Russians’ loan debt hit record high: what’s next

Russians’ loan debt has hit a record high. Is a wave of personal bankruptcies awaiting us?

The share of Russians who have loans in four and more banks at the same time doubled from November 2014 to November 2019. The amount of such borrowers totalled 6%. Another 23,3% had loans in two banks, while 9,1% did in three. However, the statistics don’t include Sberbank clients.

A lasting fall in the population’s income (since 2014) and a rapid growth of lending led to a huge debt load. Moreover, even the pandemic didn’t stop people — people continued actively taking out loans during the crisis and didn’t really think about how they would repay them.

In April 2021, we saw an absolute debt record — 11,7%, which increased by 0,8% in the last year alone. The number of loans rose by 13,% over the year, while real incomes fell by 3,5%. Moreover, these are official numbers. I think that real incomes dropped deeper (by 10-15%) because the blossoming grey labour market doesn’t find its way anywhere.

The mortgage, especially the preferential state programme, provided major growth. Unsecured lending is second. Banks and microfinance institutions’ loan policy allowed granting money even to those clients whose 80% of income is used to repay debts. I remind you that 50% is a well-thought-out policy in this case. This illustrates how much financial organisations have softened their requirements in the last years. So as of April 2021, the average overdue debt increased by a third reaching 138,000 rubles. The share of overdue loans in the total lending stably stays at 4,7% (according to the Russian Central Bank), but the amount of such debts already reached a trillion rubles.

As a consequence, about 3 million people had submitted such requests by autumn 2020, and banks changed repayment terms for 1,79 million loans for around 807 billion rubles. 25% of people didn’t manage to go back to the repayment schedule in the end — it is approximately 201 billion rubles of bad debts whose fate won’t be decided in banks.

People are already starting to talk about the so-called debt bubble in the lending market now, which is evidence of economic risks and social tensions in society. Russian families’ debt against GDP rose from 15,6% in 2016 to 21,2% in 2020. A civilised way of deflating the bubble around the world is bankruptcy. We also have it, and even simplified proceedings were introduced for sums below 500,000 rubles, without the necessity to going to the Court of Arbitration at one’s place of residence. An extrajudicial procedure has a series of difficulties that don’t let borrowers go through it quickly and effectively. One of the requirements is to have repaid debts, which is almost impossible due to the specifics of the activity of the Federal Bailiff Service. In other words, an instrument seems to be given, but then it is up to you to sort it out.

All in all, the number of bankruptcies with the simplified scheme is trifling. While a standard procedure envisages paying for services of a lawyer (about 100-120,000 rubles), finance manager (25,000 rubles), additional costs (for publication, the post, sale of property at auctions). One should have 150-170,000 rubles to go through the standard procedure. People who are in a debt pit simply cannot afford such sums. It turns out to be a vicious circle. I won’t surprise if banks will soon launch a new product in the market — “loan in cash to pay for bankruptcy proceedings”. Live it up.

Situation in Tatarstan

The situation with overdue debts in Tatarstan isn’t bad in general: compared to the rest of the country, the republic ranks 14^th in overdue debt.

In 2020, the share reached 3,47% of the total number of loans going 0,2% up, which isn’t critical in itself. Digits in the size of the debt per one working resident of the republic are concerning a bit: it grew to 269,000 rubles adding 16% a year. These are the average numbers across Russia: overdue debt is equal to 4,38%, the annual rise is 0,3%, a debt per citizen is 265,000 rubles.

If we are talking about the volume of the retail portfolio of banks in Tatarstan at around 500 billion rubles, we have 17 billion rubles of potentially bad debts. The number is enormous in itself. It is a separate question how much of this some will be in default, but still.

The depth of lending (the number of borrowers versus the number of the population) is 30%. Here the republic is in the country’s top 10: the Republic of Tuva with 38,4% has the highest indicator, while Ingushetia with 7,8% has the lowest.

The debt load (the ratio of the average debt per one borrower in a region as of the reporting day to the average income in a region during the previous four quarters) is 14%. Again, it is close to the country’s average. The Republic of Sakha-Yakutia with 33,3% is the leader, the Republic of Ossetia-Alania with 6,8% holds the smallest indicator.

What about the future?

It is no surprise that seeing such impressive numbers in all the regions, the Russian Central bank decided to cool the lending market down as much as possible. New restrictions — the so-called quantitative limits on some loans — are coming into force. Increments in the risk-benefit ratio for unsecured consumer loans will rise from 1 July 2021.

It is offered to use unified methods to calculate individual credit ratings of natural persons — now the rating can get worse even if there is a more than 90-day overdue debt from 500 rubles.

In fact, crackdown measures are being taken for both banks and borrowers: when your rating won’t let you take out another loan for the smallest flaw.

I think it would be absolutely useful to teach citizens financial literacy — not only the older generation but also schoolchildren and students. Perhaps, financial literacy classes should be introduced because a credit story is now created at a young age. Both a 15-year-old schoolchild and a 60-year-old pensioner should understand the definition and the amount of the optimal debt.

The easiest way to solve the problem of the debt load is to urgently boost economic growth and ensure new sources of the population’s real income. The forecast for income growth in 2021 is 3%. Given the fall in 2020, this number has nothing interesting and new.

The economy is in stagnation, there is small hope for the feedstock supercycle, which will bring a rise in feedstock prices, we already see a gradual growth of oil rates. Hopefully, after replenishing the budget thanks to mineral extraction tax, the government will go to the market with public contracts and public support programmes. As I have repeatedly written in my articles, the “market hand” and monetarism as such don’t work in Russia. The old good budget stimulus is seen as the only power that can cope with the economic decline.