No risk control whatsoever in the consumer financing market

Credit pumping as part of the growth model and institutional environment which have been established in Russia, will lead to a short-term revival of the economy, escalation of structural problems, and a crisis which would cost much more than the crisis of 2008-2009.

Personally, I don't think that the banking sector should act a locomotive of growth. The banking system should develop at the same growth rates as the economy at large, otherwise it might result in structural disproportions and further crises.

Economic freedom in the real sector and strict supervision in the financial sector are required to provide a quality economic growth. The financial sector is less important in any case, because it can't provide economic growth. By the way, we have compared a financial sector contribution in percent of GDP: 8% in the United States and Europe, 4% in Russia. However, it is obvious that the financial sector can't constitute a source of economic growth even though its growth was doubled. Economy is the real sector. However, there were many cases when a financial sector crisis spread into the real sector. This is why a strict supervision is required.


In general, speaking of the current situation in the Russian financial sector, one may say that the market has adequate liquidity and Bank of Russia's policy towards refinancing rates is sound.


The threat may come from the consumer finance market which has been overheated over the past 1,5 years. We can't afford such a large-scale development of consumer financing. The fact that Rb 2.2 trillion of loans as refinancing have been issued and the Central Bank has become a net lender rather than lender of last resort in the banking system is definitely a step towards a banking crisis.


Let me recall that as early as in 2012 Russia caught up with the United States in a share of costs on consumer debt service in disposable income. Costs of interest and principal payments on loans accounted for 11.5% of household disposable income. However, debt under bank loans accounted for 85% of GDP in the United States against 14% in Russia. Based on these data, many experts say that Russia has potential to develop its consumer financing. This is misperception. Loans are expensive and very short-term in Russia. Therefore, further increase in debt would lead to a bad debt crisis, because individuals wouldn't be able to service such loans.


According to the Central Bank, an average consumer loan period is 2 years at an average interest rate of 17% in Russia, which is very expensive. Basically, mortgage loans is an excellent tool to encourage economic growth and solve social problems. Yes, it is, but not at 20% p.a., because in such case the borrower pays for two apartments just over five years. Neither can interest rate of 12% on corporate loans be an option for the development of the real sector. Indeed, the market is facing a problem of long and cheap money, interest rates should be set at 7% or less.


Consumer financing in normal, European or American perception, can exist subject to much longer terms and lower interest rates. It should take a lot of time. I see no prospects for healthy development of consumer financing in 3 to 5 years to come, being free from the threat of a banking crisis. Thought banks can benefit from the situation, risks are high.


No risk control is obvious, given such a growth (40% annually). In fact, consumer loans are issued to everyone and their brother on every street corner. No bad loans relates to the fact that delays in payment are still at the back of growth rates. Bad debts will grow as soon as growth rates slow down.


In 2012 the Russian Government just ignored these problems, because consumer financing accounted for about 1.5% of GDP growth. While it is possible to explain why they wanted growth at any cost, especially prior to elections, it is too dangerous now.


Vedev A.L. - Director of the Center for Structural Studies