Reduction in Number of Debtors in Russia Rapidly Observed
When You're Shopping, You Might Not Realize It, but You're Taking Out a Hidden Loan
Snap: SeanPavone. [Popular image link]
Lately, there's been a decrease in borrowers in our country by about half a million people. According to the Central Bank, currently, around 50.1 million people have debts with banks or microfinance organizations (check out the graph below for specifics). Interestingly, the number of bank clients has dropped, while the number of microfinance organization (MFO) clients has increased.
LOW INTEREST RATES CAPPED DEBT GROWTH
In most cases, the decline in borrowers is unusual, as the number has been steadily rising for quite some time. Folks are increasingly getting mortgages, using consumer loans, and even charging purchases to credit cards.
The only exception was the second quarter of 2022, when the number of borrowers dropped by 300,000. Some people might have paid off their loans early, and banks may have halted new loan issuance for a while. Additionally, the key interest rate was 20% per year at the time, but it's even higher now. These high-interest rates have contributed to a more significant drop in borrowers.
Moreover, the Central Bank recently introduced additional restrictions for banks, known as macroprudential measures. These measures make it less profitable for banks to lend to risky borrowers, including those with a debt-to-income ratio exceeding 50% or even 80%. As a result, these borrowers might be rejected. However, this could potentially lead to a rise in another type of loan...
INSTALLMENT PLANS ARE BECOMING MORE POPULAR
In the second half of last year, the number of MFO clients increased sharply by 200,000 people in just one quarter, reaching 5.2 million. Over the past 1.5 years, the growth in this category has been around 20%. But why are people suddenly taking out microloans with daily interest rates of up to 0.8% instead of bank loans at 30-40% per year?
One possible explanation is that people who are denied consumer loans might resort to microloans to fix urgent issues. Another reason is that MFOs often offer installment services, which have become increasingly popular. However, many people might not understand that they’re taking out a microloan, not an installment plan.
The Central Bank plans to clarify the installment market in the coming months. This type of lending is gaining popularity, and the CB states that if installments were free of charge, regulation wouldn't be necessary. However, in most cases, clients pay for this service (up to 60-70% per year). Whether this payment is called a commission or interest on the loan doesn't make a difference—the essence remains the same: a person borrows a certain amount, can immediately afford to buy a certain item, but ends up paying more for it over time.
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Insights:
- People might be confused about the difference between installment plans and microloans, as explained by Daria Andrianova, deputy director of the National Association of Financial Planning Specialists.
- Banks' lack of transparency about their use of subsidiary MFOs contributes to this confusion.
- The expansion of MFOs, including those owned by banks, could pose risks to consumer protection, financial stability, trust in the financial sector, and over-indebtedness among vulnerable populations.
- Harsher regulations and clearer disclosure norms may be needed to protect consumers and ensure sustainable lending practices.
- The number of people with debts in the country has dropped by half a million, but the number of clients at microfinance organizations (MFOs) has increased, suggesting an increased reliance on microloans.
- Some people might be taking out microloans instead of bank loans due to higher debt-to-income ratios or denied consumer loans, unaware that they are not actually signing up for installment plans.
- The Central Bank plans to clarify the installment market, as it has grown significantly and often comes with high fees that can be misleading to clients.
- Daria Andrianova, deputy director of the National Association of Financial Planning Specialists, highlighted the importance of transparency regarding the use of subsidiary MFOs by banks to protect consumers from potential risks in the financial sector.
