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Risks of the leasing companies - minimization or management

It is necessary to recognize availability of the uncertainty which is present at behavior of participants of leasing transactions - credit institutions, lessees, suppliers. In addition to discrepancy of the legislation, backwardness of a banking system, economic instability, it leads to emergence of risks, various by the nature, which ignoring can affect not only efficiency of activity of the leasing company, but also result in its bankruptcy. Specific feature of the Russian leasing is that for most the leasing companies even one leasing transaction according to which payments will not be made can have significant negative impact on a financial condition of the company lessor. It is caused, mainly, by small sizes of a portfolio and equity of the last.

The specifics of leasing activity in recent years, in connection with market development, put in the forefront risk of acceptance of unreasoned decision about the conclusion of the transaction therefore risk management becomes the important tool within strategic development of the companies. Unfortunately, the standardized and unified approaches to assessment and risk management of the leasing companies are absent therefore the companies should develop independently such systems that is very labor-intensive process. The risk minimization methods which are often put into practice by the leasing companies (advance payments, pledges, other interim measures, insurance) do not solve a problem of integrated management of them, and lead to rise in price of the transaction, rearrangement of responsibility from one participant of the leasing relations on another and also to a so-called "vicious circle of risk".

In our opinion, development of the leasing market at the moment already reached that phase when the leasing company stops being the agent of bank at signing of the contract, and assumes certain risks, receiving for it the corresponding payment. It says about need of creation of a system of integrated management of risks, both the single leasing transaction, and all company based on risks assessment in general.

We allocated risk management methods, for the purpose of the analysis of a possibility of their use for the leasing companies. Without stopping in detail on each risk management method, we will note that hedging in his classical understanding (a complete elimination of a possibility of receiving any profit or loss on this position due to opening of the opposite or compensating position) is not suitable for credit risk management, however in separate sources credit derivatives, and in particular, credit swaps, are carried to this method of management.

The credit risk can be divided into three subspecies conditionally:
1) risk of "the lessee's default" as which we understand impossibility or unwillingness of the lessee to pay the leasing payments granting the leasing company the right to begin collecting a subject of leasing;
2) the liquidity risk which is expressed in the untimely payment by the lessee of leasing payments which is not granting the leasing company the right to begin collecting a subject of leasing;
3) risk of "a default of the supplier" as which we understand impossibility or unwillingness of the supplier to deliver leasing property according to agreements for which the advance payments exceeding advance payments of the lessee are paid.

Realization of any one risk event will not lead to a considerable economic loss of the company if it is able to be compensated by reserves under expected losses of EL (Expected Loss). However there is a probability of loss of a considerable part of the leasing portfolio that can result even in bankruptcy of the leasing company - so-called unexpected losses of UL (Unexpected Loss).

Thus, in risk analysis of the leasing company it is necessary to consider both EL, and UL. Expected losses which are characteristic of the separate leasing transaction, calculate on indicators of probabilities of risk events, taking into account providing according to transactions. The size of unexpected losses characterizing the leasing portfolio in general is measured by the size VAR (Value-at-Risk) at reliability level, which is usually accepted at the level of 95%. The size of unexpected losses, in the theory, has to correspond to the capital under risk, i.e. to own economic capital of the CAR (Capital-at-Risk) company which for the leasing companies it makes sense "to tie" to equity, with the coefficient established depending on tendency of the company to risk.

The indicators determining the sizes which are responsible for risk of losses for the leasing company will be:
1) average annual probability of a default with the known settlement date of PD (Probability of Default);
2) the sredneozhidayemy share of losses of means of LGD (Loss Given Default) calculated as the relation of size of losses in case of a default to the size of means under risk.
In case of the lessee's default the leasing company will lose not all size of invested funds, and its part as having the property right to object of leasing, will be able to sell it in secondary market, and often attracting additional types of providing - to address their collecting;
3) the size of means under risk of EAD (Exposure at Default) which for the leasing agreement is equal to the amount unpaid the lessee of leasing payments for settlement date.

One of the main objectives in risk assessment is the problem of calculation of probability of a default of the lessee or supplier of PD. There are several approaches to calculation of PD. In our opinion, it is possible to put into practice now only the method based on quality and quantitative standard of rating of the lessee on its internal financial performance and special business factors. Other, based on capitalization of the lessee in the stock market and level of its debts to creditors, on use of information on defaults of lessees for a considerable time frame (not less than four-five years) to apply extremely difficult in view of backwardness of the stock market and relative youth of the Russian market of leasing services now, and as a result, to lack of such statistical information on defaults.

Determination of the purpose risk management is a starting point for forming of the risk management system considering strategic objectives of the leasing company in general. The portfolio of transactions has to be formed, proceeding from the created purposes of management. On the existing portfolio hazard rates are calculated:

  • the size of means under risk;
  • sredneozhidayemy share of losses of means;
  • probability of approach of insolvency of lessees and suppliers;
  • rate of leasing percent;
  • expected losses (risk);
  • unexpected losses (risk).

At making decision on inclusion in a portfolio of the new transaction, it is necessary to carry out risk analysis of the transaction, with calculation of the indicators characterizing risk of this transaction. Then it is necessary to carry out the analysis of influence of risks of the considered transaction on a portfolio in general.

In case at the conclusion of the analyzed transaction indicators of the actual portfolio improve, i.e. become closer to indicators of an optimal portfolio, the transaction is subject to the conclusion and inclusion in a portfolio. If indicators of a portfolio do not change or will change for the worse, i.e. the conclusion of the transaction will delay forming of an optimal portfolio, then for such transaction it is necessary to consider all complex of methods of impact on risk later influences to carry out the specified analysis once again. If impact on risk for any reasons is impossible, it is necessary to refuse implementation of such transaction.