Pawnshop market participants complain about the long payback period for business
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In January-March, for the first time in three years, the number of pawnshops included in the Central Bank register exceeded the number of those excluded. Market participants believe that this is due to the fragmentation of the business of existing companies, including “in case of regulatory risks.” Players call the current state of the market unattractive, noting the long payback period for the business. But experts emphasize that the pawnshop business remains marginal and less regulated compared to, for example, microfinance.
According to Kommersant’s estimates, in the first quarter the Bank of Russia included more companies in the pawnshop register than it excluded from it—50 versus 39. This happened for the first time in three years. As a rule, the number of companies removed from the register exceeded the number included in it by 1.5–4 times.
Market participants are confident that the new dynamics are not associated with the growing popularity of the industry, but with the fragmentation of the business of existing players. “We are talking about technical changes to legal entities – this is the practice of the non-network segment, as well as the fragmentation of the business of network participants and the organization of reserve companies in case of regulatory risks,” explains Aleksey Lazutin, chairman of the board of the National Association of Pawnshops.
According to Mr. Lazutin, if “new systemic market participants” appear, it will be through mergers and acquisitions or through the organization of pawnshops within vertically integrated jewelry holdings as a source of raw materials. The attractiveness of the segment for new players may be associated with the rise in gold prices, but this is “too volatile,” adds Stanislav Boronin, CEO of the Fianit pawnshop chain.
An influx of new players into the number of pawnshops was observed in previous crises – in 2008 and 2014. However, 95% of those who wanted to quickly enter the market were eventually forced to close or sell the business, notes Mr. Boronin. “It is currently extremely difficult to organize a systematic pawnshop business from scratch in the Russian Federation,” confirms Mr. Lazutin.
Given the decline in interest income, the business does not look attractive to new players, market participants say. Some pawnshops ended 2023 with almost zero profit or even a loss, notes Lyudmila Gribok, chairman of the board of the Regional Association of Pawnshops. “The time to reach operating zero, taking into account inflation, staff shortages, and growth in rental payments, is three years, and the return on investment is 5–5.5 years on average for the market,” clarifies Stanislav Boronin.
According to the National Association of Pawnshops, at the end of 2023, their total portfolio of collateral amounted to 65–70 billion rubles. The Central Bank in 2022 estimated it at 43.1 billion rubles. Up to 85% of the portfolio is backed by gold, mainly in the form of jewelry.
However, experts clarify that the pawnshop market may be more attractive to new players than other segments, such as microfinance. “The regulatory burden on pawnshops is significantly less (see Kommersant on March 18) than on other representatives of the microfinance sector. Pawnshops are not subject to macroprudential limits, which have now become the main restriction for microfinancers. In general, pawnshops do not seem to be the most affected by regulation,” says Mark Savichenko, chief analyst at Ivolga Capital Investment Company. The marginal rate of 119% per annum and the current situation in gold prices make the business high-margin and interesting for large investors from adjacent segments of the financial market, agrees Ivan Uklein, senior director for bank ratings at the Expert RA agency.
New players could use new types of collateral, believes Mark Savichenko. For example, he clarifies, working with electronics and household appliances greatly expands the potential audience of a pawnshop. Unlike the jewelry segment, there is no need to register non-standard collateral in government information systems, which significantly reduces labor costs, agrees Ivan Uklein. However, he admits, working in non-traditional segments requires “strong historical expertise or significant investments with uncertain payback periods.”
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