In the last year, Russia has seen a spectacular and continuous increase in consumer credits granted to households and individuals. This increase approximates 25% compared to the previous year and translates to an amount of 1.8 trillion rubles or €25 billion.
The Russian central bank, for its part, in its effort to limit this phenomenon of potential “bubble” to consumer credit has recently imposed some restrictive measures on the regulatory framework of the Russian banks to grant new consumer credit.
by Thanos S. Chonthrogiannis-https://www.liberalglobe.com
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But this framework of measures is incomplete, and it is not enough to limit the phenomenon. The Russian population, and particularly over the last four years, has been experiencing a continuous decline in its purchasing power due to reduced wages being reduced each year, with the result that the low income classes are increasingly borrowing to be able to cope with the problems and expenses of everyday life.
The 30% of indebted households in order to repay their consumer loans are forced to spend more than 60% of their monthly disposable income. Essentially, the remaining amount of disposable income is not enough to cope with on its monthly subsistence costs, so they have entered, this category of households and individuals, in a vicious cycle of borrowing with high interest rates (consumer loans have high interest rates) to repay their previous loans, increasing in an exponential way their total debts.
The fact that more than 19 million Russian citizens living below the poverty line the drastic increase of this magnitude, due to heavily indebted households that will eventually go bankrupt, shows us the size of both the “bubble” in consumer credit and the size of the social problem that could lead to a social explosion.
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On the other hand, many Russian economists (with the right reason) believe that limiting the market credits will reduce the level of consumption which will have a direct impact on the growth rates of the Russian economy. The level of unsecured appropriations in Russia reaches 9% of GDP when the equivalent size for Eastern Europe is double.
Consumer credits on low Incomes act as fuel for the demand and consumption and indirect support of any development of the Russian economy and given that the Russian economy has been affected since 2014 by the sanctions imposed both the United States and the EU due to the crisis in Ukraine.
Recently the Central Bank of Russia has announced that it will tighten the banking regulatory framework regarding the conditions for the allocation of consumer credit by banks to households and private individuals. The new proposed rules make the officially declared income the benchmark in relation to the total existing debt of the loan seekers as an indicator of the granting of loans.
But these new rules do not correct the situation of heavily indebted households that are constantly increasing, since heavily indebted Russian households have two options either to declare a sudden bankruptcy with what it entails or to acquire loan with unbearable conditions from the shadow market that will sooner or later lead them to bankruptcy.
The right policy should define, in addition to the measures imposed by the Central Bank of Russia, that all households and individuals who have been overcharged and proven based on their incomes cannot sustainably serve their debt should this debt be classified as a red loan.
Then after this loan has been cut by 15%-20% and depending on its size (it should be noted that the haircut of these loans should be imposed as a penalty against the banks that while they knew the over-indebtedness of their customers continued to grant them loans).
The next step will be the banks to lengthen the remaining debt and after preceding the initial total debt haircut, to repayment horizon in such a way that based on the stated income of the borrower the monthly total repayment amount not to exceeds 20%-25% of the borrower’s monthly income.
In the event that in the future the official monthly income of the borrower increases or decreases the monthly installment of the debt service will be adjusted accordingly with simultaneous reduction or increase respectively of the total repayment time so that the monthly repayment installment of the loan to remain at the same level.
In this case, the monthly disposable income which will be available for consumption will be drastically increased in heavily indebted households in order to be able to live decently, without being forced to make new loans. Any social explosion is avoided, consumption will increase to higher levels due to an increase in the disposable income of the households concerned.
By this way is created a strong protection framework for heavily indebted households and private individuals without limiting the growth of the economy.
Thanos S. Chonthrogiannis
