Higher risk ratio increases customer base of microfinance institutions

Additional risk ratios regarding expensive unsecured retail loans have been in effect since July 1, 2013.
According to a report of the Bank of Russia, an additional risk concerning expensive retail loans which is recognized in calculating capital adequacy amounted to Rb 233bn as of August 1, 2013. According to Gaidar Institute's estimates, it corresponds to nearly Rb 180bn of loans whose total cost exceeds 25% p.a. in rubles or 20% in a foreign currency. Our estimates show that it accounts for nearly 30% of the total unsecured loans issued by banks in July 2013.

Analysis of financial reports of certain banks allows one to assess the structure of expensive retail loans. For instance, the category of most expensive loans which embraces loans at an interest rate of more than 60% p.a. accounted for Rb 17bn or about 3% of total unsecured loans in July 2013. Another Rb 26bn or 4.5% unsecured loans were issued at interest rates ranging between 45 and 60% p.a.

It is these two categories of loans that are expected to receive maximum risk ratio in the next year. Loans at an interest rate of 45 to 60% p.a. are expected to receive risk ratio 3 instead of the currently applicable 1.7. Most expensive loans at an interest rate of more than 60% are expected to have a tripled risk ratio, from 2 to 6.

A major part of expensive loans (more than a half or 15% of unsecured loans) fell within a range of 25 to 35% p.a.

It is hard for the time being to measure the effectiveness of the proposed measures limiting interest rates on loans, because it is important to understand how dynamics of expensive loans is going to change in the next few months. Even now, however, such measures can be considered as one-sided. In most cases high interest rates on loans are determined basically by risk assessment models adopted at banks rather than their extravagant appetite. Inability to issue loans at high interest rates would force banks from this segment of borrowers who are ready to pay such a price in exchange to have access to loans, but it wouldn't weaken the demand. As a result, those who are ready to borrow at any interest rates would move from banks to the segment of microfinance institutions, thereby deteriorating the social aspect of debt load on the Russian population. It would be more efficient to create common rules for all financial institutions in the retail loan market along with measures aimed at enhancing financial awareness of individuals across the country.

Khromov M. Y., a senior expert at Gaidar Institute's Center for Structural Research