative decrease to the level in 30 Sept According to the Financial Stability Report of Romanian National Bank (2012) several factors corroborated to determine the decrease in credit supply to private sector denominated in national currency: (a) banks low risk appetite (high risk aversion), (b) lack of long term funds denominated in domestic currency, (c) liquidity issues in global financial markets affecting especially parent banks of subsidiaries operating in Romania. 313

4 Figure 1: Real growth rate of private sector loans by reference with 30 Sept Source: RCB Report for financial stability, p. 47. Romanian Central Bank (RCB) seems reluctant to recognize its contribution to credit crunch at the early stages of the crisis due to enacting pro - cyclical prudential legislation (Constangioara, 2010). Yet RCB ultimately has realized the adverse consequences the enacted prudential legislation on credit and consequently on real sector and implemented monetary policy aimed at increasing both demand and supply of credit. Thus since September 2008 RCB lowered the policy rate by a cumulated 5 percentage points, from 10.25% to 5.25%, a clear signal to commercial banks to lower the price of their loans. On a supply side RCB enacted in 2012 legislation meant to easy the required reserve policy and improve the liquidity in the market (ECB Financial Stability Report, 2012). Same report shows that demand for credit was also positively affected by economic recovery started with 2011 and improving expectations in the real economy. All this measures stopped the decline in loans to private sector although as depicted in Figure 1, by reference to 30 Sept. 2008, the real growth rate of credit to the private sector remained negative. 314

5 CONJOINT ANALYSIS OF CONSUMERS PREFERENCES OF CREDIT CARDS Present study continues the efforts to advocate the usage of quantitative studies in business, by proposing using the conjoint analysis for analyzing the consumers preferences for credit cards in Romania. Credit cards in Romania Credit cards are financial instruments that can be used when needed. The loan offered by a credit card is fixed. Success of credit cards in Romania can be explained by how easy they can be obtained. The only condition needed are tenure (last three months with the same employer) and a proof of the wage received by the applicant. Their success comes despite the fact that credit cards are the most expensive consumers loans on the market, with annual interest up to 28%. Interests are in most cases accompanied by commissions and taxes which can raise the cost of the credit to as much as 40%. Nevertheless, high costs can be avoided if credit cards are used to finance purchases at supermarkets. In this cases most banks offer a 30 days grace period within which if you repay the loan you do not pay interest. Table 1 summarizes the advantages and disadvantages of credit cards. Credit cards offer other advantages also. Most of them are covered by insurances (lifeinsurances and insurances against theft). Banks have developed strategic partnerships with major retailers (for example between BRD and Carrefour or Unicredit Tiriac Bank and Metro). These partnerships take the form of co-branding, in which cases credit cards are designed with both the bank and retailer brand. Such strategic partnerships between banks and retailers can result in increased card usage, higher spending levels, efficient marketing opportunities, and higher satisfaction and value for customers. Table 1: Characteristics of credit cards No collateral is needed Life insurance Theft insurance Advantages Partnerships between banks and retailers Easy access to credit Grace period as long as days when no interest is paid High interest rates High taxes Disadvantages Grace period is limited to purchases of merchandises from retailers High costs of withdrawals from ATMs The lowest interest rates on credit cards are granted by CEC, a bank with Romanian capital. ING, ATE Bank, OTP and BRD are also among the banks with the lowest cost of the loans. The highest interests are found at Garanti Bank, RBS, Banca Romaneasca, 315

6 Unicredit, Raiffeisen or BancPost. The latter charges, alongside a 26% interest, the highest commissions on the market. ATE Bank and Millennium offer the longest grace period on the market, coupled with a low commission from ATM s withdrawals. Alpha Banks distinguishes from other banks through the lowest costs associated with ATM s withdrawals. BRD offers a system based on accumulating points at each purchase from retailers, points that are consequently transformed in money. At CEC bank at the end the grace period you need to pay only 2% of the principal per month (Pascu, 2009). Research methodology Conjoint analysis is a main-effects analysis meant to estimate the joint effect of a set of independent variables measuring the attributes of a product or service on a dependent variable measuring the preferences of consumers. Preferences are the left hand-side, ordinarily scaled variable. Attributes are used as independent variables. Both continuous and categorical variables can be employed for measuring attributes. When preferences are modeled directly the conjoint analysis is known as Metric. When attributed are categorical variables the model of conjoint analysis is: = (1) Estimated coefficients represent part-worth utilities, depicting the contribution of each level of an attribute to the estimated preference. Consequently the estimated overall utility of a combination of attributed defining a product is the sum of the estimated partworth utilities. For the purpose of this paper we have assumed that preferences for credit cards are dictated by three characteristics: Grace period (High, Low), Fees associated with the credit card (High, Low) and interest rates charged by the banks (High, Low). We have used only three independent variables. All three are categorical with two categories. It results thereby a set of 2x2x2 profiles giving the possible combinations of existing classes of the employed variables. A total of 200 subjects were required to assess the resulting profiles on a scale from 1 to 10, which gives a number of 1600 observations used in the analysis. Data In the spring of 2012 we collected data using a survey-based questionnaire targeting Romanian consumers of credit customers. Data serves to assess the preferences of investigated consumers for credit card products. The quantitative modeling of preferences proposes the conjoint analysis. The statistical package employed in the analysis is SAS

7 Results Actual conjoint analysis is performed using PROC TRANSREG in SAS 9.2. The analysis variables and transformation specific options are specified in the MODEL statement. The option IDENTITY (RATING) requests an identity transformation of the dependent variable Rating which is specific to metric conjoint analysis. The CLASS specification identifies the independent variables as being categorical variables. An exhaustive presentation of PROC TRANSREG is found in SAS/STAT 9.2 User s Guide. Main results obtained by running the TRANSREG procedures are presented in Table 2. Table 2: Main results of metric Conjoint Analysis Label Utility P-values INTERCEPT GRACE PERIOD HIGH GRACE PERIOD LOW FEES, LOW FEES, HIGH INTEREST HIGH INTEREST LOW Table 3 presents the overall estimated utilities. Table 3: Overall estimated utilities Grace period Fees Interest Estimated Utility LONG LOW HIGH = LONG LOW LOW = LONG HIGH HIGH =6.745 LONG HIGH LOW =7.305 SHORT LOW HIGH =5.945 SHORT LOW LOW =6.505 SHORT HIGH HIGH =5.885 SHORT HIGH LOW =6.445 Note that the customers value most the combination (GRACE PERIOD HIGH, LOW FEES, LOW INTEREST) with an overall utility of and least the combination (GRACE PERIOD LOW, HIGH FEES, HIGH INTEREST) with an overall utility of Table 4 shows the importance of utilities. 317

8 Table 4: Importance of attributes Attribute Importance (%Utility range) Grace period 0.43*2/(0.43*2+0.03*2+0.28*2)=58% Fees 0.03*2/(0.43*2+0.03*2+0.28*2)=4% Interest 0.28*2/(0.43*2+0.03*2+0.28*2)=38% The importance values (Table 4) shows that the grace period play the most important role in buying decision. Thus, the attribute GRACE PERIOD has an importance of 58%. With only 4% utility, fees are the least important and interest with 38% utility are in the middle. CONCLUSIONS They can be used to finance sales (Points of sales financing) or to obtain cash from ATMs. Among consumer credit products they distinguish themselves by allowing the owner to use them without paying interest under certain circumstances. Interest can be avoided if the loan is repaid within a certain grace period specified in the loan contract. After presenting the relative importance of the market and the factors which have corroborated to determine the evolutions in the market, we analyze the product offerings at national level of the market. We argue that Romanian consumer credit market is dominated by personal loans and loans for the purchase of durable goods. We also argue that in Romania a particular interest is given to revolving credit products. The empirical analysis advocates the use of conjoint analysis to identify the importance associated with different attributes of credit cards. We have found that shows that the grace period, with a 58% utility, plays the most important role in buying decision. To the opposite, with only 4% utility, fees are the least important characteristic of a credit cards considered by possible clients. REFERENCES A. Constangioara Consumer Credit Scoring. Romanian Journal of Business Forecasting, Issue 3: DG Health and Consumer Protection Establishment of a Benchmark on the Economic Impact of the Consumer Credit Directive on the Functioning of the Internal Market in this Sector and on the Level of Consumer Protection. DG Health and Consumer Protection: Brussels. Mercer Oliver Wyman Consumer Credit in Europe: Riding the Wave. European Credit Research Institute Press: Brussels. 318

9 National Bank of Romania Press Financial Stability Report. Bucharest: National Bank of Romania Press. P. Green, J. Carroll and S. Goldberg A general approach to product design optimization via conjoint analysis. Journal of Marketing, vol. 43: P. Green, V. Srinivasan Conjoint analysis in consumer research: Issues and outlook. Journal of Consumer Research, vol. 5: R. Pascu Cardul de credit, o afacere pentru tine sau pentru banca? Rothemund, M. and M., Gerhardt The European Credit Information Landscape. An analysis of a survey of credit bureaus in Europe. European Credit Research Institute Press: Brussels. V. Srinivasan A Conjunctive-Compensatory Approach to the Self-Explication of Multi-attributed Preferences. Decision Sciences, Vol. 19: W. Watson Introducing the Market Research Analysis Application: SUGI Paper. Weil, L Efficiency of Consumer Credit Companies in the European Union. A Cross-Country Frontier Analysis. European Credit Research Institute Press: Brussels. 319