Comment by CEO of Finko Group, Janis Pizics for investors on Mintos:
“Following up on my earlier message to investors on Mintos on the Board of the Central Bank of the Republic of Armenia (CBA) revocation of license for the lending company United Credit Joint Stock Company (Varks), there are couple developments to share as well as answers to questions about Finko I’ve seen on the Mintos blog.”
According to the legislation of the Republic of Armenia, after a liquidation process is started, the shareholder of the liquidated company is obligated to appoint a liquidation committee within 5 days from the license revocation date. This committee must present a liquidation plan to the CBA and get their approval.
The Liquidation Process
On March 28, 2020, the shareholder of Varks AS “TIG invest” established a liquidation committee consisting of the previous Varks management team (the Committee). On the same day, all necessary documents were submitted to the CBA. The Committee itself and the liquidation plan was approved by the CBA on March 30, 2020.
Accordingly, the liquidation process is now led by the Varks team. This will allow the company to run down the business in a normalized and controlled manner, without compromising business processes and metrics. However, according to the liquidation plan agreed with the CBA, Varks was required to write off all accrued interest and penalties for delayed portfolio and stop any new accruals of interest and penalties for 2 months on the non-delayed portfolio. Despite this write-off, the current outstanding portfolio is sufficient to cover all liabilities locally and internationally, including Mintos.
According to the estimates in the liquidation plan approved by the CBA, it is expected that Varks will be able to resume the transfer of borrowers’ repayments to investors on Mintos in the middle of April 2020.
The pending payments shown on Mintos marketplace are a result of the settlement timing difference. On the day of license revocation, 24 March 2020, pending payments reached 10 days, and this number has grown since then. The number of pending payment days will keep growing until mid-April when repayments to investors on Mintos are expected to restart. Investors will receive all interest on invested loans as well as increased interest for any pending payments.
The Committee has already started active work and currently are in process of optimizing all costs. It is expected that Varks will close more than half of their branches during April 2020, as well as decrease payroll costs by 50%. All other cost items will also be significantly reduced. Currently, the full focus has been switched to the debt collection to assure that liabilities to all creditors can be covered in full.
Update regarding the decision on revoking the license
As mentioned previously, the decision of the CBA has been a surprise to the Varks management and Finko group.
Varks had a significant net profit in 2019 and, therefore, generated cash which was subsequently lent to the group treasury company for finance business development in new markets. Such lending was done starting from the end of 2018 and balances reported to the CBA on a monthly basis.
On February 25, 2020, Varks received a letter from the CBA informing about CBA’s decision to consider the above-mentioned loan unrecoverable. Varks answered this letter on March 10, 2020, providing details about the loan, as well as providing an official group guarantee that this loan is, in fact, recoverable. Afterwards, Varks’ representatives ensured regular communication with the CBA and offered several options on how this loan can be even fully covered, which was a strong requirement from the CBA. On March 23, 2020, Varks sent an official letter to the CBA proposing to fully repay this loan within one month (part of it was already covered at that point). On March 24, 2020, the CBA rejected this offer and revoked the license.
Similar to other countries, also in Armenia different measures have been implemented to react to the COVID-19 pandemic. All international travel is banned and currently, all citizens are required to remain at home. They can leave the house only under specific reasons defined by the government. These measures will result in a significant negative impact on the local economy and increased unemployment.
Varks has seen a drop in repayments due to COVID-19 as well as due to information on revoking the license. Nevertheless, it is expected to have a short-term negative impact on collections as in all local public statements (including from CBA) it has been clearly defined that despite liquidation all clients have to close their debts with Varks.
As of now, Varks branches are still open and clients are able to make loan repayments in branches, through bank transfers or using paybox services.
Given COVID-19 pandemic in all countries and the current situation in Armenia, Finko group has taken several strict measures to ensure the profitability of the group and fulfilment of all liabilities:
– Significant cost reduction in all operating markets is in process. This includes significant reduction of personnel costs and any marketing costs, renegotiating agreements with all suppliers to get both – reduction in prices and much better payment terms, as well as fully restructuring all the communication flow with clients and other activities.
– Similar cost reduction is in process on the group level. Currently, all non-critical group functions have been stopped and costs eliminated. This includes also a significant reduction in the workforce.
– In all operating countries and on the group level IT infrastructure has been set up to ensure fully efficient working from home. Consequently, a significant resource has been shifted to monitoring and controlling performance and quality of work.
– Significant resources from all other teams have been transferred to Debt Collection. Currently, most Debt Collection processes in all countries happen from home.
– Currently, Finko group has consciously decreased sales volume in all markets to reduce outstanding portfolio and improve future cash flow.
– The risk engine has been adjusted to accept only the most profitable and cash-generating clients
All the above-mentioned already implemented activities and other actions still to come will ensure that Finko group stays profitable also during these uneasy times.