Easy Loans: Consumer-Lending Boom Sparks Fears Of Recession


◊ Easy Loans ◊


StockMarketNews.Today > …  More ordinary Russians have come to depend on easy loans to purchase goods, maintain a certain living standard or simply to survive…

As real disposable income for Russians continues to fall—it declined each year between 2013 and 2018—personal consumer lending has exploded, topping around $130 billion last year, up 46% compared with 2017, according to the Moscow-based United Credit Bureau, which tracks credit histories on 90 million Russian borrowers. Most of Russians’ debt is due to a surge in unsecured cash loans, the country’s central bank said.


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Interest rates on bank loans range from 12% to 19%, depending on the length of the loan, according to data from Russia’s central bank. But commercial or nonprofit lending institutions other than banks often gouge borrowers with interest rates that can hit more than 500%, according to local financial experts.

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Russian officials worry the borrowing boom could further undermine the country’s financial stability. Western sanctions on Moscow and low oil prices, on which the economy heavily depends, have dented Russia’s economy, weakened the ruble and compounded already sluggish growth. Nearly 13% of Russians live in poverty, according to government data.

Russian President Vladimir Putin warned in June that banks were giving out loans to people whose repayments amount to 40% of their wages, fueling a possible bubble. Maxim Oreshkin, the country’s economy minister, projected the bubble would burst and drag the country into recession if lending isn’t tamed by the Russian central bank. “Our estimate is that 2021 is the year when [the consumer-lending problem] will blow up,” he told the local Ekho Moskvy radio station in July.

Russians hold an average of nearly 290,000 rubles, or $4,600, in debt, according to United Credit Bureau. This is a meager sum compared with the U.S., where the average personal debt is roughly $38,000, excluding mortgages, according to Northwestern Mutual, a financial-services organization. But the average monthly Russian salary is around $670. About 44% of Russian households are indebted, according to the central bank, up from 34% two years ago. One in eight Russian borrowers spends more than 50% of their income on loan payments.

The “consumer-lending boom is negatively impacting especially the lives of those who earn a low level of income,” Mr. Oreskhin said in a Wall Street Journal interview. “It’s a big problem.”


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Elvira Nabiullina, Russia’s central-bank governor, disagrees that consumer lending is creating a bubble and insists the debt boom is under control. But beginning in October, the central bank will require credit institutions to calculate borrowers’ income and their debt burden before granting new loans—something many lenders don’t do now. The Economy Ministry is also weighing measures to support people who can’t pay their debt.

Some bank representatives said consumers sometimes lack financial literacy and need extra guidance, which they provide.

Defaulting after accepting unmanageable loans is pushing many Russians to file for bankruptcy under a new personal-bankruptcy law that came into force in 2015. The law covers those with a total debt of more than 500,000 rubles and more than three months of missed payments. In the first half of this year, 29,000 people filed for bankruptcy, 1.5 times higher than during the same period a year ago, according to the United Credit Bureau.




Extra: The Russian Central Bank Plans To Lower The Key Interest Rate In Small Steps

The central bank embarked on a monetary easing cycle last month, lowering the cost of lending amid sluggish economic growth and abating inflationary risks. Analysts expect further rate cuts but there is no consensus on their scale and timing.

At its last board meeting in June, the central bank considered holding the key rate and cutting it by 50 basis points but eventually trimmed it by 25 basis points to 7.50%, Nabiullina said.

“Other things being equal, we are trying to move in moderate steps for the economy to adapt to our new decisions,” she said in an interview with Reuters cleared for publication on Wednesday.


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Under its baseline scenario, the central bank, which aims to keep consumer inflation at its 4% target, plans to complete its monetary easing cycle by mid-2020, Nabiullina said.

Russia’s monetary policy will become neutral once the key rate reaches a range of 6% to 7%, she added. Expectations of further rate cuts have boosted demand for Russian OFZ treasury bonds this year. Rate cuts drive bonds’ yields down, which inversely send their prices higher.

Nabiullina said inflows of foreign funds into OFZ bonds have not caused the market to overheat, while volatility in capital flows do not constitute a risk because of Russia’s low state debt. Russia’s debt currently stands at less than 15% of gross domestic product (GDP).

“We have tools to mitigate the implications of spikes in volatility for financial markets and the economy,” she said.

RISK SCENARIO… In its latest monetary policy report published last month, the central bank added to its risk scenario a probability of a drop in prices for oil, Russia’s key export, to just $20 per barrel.

“In order to bring the risk scenario closer to real situations, we have priced in an option in which oil prices fall sharply for a short time before increasing to some extent and stabilizing,” Nabiullina said. Seeking to avoid such a scenario and prop up the price of crude, OPEC and its allies led by Russia agreed to extend oil output cuts until March 2020 on Tuesday.

“The main factor behind the oil prices drop in this scenario is the slowdown of the global economy,” she said, adding that such a scenario was unlikely.


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Asked about the trade war between China and the United States that has been fuelling concerns about the global economy for months and rattling emerging market currencies, Nabiullina said she did not expect the dispute to be resolved soon.

STRONGER ROUBLE… The Russian rouble could firm if the government proceeds with its plan to uncork the National Wealth Fund, now at around $60 billion, and start using it once it reaches 7% of GDP, a level it is expected to reach next year, Nabiullina said.

“This could lead, for example, to the rouble firming in a structural manner and to its stabilization at a new level,” Nabiullina said without elaborating on the rouble exchange rate. Nabiullina said the fund’s spending should be economically feasible, reiterating her call for the 7% threshold to be re-examined and possibly raised.


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BANKING SECTOR WATCH… The central bank has shut dozens of commercial banks in the past few years as part of a program to clean-up the banking sector, helping increase its sustainability.

Russian banks are on track to post a higher net profit this year than the 1.3 trillion rubles ($20.6 billion) they made in 2018, Nabiullina said. “We have largely solved the issue of laundering of illegal incomes through the banking system. But now we need to constantly be vigilant for this operation not to come back.”


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In addition to shutting smaller lenders, the central bank has bailed out a handful of major banks, including Otkritie, B&N and Promsvyazbank.

Nabiullina said the central bank now needs to prepare the rescued lenders to be sold on the market and to be converted into banks with a large free float of shares. ($1 = 63.2400 rubles)

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