Lending may eventually contribute nothing to financing of the final demand

Last year the lending market was characterized by high debt ratio. The share of payments for servicing households' debts to banks kept growing over the past year and reached more than 13% of the total households' disposable income by the middle of the current year. Last year the share stood at about 11%.

Growth rates in households' debts to banks have been slowing down during more than two successive years, being indicative of "overheated" market. The peak was reached in mid-2012, when households' debts increased more than 40% within 12 months. By mid-2014 the growth rate more than halved, to 21%. Additionally, during the past year the growth rate began to slow down in absolute terms too. This has significant systemic effects.

Should the existing trends persist, this year will unavoidably see the following: the amount of growing households' debts will become less than that of interest payments. This implies that the retail lending market will lose its basic macroeconomic significance by ceasing to be the source of financial resources for households and instead increasingly claiming payments for servicing the existing debts.
In fact, any consumer loan weakens the borrower's purchasing power in the long run. Loans have to be repaid plus the accrued interest which is markedly above the inflation level. It's almost always more cost-efficient to stash and buy later than buy on credit as soon as possible. The only reason the borrower has for using a credit is the opportunity to buy the desired product "right here, right now" before he accumulates the required amount of money to buy the product .

This will require that debts grow at a faster rate than interest payments. Consequently, even if every single borrower has to part with some of his money in favor of banks, in general, the household sector may for some time generate extra resources by issuing new loans.
This is what happened to Russia's population in the period between 2011 and 2013. Loan debts grew much faster than the value of the credit portfolio, therefore households' income received a substantial bonus during the period. In 2012, lending's net contribution to the households' financial balance reached almost 4% of the final consumption expenditure (a sum of retail turnover, paid services, and public catering).

The situation reversed early in 2014. Interest payments exceeded growth in debts, and lending's contribution turned out to be negative. The situation is partially mitigated by the cessation of growth in the value of debts. Households' interest payments under bank loans in H1 2014 showed a decline in the average weighted lending rate vs. the level observed in 2012. However, the growth rate of debts keeps declining steadily. To reach 17-18% at year-end, banks' lending activity in the retail market should be increased 1.5 times in H2 2014 vs. the first half of the year. At the most, lending will contribute nothing to financing of the final demand in the current year.

Decline in the rate will reduce the volume of interest payments, while extended terms will allow loan debts to increase, with the volume of new loans remaining unchanged. Both processes are being blocked by high credit risks which force banks to put a stay on lending. The issue may be addressed by switching the market to longer and cheaper residential loans. This trend emerged during the first months of the current year.

Mikhail Khromov, leading expert of Gaidar Institute's Center for Structural Research