The Russians are caught in credit scissors. A crisis is brewing in the consumer lending market

Russians have almost no free money, they are reducing consumption, not expecting improvements, and not just actively taking out unsecured loans, but increasingly refinancing, as follows from today’s analytical publications of Vedomosti and Kommersant . This is stifling economic growth and is bringing a new consumer lending crisis closer.

Without money and optimism

Yesterday we learned that two thirds (65%) of Russian families have no savings at all, and for the majority of the rest they do not exceed three months' income.

Now it turns out that the already poor expectations of Russians have worsened: the quarterly index of consumer confidence of Russians (according to The Conference Board and Nielsen) fell to a historical low of 62 points.
Only 25% of buyers believe that their financial prospects will improve (minus 5 percentage points), and the share of those willing to spend money has fallen to 14% (minus 7 percentage points). The share of consumers who have spare money fell from 77% to 72%.
The number of Russians seeking to save money increased from 62% to 69%. The share of respondents switching to more affordable products increased to 57%.
The decline in consumer confidence is confirmed by third-party data. Retailers see that customers are price sensitive, have a rational approach to shopping, and prefer chain brands and bulk products. Shopping centers are reporting a drop in revenue per square meter in the non-food segment, and this is a sure sign of a reduction in spontaneous purchases, writes Kommersant.

All this is a consequence of the VAT increase and a decrease in real income (by 2.3% in the first quarter according to Rosstat), analysts say.

Trap for people and banks

Along with the fall in income, consumer lending is growing, in which the most dangerous trends for the market are intensifying, Vedomosti writes. The Central Bank is alarmed by the speed of the process: this could be a trap for both the population and banks, the publication quotes the first deputy chairman of the Central Bank, Dmitry Tulin.

In the first quarter, Russians took out 1.9 trillion rubles in loans. More than half (1.05 trillion, +25% year-on-year) are non-targeted unsecured loans. Retail loan issuance increased by 16% over the year, while mortgages grew by only 3.5% (data from Frank RG).
In March alone, the portfolio of unsecured consumer loans grew by 2% compared to February. The growth is primarily due to an increase in the size of loans issued, Central Bank analysts write in the latest bulletin “What Trends Are Saying.”
They explain this by the population’s spending on large purchases and the increase in reserves for loans with a rate above 10% from April 1, due to which banks could quickly issue loans.

The real reason may be different and much more dangerous. It is profitable for banks to give larger loans and for a longer period, explains First Deputy Chairman of the Board of Sovcombank Sergei Khotimsky: “The memory of the problems of 2014 turned out to be short.”

Many new loans are refinancing of existing debt. A borrower may have 4-5 loans, which are replaced by one larger one, at a lower rate, but for a long period, said Fitch analyst Alexander Danilov. The situation is abnormal: “The level of debt burden of existing borrowers is growing.” Danilov also sees the risk of a repeat of the retail lending crisis of 2014, when a quarter of the most expensive loans were not repaid.

The growth of retail lending is “an objective process, there is no need to prohibit it,” says Tulin, promising to control the growth rate on the side of the Central Bank. If the economic situation is stable, the debt burden can grow for a long time without visible consequences: “It is unlikely that a large share of loans will go into overdue in the near future,” Vedomosti quotes Andrey Poryadin, chief risk management manager at Raiffeisenbank.

Why is it important. Falling incomes while the credit bubble is rapidly inflating means “scissors” for the population. With any serious economic shock, a crisis in the banking system seems very likely. The Central Bank is trying to limit the growth of consumer loans and introduces a maximum debt burden of the borrower, but this does not help much.