24 offices in Indonesia cover 85 cities

What made Indonesia such an attractive market, and what was it like building a presence in the country?

Indonesia is a great opportunity for the consumer finance business. Home Credit Group was founded 25 years ago in the Czech Republic, and we have been expanding internationally ever since. Local banks tend to focus on certain socioeconomic groups and leave out a large majority of the citizenry. We want to bring in organized lending services for groups that are underrepresented. Our efforts began in Russia, and we subsequently expanded into Kazakhstan, Vietnam, and China. In 2012, we entered India, Indonesia, and the Philippines. We are treating Indonesia as an equal partner, clearly a subject of its development, not an object of our business. Providing huge jobs opportunity must be here and supporting economy by creating multipliers effects. We sought to get a feel for how business is done in Indonesia and wanted to develop a winning formula for this opportunity-rich environment. We found a local partner in the area and opened shop. We partner with retailers across the country, placing our own employees in their stores and offering financing for major purchases. Once we develop a large-enough customer base, we begin cross selling other products based on our services and customers’ needs. We have a suite of products that we can offer through our license. This is our point-of-sale distribution model. We are the largest point-of-sale (POS) player in the world and have nearly 400,000 locations across the 10 countries we operate in. Here in Indonesia, in January 2015, we had about 800 POS while today we have grown to almost 13,000 POS.

What are your screening practices and how do you maintain credit repayment?

Our system relies heavily on the tools that we have developed over the last 25 years in various countries. We take the strategies we learned and localize them. In India, over 70% of our core customer base had no experience with the formal lending sector. In Indonesia, it is around 40%; few people have previous experiences with such lending mechanisms. Consumer finance existed previously, though we bring to the market a different way of operating. Our competitors relied heavily on slow, burdensome physical channels, whereas we offer easy, centralized, and fast service. A large portion of our decision and assessment procedures are automated, and we currently make lending decisions within three minutes of receiving an application. We rely on the information the customers provide as well as a credit report provided by the government and other data sources. My goal is to continue to improve the speed, automation and detail of our underwriting. In Russia, we currently use an average of 57 sources for our underwriting and we seek to bring a similar level of detail to Indonesia.

How do you finance your lending in Indonesia?

We finance through a combination of our equity and local banks. When we started, we used mainly equity and support from our parent company plus one willing local bank and later started working with other local banks. Getting support from the first bank is always the hardest because we had no credit history; however, once we performed well with those debt obligations, other banks were eager to work with us. We are currently working with six local partners in our joint financing scheme. We also have international banks that are our partner banks across a variety of countries.

Are there any specific product categories that have had an outsized impact on your growth?

Phones have been the major factor; 70% of unit growth and close to 65% of finance volume have come from phones. Mobile phones are still the number-one source of growth in the marketplace. The expansion is due to the turnover in cellphone purchases—people buy new phones with great frequency.

Will growing consumer confidence in 2018 change the makeup of your lending?

It will. We introduced a mobile app in 2017 that will become a centerpiece of interaction between the company and our customers. We are currently building and introducing new features for our customers. In 2017, our volume tripled, though our productivity per shop improved only marginally. This means our growth came largely from increased distribution—we now have 24 city offices covering 85 cities. We are changing some of our processes to improve our productivity and introducing a number of new strategies into our portfolio. We expect to more than double growth in 2018. We plan to cover an additional 46 cities that are mostly tier-2 and tier-3 cities. By the end of 2018, we should cover 130 cities.

What have you seen in terms of repayment and what is your typical interest rate?

Due to the riskier nature of our clients, we have to charge slightly more; however, we are not out pricing ourselves from banks. In terms of acquisition, our rate starts at 0% for customers. A typical rate on a mobile phone for example would be 1.5-2.99% a month. The price depends on the channel, type of phone, and geographic location. We use a risked-based approach.

What percentage of non-performing financing (NPF) have you seen in the last three years?

We continue to improve every year, though not as fast as we would like. Our NPF fluctuates between 0.3-0.7%. We look mostly at vintage delinquencies and other risk indicators to give us a better understanding of our NPF, and these levels are normal for the type of state we operate in. We run our business such that our margin can sustain a 100% increase in our risk cost. As a group, we have been through a number of business cycles, allowing us to create a system that can withstand shocks. We need to have a sufficient cushion to handle unexpected events.

What are your other expectations and what do you hope to achieve in 2018?

We are mainly focused on profitability. We need to ensure that we have a business model that is flexible enough to compete with traditional players and emerging fintech. I welcome competition, though I worry about unregulated fintech because not all firms operating in that space are equal. Established players have an obligation to report to the debtors’ databank, while unregulated players do not. For us, it is critical to ensure that we do not over debt the customers. We saw this in Russia and it was undesirable. We want to ensure we have excellent data about exactly how much money people have borrowed, so we can ensure that our operations remain stable. We also expect to double our lending levels and expand our partnerships with local banks. Our growth will come from cross-selling products to customers who have established excellent credit histories. These loans typically grow to four or five times the original loan amount, increasing our volume and extending the repayment period.