Mini-loan with maxi interest: 100% a year for 600 RON

Romanians” hunger for loans has created a new market niche: small short-term loans loan granted at home, with 50% interest for six months. The company that identified the new market niche is Provident Financial Romania, a non-banking financial company established at the end of April. The company is the domestic branch of the Provident Financial Group from the UK, which put together 4.4m euros (3 million pounds sterling) for an investment in launching the loan at home worth 600 RON for 6 months (26 weeks), with a total amount to repaid worth 901 RON payable in weekly instalments of 34.6 RON.

Although company officials did not care to specify customer targets for 2006, if three quarters of the initial investment was used to grant loans, then 20,000 Romanians could benefit from this financing solution this year. Interest for this loan will stand at 50% for six months and 100% for a year, even though it is not considered important by those looking for this kind of funding, Provident Financial Romania says. For comparison, the average interest on consumer loans in RON granted by banks to individuals for six months range from 14% to 20%, according to National Bank data.

“100% interest ceased being sustainable in Romania a very long time ago. Now we are working with interests on loans that have gone to one figure even for RON,” comments Radu Ghetea, the chairman of the Romanian Banking Association.

“To our customers, it is not the interest that matters, it is the actual cost of the loan,” stated Stephen Rice, general manager of Provident Financial Romania. “We make it very clear to our customers right from the start how much they can borrow, the length of the repayment period and how much they have to repay,” Rice says.

The British group obviously cannot afford to charge such interest in London. It remains to be seen whether the market will stomach this offer or not, accepting to pay such a high cost just because Provident spares its customers of the traditional red tape and a trip to the bank. If the market rejects the high cost, the company will probably cut the interest rate in time. Credits even smaller than this, starting from 400 RON, have been provided by another non-bank financial services company for three years, CitiFinancial, a branch of Citibank. Interests in this company”s case are way above the market level, too, and the company stands out as being completely non-transparent, having never officially revealed the interests charged, the volume of loans granted or the number of clients.

The Provident offer is only available to the people in Bucharest for the time being, as the company intends to focus on the capital. Provident has developed plans to increase the number of branches in the capital, from 1 to 3 by the end of the year. Expansion to other cities is planned for 2007. The customer has to prove they have a stream of income (salary, pension or other form of income) and that they own the residence where the company representatives have visited. After signing the loan agreement, the customers will receive 600 RON in cash in no more than 48 hours from calling for a loan. They are to repay 901 RON in weekly or monthly instalments also at home.