bne IntelliNews – Sky-high inflation is forcing more Russians to take out “payday” loans

Sky-high inflation is forcing more Russians to take out expensive short-term loans to make it through the end of the month when they get their paycheck.

In May of this year, Russians took out more consumer loans just to cover their daily living expenses than during the corona crisis. Short-term loans for “urgent purposes” to cover a monthly shortfall accounted for 10% of all personal loans taken out in May, up from 6% in the same month last year, the Central Bank of Russia (CBR) reports. The number of applications for these loans also increased by 1 percentage point from April to May and by 2.5% year-on-year. Kommersant reports.

In addition, the average size of loans has also increased. Experts believe this is because banks have restricted the number of loans they make and are imposing stricter rating criteria to curb the growth of non-performing loans (NPLs) as Russia slides into recession due to extreme sanctions imposed by the West after Russia invaded Ukraine in February.

“In May 2022, 2.38 million payday loans of up to RUB 30,000 ($563) for up to 30 days totaling RUB 21.59 billion were issued. This is the highest volume since December of last year and is 16% higher than a year earlier. According to the central bank, microcredit was extended across Russia from January to March [worth] RUB175 billion,” said the National Bureau of Credit Histories.

Rising inflation creates the problem of eating away at incomes faster than companies can raise wages. Inflation is at a multi-year high, even after falling to 17.1% in May from 17.8% in April.

And the pressure is unlikely to ease anytime soon, even after the CBR’s emergency rate hike to 20% shortly after Russian forces crossed the border into Ukraine, which appears to have effectively curbed inflation. As pressure on price growth has eased, the CBR has cut interest rates back to the pre-war level of 9.5%, but inflation remains in double digits, disproportionately hitting the poorest.

The CBR is currently forecasting average inflation in the range of 14% to 17% this year and 5% to 7% next year, while interest rates should fall back to 4% in 2024, the CBR says, but it’s not doing so in the meantime help low-income families as high inflation reduces real incomes.

According to a recent Kept (formerly KPMG) survey conducted in April-May, less than a quarter (23%) of Russian borrowers are confident they can service loans already taken out, while as many as three-quarters of Russians are struggling count in the fulfillment of payment obligations. Not only private customers of banks were surveyed, but also small and medium-sized enterprises (SMEs). This insecurity is caused by the fear of losing jobs. Unemployment has not risen from current levels near the post-Soviet low of just over 4%, despite an expected economic contraction of 8% to 15% this year, but regional authorities are already reporting the first signs of rising tensions in labor markets. At the height of the coronavirus (COVID-19), pandemic unemployment was above 8% and is expected to rise back to that level in the coming year. In anticipation, the vast majority (93%) of Kept respondents plan to cut costs in anticipation of tougher times.

Borrowers’ concerns have yet to surface in banking statistics, although the CBR stopped reporting some key variables such as bad loans and sector earnings in April.

On April 1, loans past due by 90 days or more (the definition of NPLs) exceeded RUB 1 trillion, but in percentage terms this accounts for only 4.1% of banks’ portfolios and less than last September (4.3%). , reports Kommersant. Sberbank informed the publication that the share of loans overdue by a day or more is only 1.5% and “no problems” are visible among corporate customers.

But banks and government are already taking action: banks can restructure problem loans, and the CBR said in its latest banking update for May that the government is using money from the National Welfare Fund (NWF) to recapitalize key companies. Problems were smoothed out by credit holidays and restructuring, without which bad debt would have grown 15% in April-May, Kommersant quotes experts who estimate that one in seven borrowers has lost their ability to service their debt. Independent expert Andrei Barkhota said Kommersant that NPLs could rise by 25% to 30% by the end of the year.

The state is already planning to step in to cushion the blow with a 4 trillion ruble ($67.8 billion) welfare package to help ease the economic shock of the war in Ukraine. The Ministry of Finance announced a 10% increase in pensions in early June, the Bank of Finland Institute for Emerging Economies (BOFIT) reported in its weekly update on June 10. who typically also have a part-time job tend to be among the safest. Most Russians do not see a pension as a retirement plan, but as a supplement to a better standard of living in the second half of life.

“The previous pension increase of 8.6% was planned for the beginning of this year. The increases are intended to compensate retirees for rising consumer prices. With a view to the increase that has now been made, it represents compensation for the sharp jump in prices after Russia invaded Ukraine,” reports BOFIT.

The government’s spending plan is set to increase wages and benefits by millions of dollars to mitigate the economic fallout from the country’s invasion of Ukraine. A bill signed into law by Russian Prime Minister Mikhail Mishustin on June 21 will also increase Russia’s minimum wage and living wage by about 10%, according to business daily Vedomosti. Under the new measures, families with children under the age of three will also increase. There will also be more financial support for low-income families with children up to the age of 17. The proposal was laid out by President Vladimir Putin last week during a televised meeting of Russia’s State Council, where he stressed that the Kremlin’s main job is to ensure the minimum wage stays above the “living wage”.

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