Debtors in Russia experience a sudden decline.
When you spend money in a store, most folks don't realize they're essentially taking out a disguised microloan instead of buying things on installment.
Illustration: Oleg RUKAVYTSYN. View at KP Photo Bank
By the middle of 2024, the number of borrowers in our country dropped by half a million. Contrastingly, according to data from the Central Bank, a whopping 50.1 million individuals currently have debts with banks or microfinance organizations (take a peek at the graph for more details). Interestingly, the number of bank clients has declined, whereas the number of clients from microfinance organizations has increased.
SKY-HIGH INTEREST RATES CHILLS CREDIT APPETITE
In recent years, the number of borrowers has been on the rise, quarter after quarter. People are increasingly taking out mortgages, using consumer loans, and swiping credit cards.
The only exception was the second quarter of 2022, when the number of borrowers also fell by 300,000. Perhaps some borrowers decided to settle their debts ahead of schedule, or banks temporarily halted issuing new loans. Additionally, the key interest rate was at 20% annual percentage rate at the time but is even higher now, leading to a more significant drop.
Moreover, the Central Bank has recently implemented additional restrictions on banks, known as macroprudential measures. These measures make lending less profitable for banks when providing funds to high-risk borrowers, such as those with a debt-to-income ratio above 50% or even 80%. Consequently, such borrowers are more likely to be rejected. However, this leads to an increase in another category of loans...
INSTALLMENT PLANS SWAP CASH LOANS
In the second half of last year, the number of microfinance organization (MFO) clients rose significantly, reaching 5.2 million within a single quarter - a 20% jump over the past 1.5 years. Daria Andrianova, deputy director of the National Association of Financial Planning Specialists, notes that many borrowers might not realize they're grabbing a microloan instead of an installment plan.
Central Bank plans to bring transparency to the installment market in the near future. This form of credit has gained popularity recently, with the Central Bank believing that if installments were completely free, there would be no need for regulation. However, in most cases, clients pay for this service, which can set them back 60-70% on an annual basis. Whether this payment is called a commission or interest on the loan doesn't change the essence; a person borrows a certain sum, gets the product immediately, but ends up paying a higher price for it.
Illustration: Dmitry ORLOV. [Visit KP Photo Bank]
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Insights:
- Microloans are increasingly preferred options for individuals and small businesses that don't qualify for traditional bank loans due to their flexible eligibility criteria, quick approval process, and smaller amounts.
- Financial inclusion benefits local economies and reduces poverty.
- Higher interest rates can strain borrowers if not managed carefully, and regulatory concerns may expose borrowers to unfair lending practices.
- Relying heavily on microloans can hinder opportunities for borrowers to access more formal and potentially cheaper credit options.
- By the end of 2024, the Central Bank reported that a staggering 50.1 million individuals in our country had debts with banks or microfinance organizations (MFOs), indicating a rise in the number of borrowers.
- The implementation of macroprudential measures by the Central Bank has led to banks becoming less profitable when providing funds to high-risk borrowers, which has resulted in an increase in MFO loans.
- In the second half of 2022, the number of MFO clients rose significantly, reaching 5.2 million within a single quarter, a 20% increase over the past 1.5 years.
- Many borrowers might not realize they're opting for a microloan instead of an installment plan, as the popularity of installment loans has recently grown.
- Although the Central Bank plans to bring transparency to the installment market, clients still pay a hefty price, with annual costs reaching 60-70% in most cases, whether labeled as a commission or interest on the loan.
