Life on the Installment Plan, Part Three

The “handy lawyer” at a place calling itself the Civil Legal Defense Center promises to relieve people “of their debts 100% quickly and legally.” Photo taken in central Petersburg on 22 July 2018 by the Russian Reader

Russians’ Bank Debts Grow Twice as Fast as Their Wages
Central Bank and Economic Development Ministry Plan to Reduce Banks’ Interest in Loaning to General Public
Tatyana Lomskaya and Emma Terchenko
Vedomosti
August 1, 2018

The Economic Development Ministry has reported individual consumer loans have been growing faster than wages and savings. In June, they grew by 15.9% in annual terms after a 15.1% uptick in May. If the season were not taken into account, this would amount to an increase of over 20%. However, real wage growth during the same period slowed to 7.2%, while the growth rate of savings deposits fell 7.1%. (The figures for May were 7.6% and 7.7%, respectively.)

The entire portfolio of loans to the general public increased by ₽1.1 trillion to ₽13.3 trillion [approx. €181 billion] during the first six months of 2018, according to figures from the Central Bank. Sberbank alone lent a record-breaking ₽714 million [approx. €9.7 million] in consumer loans during this period, which was 74% more than a year ago, while VTB Bank supplied the general public with ₽400 million in loans or 32% more than over the same period in 2017.

The public’s demand for consumer loans has grown. Inflation is relatively low in the wake of 2014, the Central Bank’s key rate has stabilized at a low level, and wage growth has picked up, explains Sergei Shirokov, managing director of Sberbank’s Borrow and Save Division.  Since the start of the year, VTB has twice improved the terms of its loan programs and increased the issuance of loans by 17%, notes Dmitry Polyakov, a vice-president at the bank.

Companies, on the contrary, have increasingly gone on a savings binge, writes the Economic Development Ministry. In June, they increased their bank deposits by 8.3% in annual terms. (The increase in May was 6.5%.) Their outstanding loans have also grown, but only by 2.8%, compared to the same period in 2017, or by 3.3% when corporate bonds are taken into account. (In May, the same figures grew by 2.6% and 3.1%, respectively.)

Banks have focused on lending to the public. Under current regulations, they find this more profitable than lending to businesses, complained Economic Development Minister Maxim Oreshkin. This circumstance worried his ministry, he said. He suggested the Central Bank should make it more profitable for banks to loan to companies as opposed to making consumer loans. The ministry did not respond when we asked whether Minister Oreshkin, as a member of Sberbank’s advisory board, had voiced his concern about the high rate of consumer loans issued by Sberbank.

Retail lending has actually been recovering faster than corporate lending, partly because the public vigorously decreased their debts to banks in 2015–2016, whereas now, as wages have increased and rates have hit bottom, they have again accumulated debts, says Natalya Orlova, chief economist at Alfa Bank. Banks are also more interested in lending to individual due to western sanctions against Russian companies, she continues. If a company is at risk of western sanctions, it might also have trouble paying back its loans. Unlike mortgages, however, the growth of consumer loans has almost been exhausted. Outstanding loans have nearly reached 10% of GDP, the maximum for Eastern Europe, warns Orlova.

Consumer lending started to recover last year amid falling personal incomes. People were able to increase consumption only by taking out retail loans, analysts at RANEPA noted. In early 2018, on the eve of the presidential election, the salaries of state-sector employees increased dramatically. The government had to make good on President Putin’s May 2012 decrees and bring the salaries of teachers, doctors, and researchers to 100–200% of average regional wages. On the heels of the wage increases, personal incomes rose by 4,2–5,6% in annual terms from February to April. In May and June, however, real personal incomes of Russians returned to a near-zero growth rate. This sparked an increase—from 12% in May to 22% in June—in the percentage of Russians who anticipated that their family’s financial circumstances would worsen over the next year. The percentage of people who excepted their fortunes to change for the better shrunk from 24% to 19%, according to a poll conducted by inFOM.

The Central Bank has already been reducing the profitability of consumer loans for banks. The risk ratio for unsecured consumer loans was increased on May 1, and the regulator plans to raise it again on September 1 for loans whose total cost exceeds 10% per annum. The Central Bank has been also been reviewing other proposals for stabilizing the growth of consumer loans, said Vasily Pozdyshev, the Central Bank’s deputy chair, as quoted by RIA Novosti. For example, increased oversight requirements could be applied to banks whose consumer loan portfolios increased much more quickly than the market average, or the growth of such loans could be restricted, said Pozdyshev. According to him, the banks had made an interesting propose to introduce differentiated risk ratios for consumer loans depending on their amount: large loans in amounts greater than ₽300,000 [approx. €4,000] would bear the greatest risk ratio. In addition, as of 2019, banks should start regularly calculating the PTI (payment to income) ratio as a means of determining a customer’s credit worthiness, although the Central Bank would not use it as a regulatory instrument befored 2020, added Pozdyshev.

High-risk borrowers are more likely to seek loans from microfinance institutions (MFIs). According to the National Credit History Bureau, MFIs issued ₽26.3 billion [approx. €358 million] in so-called payday loans from April to June, which was 23.8% more than last year. Vulnerable segments of the populace are already seriously indebted, says Georgy Okromchedlishvili, principal analyst at ITS Wealth Management, and significant growth in these loans is not anticipated in the future, but nor is a noticeable decline expected. Stable economic growth has to be in place for that to happen, he argues.

Translated by the Russian Reader