Debt burden of Russian households at record high

A sharp fall in real disposable incomes has pushed Russians to increase their debt burden. The latter is growing along with the number of overdue loans prompting the Bank of Russia to introduce new measures against a possible payday loan bubble.

The Russian Central Bank considers that the country could find itself in the midst of a payday loan bubble, as household spending in Russia is rising significantly faster than incomes, says The Moscow Times. According to the regulator, struggling households load up on short-term, high-interest debt as they come out of the coronavirus recession. The Central Bank has noted “a fairly rapid growth in individuals’ debt burdens” this year, said the bank’s First Deputy Governor Ksenia Yudayeva on 17 May adding that “in some places, we can even talk about bubbles”.

The COVID-19 pandemic has exacerbated years of squeezes on living standards spurred by Western sanctions and the Kremlin’s austere economic policy. Thus, Russian household spending power fell to its lowest level since 2009 in the first months of 2021, reads a report of the Bank of Finland’s Institute for Economies in Transition. To help cover everyday expenses, households resorted to loans. In March, the number of payday loans issued was at an all-time high. Furthermore, the volume of loans that are more than 90 days overdue has risen by 20% over the last year to above 1 trillion rubles ($13,5 billion).

In 2019, the Central Bank already implemented a series of measures, which included limiting interest rates and forcing banks to insure themselves by keeping more capital for the riskiest borrowers on hand. Now the regulator is backing a new round of draft bills passing through the Russian parliament. One of them would require banks to tell borrowers when a new loan would take them above a 50% debt-to-income ratio.

Meanwhile, rising prices are adding to the pressure on already struggling Russian households. Surveys show that Russians consider inflation to be almost three times higher than its official rate. According to economists, the rise in prices is caused by a combination of global factors, such as surging commodity and food prices, the devaluation of the ruble and supply chain disruption.

The Central Bank has responded quickly to the inflation crisis so far. This year, it has hiked interest rates from 4,25% to 5% and has signalled its intention to pursue an aggressive path of “normalisation” with more hikes expected until the end of 2021. However, raising interest rates threatens to slow down growth, which is essential for the country’s post-pandemic economy.

By Anna Litvina

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