‘This kind of growth can’t be sustained’

As inflation rises, payday loans are undermining the Russian economy and threatening a new crisis

Inflation is rising in Russia. At the same time, banks are increasingly denying citizens’ loan applications. As a result, Russians are turning more and more to payday lenders to buy basic necessities like food and clothing — and this doesn’t bode well for the country’s economy. Journalists from the independent Russian outlet Holod spoke to two economists and a lawyer about how Russia’s payday loan services work and what their rise could bring in the future. Meduza shares an English-language summary of their reporting.

In 2023, Russians took out a record-breaking one trillion rubles (approximately $11.2 billion) in payday loans — 30% more than in 2022. Some experts predict that this figure could increase again by as much as 25 percent in 2024. By the end of 2023, the number of Russians using “microfinance organizations” (MFOs) had reached 19.9 million, which is 2.7 million more than in the previous year. And as of the end of the first quarter of 2024, about 32 percent of these loans were overdue.

Payday loans in Russia are capped at one million rubles (about $11,250) and generally have a repayment period of between one week and 60 days. Interest rates for these loans are high, averaging at about 0.5–0.8 percent per day, or up to 292 percent per year. They can be secured easily and quickly both online and offline, with applications often processed in less than an hour and money often disbursed on the same day. Traditional bank loans, in contrast, can take several days to process, and the refusal rate from Russian banks reached 80 percent in October of last year.

Currently, the average monthly income of Russians applying for payday loans is 50,000 rubles, or about $562, while the average size of these loans is 9,990 rubles ($112). In general, Russians turn to payday loans to purchase food and clothing as well as to pay off older loans, economist Nikolai Kulbak told Holod. Most people who use payday loans in Russia use them more than once: in 2023, about 83.4 percent of payday loan recipients were repeat customers.

A house of cards

According to economist Yevgeny Nadorshin, the current rate of growth of the payday lending industry in Russia is a bad sign for the health of the Russian economy. He told Holod:

Russians are aggressively taking out loans and payday loans, despite the fact that interest rates are rising faster than incomes. The country’s economy is currently growing not from import substitution or investments but due to a rise in consumer demand that’s being fueled by loans. This kind of economic growth can’t be sustained for long. Its slowdown or even decline are the most likely scenarios for the future.

According to Nadorshin, MFOs currently have a greater impact on the market than banks do. “This is due to the tightening of credit policies and the increase of the key interest rate, which affects the interest rate at which banks lend money,” he explained. “As a result, MFOs have seen an additional influx of clients, which has enabled them to set a new record in loan volumes. According to data from the Central Bank, some of the people who took out payday loans in the first quarter of 2024 had previously obtained bank loans.”

Kulbak told Holod he also expects to see a continued rise in the number of payday loans being issued in Russia. “Banks used to give loans even to clients who were already devoting most of their income to paying off existing loans; now they’re increasingly refusing people,” he said, adding that he expects the trend to persist for the next six months since inflation does not seem to be slowing down. “The fewer loans banks approve, the more people turn to MFOs. Ultimately, this leads to an increase in bankruptcies,” said the economist.

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A vicious cycle

MFOs in Russia often bundle their loans with other services, from text message notifications to life insurance and legal consultations. The cost of these services can be as high as the loan amount itself and also incurs interest.

Defaulting on payments of these fees can lead to penalties, legal proceedings, and damage to one’s credit history. “If you stop making payments, interest and penalties will start accruing in addition to the principal debt,” lawyer Filipp Pokrovsky told Holod. “According to [Russian] law, the sum of fines and interest on contracts lasting less than one year cannot exceed 130 percent of the principal debt, meaning that for a loan of 10,000 rubles, MFOs can demand repayment of up to 23,000 rubles.”

One of the main risks that MFO clients face is the accumulation of multiple loans. “When a person starts extending their debts, it can turn into a vicious cycle: they’re compelled to take out additional payday loans to settle previous ones,” Pokrovsky explained.

In addition to the traditional personal bankruptcy process, Russian law allows certain categories of the population, such as pensioners, to go through a simplified, out-of-court bankruptcy process. More than 12,000 people initiated this process in the first quarter of 2024 — more than five times the number of people who did so in the same period the previous year. The number of judicial bankruptcies rose by 18.2 percent to 89,800 over the same period.

Since Russia first gave individuals the right to file for bankruptcy in 2015, over a million Russians have declared themselves insolvent.