Debtors in Russia experience a sudden drop.
Shopping in a store might lead you to think you're just buying an item on installment, but did you realize it's actually a mini loan you're taking?
In our country, the number of people with debts to banks or microfinance organizations dwindled by 500,000 last year. As per the Central Bank's latest data, there are currently 50.1 million borrowers (see the graph for details). Interestingly, while bank clients have decreased, the number at MFOs increased.
STRANGE TURN OF EVENTS
For the past few years, the number of borrowers has been steadily on the rise, quarter after quarter. People are increasingly obtaining mortgages, using consumer loans, and relying on credit cards. However, the only exception was the second quarter of 2022, when the number of borrowers also dropped by 300,000, due to early loan payments and temporary loan issuance halts by banks. Additionally, the key interest rate reached 20% per annum at the time, but it's even higher now, which explains the more significant drop.
Recently, the Central Bank enacted additional restrictions, known as macroprudential measures, to discourage banks from lending to high-risk borrowers. Consequently, these individuals might be rejected, and there's a side effect: this leads to an increase in another type of loan...
INSTALLMENT PLANS ON THE RISE
In the latter half of last year, the number of clients at microfinance organizations (MFOs) skyrocketed by 200,000 in just one quarter, reaching 5.2 million. Over the past 1.8 years, the growth has been approximately 20%. However, why are clients suddenly choosing microloans with daily interest rates as high as 0.8%, instead of bank loans with annual interest rates of 30-40%?
Daria Andrianova, deputy director of the National Association of Financial Planning Specialists, explains that some people might take a microloan instead of getting denied for a consumer loan, especially if they need the money to fix a pressing issue without delay. Additionally, MFOs are increasingly offering installment services that have become increasingly popular in recent months and can be found in almost every store. Many customers might not understand that they're taking out a microloan, not installment payments.
In the coming months, the Central Bank plans to make the installment market more transparent. While these forms of lending have become increasingly popular, they often come with fees that are the same as, or even higher than, traditional loan interest rates. It doesn't matter if this payment is called a commission or interest on the loan - the essence remains the same: a person borrows money to buy something, but ultimately pays more for it.
DON'T GET CAUGHT IN A DEBT TRAP
It's crucial to be aware of the terms and conditions associated with installment plans, as high daily interest rates can easily lead to debt traps. Taking out too many loans and struggling to manage payments can significantly impact your financial stability. Take your time to review the offer carefully, consider your budget, and weigh the benefits and risks before making a decision.
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- The decline in the number of bank clients contrasts with an increase in borrowers from microfinance organizations (MFOs), indicating a shift in the industry's finance landscape.
- The Central Bank's macroprudential measures have resulted in high-risk borrowers being rejected by banks, pushing them towards MFOs that offer microloans.
- Despite banks' annual interest rates of 30-40%, some borrowers are choosing microloans with daily interest rates as high as 0.8% due to the ease of obtaining them and the immediate need for funds.
- Unaware consumers may unwittingly take out microloans when making purchases on installment plans, leading to potential debt traps due to high daily interest rates.
- The Central Bank plans to improve transparency in the installment market, aiming to educate borrowers about the fees and interest rates associated with these types of loans to prevent financial instability.
