High-risk Consumer Credit Field Marked by Steep Interest Rates, Fewer Options

C.A.L. Israel Credit Cards charged individual customers an average of 12% interest in December.

The CEO of a leading credit-card business says his company is trying to walk between the raindrops in the current lending market, but high-risk consumers have no such luck.

In figures underlining the haphazard state of the consumer lending market, C.A.L. Israel Credit Cards a major issuer of credit cards and consumer credit charged its customers an average 12.2% interest last year, the company disclosed Thursday in its latest financial reports.

The company also disclosed that it charged individual customers an average of 12% interest in December, which is even higher than the maximum rate allowed to be charged on the so-called gray market. Credit card companies, however, are not subject to that limitation because they are considered bank corporations.

The law regulating the gray market, which refers to loans provided to customers by lenders other than banks, limits the maximum effective gray market interest rate to 2.25 times the average unlinked rate that banks charge the public at large. The most recent available figure on bank interest is from November, when the average interest rate was 5.27%. That would make the highest permissible interest rate for nonbank lenders 11.86%. But C.A.L. is not subject to that limitation.

C.A.L.’s consumer lending portfolio is sizable NIS 1.89 billion. The 12% interest rate it charged in December was identical to what it charged in December 2011. However, in the course of that 12-month period, the Bank of Israel lowered its base interest rate by 0.75 percentage points, meaning that instead of passing along the lower interest rates to its customers, C.A.L. pocketed the difference.

The rate charged by C.A.L. is the highest of the three major credit card issuers. Leumi Card has a credit portfolio of NIS 1.86 billion. In December 2012, it charged its customers an average of 10.5% which, although high, is lower than the 11.6% it charged a year earlier. During a period in which the base interest rate declined by 0.75 percentage points, Leumi Card lowered the average interest rate it charged its customers by 1.1 percentage points.

The third major player in the market, Isracard, has a credit portfolio for individual customers of NIS 683 million. It charged an average 9.21% in December 2012 and 9.92% the previous December, passing along the full drop in interest rates from the Bank of Israel.

The fact that the credit-card companies are exempt from the ceilings on interest rates that nonbanks can normally charge makes them just about the only players lending to high-risk customers.

A public panel seeking to increase completion in the banking sector called for a change in the existing law to open competition between banks and nonbanks. However, since the panel issued its interim report, the Knesset disbanded and a new election was held. The matter has not since been addressed by regulatory authorities.

Another problematic aspect of the current consumer credit market is that there is no credit rating system that would give the banks a measure of the risk of extending credit to a particular customer. “We’re in a field in which we don’t know our customer,” acknowledged Leumi Card CEO Hagai Heller, “unlike a bank that extends credit to one of its customers. We work based on statistical models and have to charge credit margins that compensate for the risk. During a period of macroeconomic threats, it’s not the safest activity. We are walking between the raindrops trying to manage this correctly.”

The panel on banking sector competition noted that nonbank lenders, which, unlike the credit card companies, are subject to the interest rate ceiling, do not find it attractive to engage in lending to higher-risk customers because they cannot charge sufficiently high interest rates to cover the risk. They are currently limited to charging 11.86% interest.

High-risk customers can only resort to a bank loan (or a loan from a credit card company deemed a bank) because the banks can charge a rate justified by the risk, but this means that competition for such business is limited.
 

Bloomberg