Translated material
The contract is cheaper than money
Banks will be forced to be honest when issuing consumer loans
The Central Bank will no longer ask banks to be honest with their clients. The regulator will simply oblige its wards to do this. As Deputy Chairman of the Central Bank Gennady Melikyan said yesterday, banks will have to disclose in contracts all the conditions for issuing consumer loans.The Central Bank's innovation should open the eyes of private borrowers to the rate at which they actually take out a loan. But this threatens banks with additional costs associated with the re-issuance of standard contracts.
As Mr. Melikyan said yesterday, banks sometimes reveal only part of the information. And it turns out that the banks’ real effective rate is much higher than the one they declare in the contract. “The first thing we definitely want to do is to force banks to actually publish in the agreement all the conditions for issuing a loan, so that people are not deceived about the rate at which they receive money,” says the deputy chairman of the Central Bank.
The rapid growth in the consumer lending market, which began two or three years ago, has shown that banks are very profitably using the financial illiteracy of Russians. In particular, the officially declared loan rate was 2-2.5 times lower than the real one, which takes into account all kinds of fees for opening and servicing an account, issuing a plastic card to which the loan amount was transferred, etc. Therefore, borrowers, who often did not read the agreement carefully, ended up having to incur unplanned expenses.
This attracted the attention of the Federal Antimonopoly Service, which in May last year, together with the Central Bank, developed recommendations for banks. Their main principle is to provide the borrower with reliable information about the terms of the loan in a standard form before concluding an agreement, allowing the consumer to compare the terms of consumer loans from different banks. According to the FAS, 91 banks follow these recommendations, in particular Gazprombank, Russian Standard, Alfa Bank, Uralsib.
Mr. Melikyan did not explain how he intends to force bankers to be honest; most likely we are talking about changes to Central Bank Regulation No. 254 “On the procedure for credit institutions to form reserves for possible losses on loans, on loan and similar debt.” When Andrei Kozlov was the first deputy chairman of the Central Bank, it was planned to oblige banks to indicate a single real effective rate in the loan agreement, and not just write in small print all the commissions that the borrower will have to pay. If the bank did not comply with the regulator’s instructions, it would have to separately create reserves for each “wrong” agreement. For a credit institution, this would mean an additional financial and time burden.
Since the number of consumer loans in Russia amounts to tens of millions, it is unlikely that banks will be able to immediately reissue all documents. However, consumer loans are short-term, which means that if the Central Bank gives its wards a little time, then many contracts will simply end, and banks will have time to prepare for the conclusion of new ones, according to different standards. However, yesterday Mr. Melikyan did not say a word about the possible timing of the innovation.
But the deputy chairman of the Central Bank did not rule out increasing the mandatory reserve requirements that banks must fulfill when issuing consumer loans. What exactly they will be expressed in, Mr. Melikyan did not specify, explaining only: “We are not going to introduce any administrative restrictions. These measures are associated with a more stringent approach to determining reserves when issuing loans to the population, but I also cannot say that they are of any radical nature.” According to him, thanks to very high rates on consumer loans, banks, even if loans are not repaid, remain a huge winner. “Today, in a number of cases, the real effective rate reaches 45-50% per annum. This is unthinkable, because the banks themselves attract resources at 3-6%, maximum 8% per annum.”