Since launching Refinancia in Bogota in 2005, Chief Executive Officer Kenneth Mendiwelson has taken an unusual approach to recouping the personal loans his debt-collection business buys from banks: amicable negotiations, rather than harassing phone calls or visits. “We provide a dignified product to someone who has been mistreated by the financial sector,” explains the 39-year-old Harvard Business School graduate, who used a $4 million loan from friends and family to get started. “Someone who falls into default is not a bad person.”
To determine what got individuals into financial trouble, Refinancia often starts with face-to-face meetings. If the outstanding debt is due to an unexpected medical bill, divorce, or another personal problem, Refinancia will refinance the loan and negotiate a time frame for starting payments in installments. “Here in Colombia and around the world, the people who are in debt with the banks become targeted with a black dot and they’re treated very badly, even unrespectfully,” says Gaia de Dominicis, a managing director in Bogota of Endeavor, a nonprofit that supports entrepreneurs in developing nations, including Mendiwelson. “Once you’re closed to the bank, you’re closed to everybody. You can’t have access to any type of credit, anywhere.”
Refinancia acquires loans at less than 10 percent of face value, packages them, and promises returns of 15 percent to 35 percent to investors that buy them, according to Mendiwelson. Roughly half of the individual loans are for about $500, twice the monthly salary of a Colombian who earns minimum wage.
About 85 percent of Refinancia’s revenue comes from Colombia, where the market for nonperforming loans is shrinking amid a strong economy; the government expects growth of as much as 6 percent this year. At the end of April, the ratio of loan defaults to the overall number of consumer loans was 3.5 percent, compared to 5 percent in April 2010, according to research firm Oxford Analytica. “It’s one of the markets in Latin America where the banking sector outlook is most positive,” Oxford analyst Neil Pyper says.
To keep his pipeline flowing, Mendiwelson is expanding into other countries. Refinancia has 50 employees in Peru, where the company opened its first foreign office a year ago. Today the country, with 30 million residents, accounts for 15 percent of Refinancia’s revenue. In early July, Refinancia acquired 300,000 nonperforming loans from a major European bank in Mexico and plans to open an office in Mexico City this year. The 510- employee company manages a total of 800,000 loans, with a face value of nearly $2 billion, from about 15 banks in Latin America. Mendiwelson expects revenues of $12 million this year and $21 million in 2012. He estimates that by 2015, 60 percent of revenue will come from debtors outside Colombia.
Refinancia was among the first in Colombia to buy defaulted loans by the tens of thousands from banks trying to clean up their balance sheets following the 1999 financial crisis, in which the country’s gross domestic product contracted by more than 4 percent. The debacle threw more than one in five Colombians out of work, leaving banks with billions in bad loans. While many companies entered the market, most were too small to buy defaulted loans in large numbers. “The difference with Refinancia is that they have the size and the funding,” says Leonardo Bravo, a partner with Bogota- based investment banking firm Sustainable Finance Partners. Its numbers show that Refinancia accounts for 31 percent of Colombia’s nonperforming loan market.
Refinancia’s tactics do not mean that more loans are recovered. As is typical for the industry, between half and 60 percent of the loans managed by Refinancia are never collected, according to Mendiwelson. He’s hoping that in 2013 Refinancia can cash in on goodwill and turn one-time defaulters into borrowers. His argument is that even a person who pays back a defaulted loan will find it difficult to escape a bad credit history when seeking to borrow again. “No one is going to give him new credit, but I can because Refinancia knows exactly how he thinks and how he has behaved in the past with the refinancing product we provided to him,” Mendiwelson says.
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