Tarmo SILD: "Iute Credit is going to buy a bank in Moldova and enter the EU market."
Interview by InfoMarket Agency
When a commercial bank aims to buy a non-banking credit organization (NCO), it seems quite logical. And when an NCO aims to buy a commercial bank, it is unusual, to say the least. That is why nobody was surprised when one of the big banks announced its intention to buy the largest NCO in Moldova. Although the deal for a variety of reasons (perhaps the pandemic had its impact, as well) did not take place; At least, not yet. But many were surprised when Iute Credit NCO received the National Bank of Moldova’s permission to buy Eurocreditbank shares in 2020. But this transaction did not take place either. And recently it became known that Iute Credit applied to the National Bank of Moldova (NBM) for a new authorization: to buy shares of another financial institution - Energbank. Usually such information is kept in secret and the fact that it came to light forces to look closely not only to the possible transaction, but, first of all, to the company - the potential buyer.
Today 49% of Enegrbank shares are "on sale": they have been repurchased by the bank and assigned the status of treasury shares until their further sale to a future buyer. Also, almost 10% of Enegrbank shares are being sold on the Moldovan Stock Exchange. Thus, the buyer, who will receive the NBM's permission to purchase this bank’s shares, can count on the controlling share.
Iute Credit with assets of 811.26 million lei is in the third position among Moldovan NCOs. As of September 30, 2021, its equity capital amounted to 305.49 million lei, loan portfolio - 818.92 million lei, the risk fund - 184.19 million lei, the profit for 9 months of 2021 - 67.48 million lei. The company serves 72.58 thousand clients, which is the second indicator on the market.
Tarmo Sild and Allar Niinepuu, the co-founders and owners of Iute Credit, both Estonian citizens, visited Moldova last week. Together they own more than 90% stake in the entire Iute Credit Group. The InfoMarket Agency’s Editor-in-Chief managed to meet with Mr. Tarmo Sild and get first-hand information about Iute Credit Group and its plans.
InfoMarket: As it is know, your goal is to obtain the NBM's permission for the purchase of Energbank shares. But not so long ago you already got such approval for the acquisition of Eurocreditbank, why didn't the deal take place?
Tarmo SILD: I can't comment on that. I can only say that it was our decision to get out of the deal; we did not come to a mutual agreement with all the owners of that bank.
InfoMarket: Anyway, is your application to the NBM to buy Energbank shares showing that Iute Credit is serious about moving into the "financial heavyweights" category which is rather fitting the commercial banks than the NCOs?
Tarmo SILD: Absolutely!
InfoMarket: And why would you do that? Some NCOs, on the contrary, would be happy to be bought by a commercial bank, not the other way around.
Tamo SILD: We're all "dancing" on the same dance floor, if you like. In the retail market, which is where Iute Credit operates, you have to offer not only loans, but also fast and reliable payment services. Money should move freely: just as human speech sounds. Just as people communicate freely and easily with one another, same should money move freely and quickly. That is our dream. The acquisition of the bank is a step towards the realization of this dream. As an NCO, we can only deal with small loans, but the bank has more opportunities for large loans, payments... We want to realize all the potential that we have accumulated in 13 years of activity.
InfoMarket: Energbank has 3 billion lei in assets, how much are you ready to pay for buying shares of this financial institution and how many shares do you intend to buy?
Tarmo SILD: We are ready to buy 100% of the shares at a market price. It will be clear only after we receive the permission to buy the bank. Without that it is premature to talk about it.
InfoMarket: And what happens if you fail to buy the bank?
Tarmo SILD: As a businessman I set a goal that I want to achieve. If for some reasons, competition or other, the acquisition of the bank proves impossible, we will have to find another goal: for example to offer in Moldova a quick and convenient way to make money payments via smartphones so that transactions become possible immediately.
InfoMarket: More than 20 years ago Micro Enterprise Credit Moldova was operating in Moldova, later it was renamed to ProCredit NCO and subsequently it got a license and has been operating for many years as ProCredit Bank Moldova. They grew out of an NCO and got a banking license. Isn't this the path you are considering?
Tarmo SILD: Moldova is not the only country where we intend to either buy or create a banking financial institution that would deal with cash payments, currency exchange and other types of transactions online and in instant confirmation mode. And that path is a likely one for some of the countries where we operate. But in Moldova we would like to buy a bank, and I doubt we would want to create a new one here.
InfoMarket: Iute Credit was founded with 100% capital from Estonia in 2008. Your head office is in Tallinn, why did you set up your first company in Moldova?
Tarmo SILD: In Tallinn we only created and are improving the technology of this business, we are automating it. We design business processes and organizational model. And we raise finance for our companies through issuing Iute Credit Europe bonds on the Frankfurt Stock Exchange.
InfoMarket: How did you come to Moldova, you could have started from another country?
Tarmo SILD: In 2007 I decided to give up my career as a lawyer and was looking for new entrepreneurial opportunities. It so happened that together with a delegation of businessmen from Estonia, along with the then Prime Minister of our country, Mr. Andrus Ansip, I ended up in Moldova. Here I met my future partner, Allar Niinepuu, and we decided to open a company here. It was an "accidental intention."
InfoMarket: What was the initial investment, if not a secret?
Tarmo SILD: The initial capital was 275 thousand euros - it was savings, funds from selling some of our assets and borrowed capital. When we started paying the promised interest to our investors, new people came who wanted to buy our bonds (liabilities) and get their return. So we developed our bond product little by little. At first everything was going very slowly: in the first year were provided loans of only 20 million lei (1 million euro), in five years it was 120 million lei per year (6 million euro); today Iute Credit in Moldova gives out such an amount in a month.
InfoMarket: And why was the company named Iute?
Tarmo SILD: We wanted to give it a name which would be understood on the local market and would be liked by people, in the end, for its originality.
InfoMarket: But under this name you have opened companies in other countries as well: Albania, Bulgaria, Bosnia and Herzegovina and Northern Macedonia, where people may not be familiar with the meaning of this word...
Tarmo SILD: ...We have shown how a Moldovan company succeeds in other markets, and Moldova can be proud of it.
InfoMarket: You also opened in Kosovo, but your license was taken away. What happened there?
Tarmo SILD: According to the official version, our license was taken away because we failed to implement our own business plan. We couldn't agree with that, so we went to the international arbitration court to sort it out. We lost millions in this story, and we spent millions more to go to arbitration. But our name is worth more, and we intend to win.
InfoMarket: Besides the fact that Moldova was the first country where you created the company, what else did you first implement in our country and then export to other markets of your presence?
Tarmo SILD: We experimented here with different ideas: we implemented installment payments when buying goods in stores; we put the first ATM that works with a smartphone, without a bank card. After testing these technologies in Moldova, we exported them to other countries. I think we found a good balance between human touch and soulless technology, which we apply in other countries. And we have created this balance here in Moldova.
InfoMarket: Do you plan to expand your business to other countries?
Tarmo SILD: We are continuing our development strategy in the Balkans, but I think we will soon be moving into the European Union. We see the demand for our services there. Europe is changing a lot; digitalization is occurring everywhere, people are increasingly using smartphones for all sorts of operations. I think we have a huge potential for business development in the EU.
InfoMarket: Microfinance is consumer loans. The global economic literature says that such loans are killing the micro-economy and hurting family budgets. What do you think about that?
Tarmo SILD: I would by no means agree with that statement. And there are many examples of that. Let's say a person with an income of 500 euro a month needs a refrigerator that costs the same amount, but in reality he can only pay 50 euro a month. In that case he has two choices: he can either save for 10 months, or he can take a loan, pay for 12 months, but he can use the refrigerator from day one. I think people should have a choice, and that's the nature of this business.
InfoMarket: In recent years, and the pandemic has reinforced this, a lot of people have been getting into debt pits with microcredit organizations, taking out new loans to pay off previous loans. What principles are applied in your company’s activity?
Tarmo SILD: We check our clients in order to prevent them from falling into debt. First of all we use open databases and credit bureaus. Our business is customers who can service their debts. To understand this, there is a Customer Perfomance Index (CPI) and Ratio, which we assign to a borrower based on a lot of data: data provided by them and existing in open sources. Of course, we don't achieve 100% repayment; people may be late with their payments. But we aim to have 90% of those who pay on time.
Iute Credit’s management is very conservative and if a client is more than 50 days late with a payment, we consider the loan to be non-performing. Delinquency over 50 days is a matter of financial discipline and we are not interested in him borrowing money somewhere else to pay off our loan. And since an average person gets an income 12 times a year, a 30-day delinquency indicates that he has a structural problem. And we're not going to wait three months to understand the severity of the problem and the risk realization. That's why management is aiming for a CPI above 90%.
InfoMarket: What's the percentage of non-performing loans; what you called "risk realization"?
Tarmo SILD: This is public data. Our entire CPI is almost 90%, and non-performing loans are 12-15% of the entire portfolio. This is a normal figure for us because our business is based on calculated risks. If you refuse a lot of loans, you can often lose good borrowers. Statistically speaking, two out of three people who turn to us get approved for a loan.
InfoMarket: How big are the assets of the Iute Credit Group and how much of them are borrowed funds?
Tarmo Seald: Today the whole Group in five countries has 160 million euro in assets. Of these, 30 million euro are shareholders' money. We have 130 million euro of attracted funds: bonds sold on the Frankfurt Stock Exchange, that's 125 million euro, and there are also contracts with local banks, particularly in Moldova and Albania,
InfoMarket: Where are the resources cheaper, local banks or buyers of your bonds?
Tarmo SILD: Local banks are a little cheaper. But they limit themselves to certain thresholds. Such cooperation cannot be very close, especially since the banks see us as a competitor. And it's bad to depend on a competitor.
InfoMarket: Today the Moldovan microcredit market has assets amounting to 11.7 billion lei. You have a 7.7% share. To what extent do you think the Moldovan market is full of NCO services? In other words, are you struggling for remaking the existing market or for its expansion by attracting new clients?
Tarmo SILD: The market is changing. In the coming years, it will be common practice to buy now and pay later. I think this market is not yet fully formed. And, it's not hard to imagine that even in Moldova its volume could be 3-4 times larger than today.
InfoMarket: But the NCO market has quite high interest rates. What's your average rate and what's the average size of a loan?
Tarmo SILD: In Moldova an average loan is 400 euro or 8000 lei and the annual interest rate is 49-50%. The same rates are in Albania, Bosnia and Herzegovina, and slightly lower - 42% per annum - in Bulgaria and Northern Macedonia.
InfoMarket: And you want to enter the EU market with such rates?
Tarmo SILD: I think that in the future the rates will go down to 20-25%.
InfoMarket: In a year and a half, starting July 1, 2023, regulation of the NCO market will be transferred from the National Commission for the Financial Market to the National Bank of Moldova. What will this change for your company and the market in general?
Tarmo SILD: If we acquire the bank, there won't be many changes for us. But even today, all our business processes and technologies are developing in such a way that they can be applied in line with international accounting standards in all the countries where we are present. Not much will change for our business practice, especially since in Albania and Bulgaria we already face quite strict control on behalf of state authorities. And we can easily adapt it to all reporting and norms in Moldova: requirements for board members, for capital, for liquidity, for the shares of working and non-working portfolios, and so on.
As for the market as a whole, I hope it will be cleared of lenders who make more money from people's misfortunes; those who cannot or do not want to develop their business by providing a quick and comfortable microcredit service. The market will clean up.
InfoMarket: If or when you buy the Moldovan bank, will Iute Credit and the bank merge, or will they operate as separate financial institutions?
Tarmo SILD: There will be no integration. They will be two separate companies with different balance sheets. Of course we will look for synergies and solutions that we could use jointly. But the assets, liabilities, and risks will be separate.
InfoMarket: Last year Iute Credit registered losses of 16 million lei, which is not typical of your business...
Tarmo SILD: We created a very conservative provision (reserve fund). If we see that the loan is not being serviced properly, we increase the fund. Last year, because of the pandemic, a lot of people couldn't service their loans on time, and for our safety, we increased this fund significantly, which covers our risk even when we give a deferral. At the end of 2019, we had a risk fund of 13.3 % of our loan portfolio; at the end of 2020, it was 28.9 %. This year this figure is slightly lower - 22.5%, but we are already profitable: more than 70 million lei in profit for 11 months.
InfoMarket: Your Group has two major shareholders and assets worth 160 million euros. The IPO mechanism is actively used to raise funds on international markets. Have you thought about it to diversify your sources of financing?
Tarmo SILD: My partner will say that selling the shares is like selling a kidney. Perhaps in the future we will consider this opportunity, but it is important for us to keep control of the company.
InfoMarket: What have you noticed in Moldova, in the financial market, that you think could be improved?
Tarmo SILD: My advice will not solve all the problems of Moldova, but I think that
people's attitude towards money starts from very simple and small things. We see with our eyes, feel with our fingers, and everything we feel gives us simple signals. My advice is simple: print new money, a normal size, with beautiful symbols apart from Stefan cel Mare that unite everyone; make your money of better quality and more serious. It affects the subconscious of people: children, young people and adults. Yes, we are all moving toward the complete digitalization of money flows, but cash in Moldova, I think, will remain for another 10 and 20 years. Just issue new banknotes that will show a modern Moldova, will reflect your identity, your history and dreams - sources of your pride. And this will not only have a cosmetic effect, it will seriously affect people's subconsciousness. Beautiful banknotes are treated accordingly. // 27.12.2021 - InfoMarket.
