Financial Markets: Increasing Complexity, Maintaining Stability

3–5 July 2019, ST. PETERSBURG

    The Bank of Russia to Limit Unsecured Long-Term Consumer Loans

    The regulator believes that these types of loan carry risks: banks are using them to try to bypass growth-curbing measures on consumer loans 

    “In our opinion, the fact that banks are trying to bypass historical measures and, apparently, future ones, by extending consumer loan periods is fraught with risk. We will be taking measures. As things stand, we think that calculating them and finding a way to impose limits on consumer loans is not a simple task, but we will be taking measures,” announced the Governor of the Bank of Russia, Elvira Nabiullina. 

    The Bank of Russia is concerned about the accelerated growth in unsecured consumer credit, which amounted to 25.3% on 1 May compared with the same point last year and is trying to depress the market. In order to do so, it regularly increases the premiums on risk factors depending on the cost of a loan: the higher the interest rate, the more the risk factors are weighted against a credit loan when calculating the ratio. As of 1 October, the Bank of Russia will also set charges depending on the burden of debt on the borrower. 

    Several banks have begun issuing unsecured long-term consumer loans, as noted by the credit rating agency Fitch Ratings in autumn last year. 

    “Some banks have started issuing general loans for 15 years: that’s a very long period of time. Consumer credit can’t be the length of a mortgage. The borrower will simply lose the motivation to pay over such a long period of time for a good or service which he or she stopped using a long time ago,” said Alexander Danilov, an analyst at Fitch Ratings. He noted that as the influx of new borrowers is limited, banks are supplying credit to existing borrowers, lengthening the credit periods and offering a lower interest rate.

    Banks try to squeeze as much profit as possible out of their clients by offering them more credit over an extended period, explained the First Deputy Chairperson of Sovcombank PJSC, Sergey Khotimskiy. “The problems of 2014 are a distant memory.” The Bank of Russia measures are merely accelerating the growth of consumer credit, as they are limiting credit rates but not their credit periods, he said. People see a small monthly payment, a low rate and long repayment period and take out huge loans, Khotimskiy explained. It is credit fraught with risk, which can lead to a non-payment catastrophe in the medium-term.