Russians to Limit Grants to Protect Citizens from “Financial Slavery”

Russian MPs are to limit their citizens’ access to credit, having proposed prohibiting banks from issuing a loan if payments on it exceed half the aggregate income of the borrower's family, says the head of the State Duma Committee for the Financial Market, Anatoly Aksakov. The law is also expected to extend to microfinance organizations (MFOs). Parliamentarians, in so doing, plan to protect the population from credit bondage. However, according to experts, because of this restriction, Russians risk becoming even more bogged down in debt. In addition, the may end up in the clutches of "black creditors" and then at stake is not only the property of the borrower, but even their life.

In Russia, it is almost impossible to find a person who has never taken a loan. Accordingly, the greater the debt burden, the heavier the price to pay. According to the Central Bank, from the beginning of the year, the volume of indebtedness of individuals to credit organizations grew by more than 25%, and by June 1, 2018, it had reached 13.5 trillion Rubles ($197,100,000,000.00).

The growth in lending was due to low rates. In addition, banks now find it more profitable to lend to the population than to companies that are in stagnation. In the MP’s plans, it is necessary to prohibit banks and MFOs from issuing loans to citizens if their repayment will take more than 50% of the total income of the family. Corresponding amendments to the Law "On Banks and Banking Activities" and "On Microfinance Organizations" are being developed by the State Duma Committee on the Financial Market.

Authors of the bill say the restriction is aimed at protecting citizens, and the choice of a mark of 50% is in line with world practice. For example, in Canada, the debt load on mortgages is 42%, in Israel 50%. According to the Bureau of Credit Histories, Equifax, on average Russians spend 40% of their income on loan payments. Experts warn it is risky to try to replicate the experience of other countries indiscriminately.

“What is meant by the family? How many people does it consider a ‘family’? Do they include people with incomes? It is necessary to consider whether the borrower has dependents as their presence reduces the size of the declared income, as some of the money goes to their maintenance. In addition, it is not clear what kind of income is being talked about. Whether only the wages of family members will be taken into account, or other sources of income - deposits, shares, income from renting apartments, for example. And it's not easy to fix them all,” said Mikhail Belyaev, head of the Finfast Consumer Banking section.

In addition, the income of a foreign borrower and Russian one is diverse. According to the Federal State Statistics Service, in June, on average, the monetary incomes of the population in Russia amounted to 33,447 Rubles ($491.00196). At the same time, in Moscow the figure reached 62,621 Rubles ($919.27628), in the Central Federal District - 42,197 Rubles ($619.45196) in the Volga Federal District – 27,078 Rubles ($397.50504), and in the Siberian Federal District – 24,946 Rubles ($366.20728).

“The problem of Russian regional finance is monstrously low salaries. People who have a salary of 30,000 Rubles ($440.4) a month or less need a second or even third part-time job, because income below a thousand dollars a month humiliates and offends the dignity of a modern civilized person,” said expert of the International Financial Center, Vladimir Rozhankovsky.

And if the crediting of the population is on the up, the incomes of citizens on the contrary fall. According to calculations by experts of the United Popular Front, as of the first half of 2018, the average Russian family owes banks more than 234 thousand Rubles ($3.435.12). This indicator increased by 19% in comparison with the previous year.

Often, Russians take another loan to pay off the previous one, and also to fill the lack of funds for current expenses. “At such low incomes, for many families the threshold of loans of 50% could become an obstacle for refinancing old loans. And this despite the fact that now new loans are almost the only way not only to extinguish the previous ones, but also simply to have funds for the day-to-day expenses,” says Mark Telehman, leading analyst of TeleTrade Group.

In other words, the authors of the legislative innovations should take into account that the Russians have already sat down on the “credit needle:” no growth of incomes is foreseen, but somehow it is necessary to live. And if banks and MFOs start denying them loans, then citizens will have nothing else to do but go to the black creditors. And communication with them can be fraught, with risks not only of losing property, but also life.

By Dimitri Dolaberidze

17 September 2018 20:23