Specialist banks and collections agencies have identified the overstretched German consumer as a source of potential profit.
With the number of insolvencies and indebted households expanding, banks need to offload their growing portfolios of bad consumer loans. Coming to the rescue are specialized banks and collection agencies that purchase bad loans at a substantial markdown in exchange for the right to collect the debt in full.
More than 2.5 million German households are financially overextended, and the number of personal bankruptcies has risen steadily in recent years.
Collections agencies purchase bad consumer debt at a fraction of its face value. They have systems in place to force loan holders to pay up. Strategies range from strong-arm tactics to personal phone calls aimed at helping consumers find ways to pay back at least a portion of their debt. In contrast to banks, they profit from economies of scale and specialist knowledge. On the other hand, they must only recover a portion of their outstanding loans to make a profit.
Securitization is another important – but uncertain – market segment. Banks can transfer their outstanding loans to an intermediary, a special company that issues bonds backed by the bank’s loans.
However, this market is unlikely to take off until there is greater legal certainty. A district court in Frankfurt ruled earlier this year that the sale of consumer loans breaches Germany’s banking secrecy law. This decision is currently being appealed on the ground that it conflicts with a decision made by the Bundesgerichtshof, the high court.
Credit Suisse First Boston estimates the total market in Germany for bad debt at EUR300 billion, excluding new business with bad consumer loans. The most important market segments include the loan portfolios of mid-sized companies and residential mortgages. Other asset classes, such as the securitization of commercial mortgages and trade receivables, are also gaining acceptance.
