Central Bank offers to oblige banks to grant loans without hidden services: consequences for banks and clients
The Central Bank and the Ministry of Finance are jointly elaborating amendments to a bill that specifies the calculation terms of the full loan value. This document will be introduced in the State Duma in autumn and, as experts think, will be adopted in the first quarter of 2022. Realnoe Vremya’s author finds out what the amendments are about and how they will help an ordinary client of banks.
According to the Russian Central Bank (CB), in eight months of 2021, the number of complaints about imposing additional services and fees rose four times (to 3,595), about fee charges did by 28,1% (to 2,049). The hidden services usually mean a bank or a microfinance company’s additional fees that aren’t spelt out in the agreement or appear in small print. Various duties or premiums can be hidden services: insurance premiums, for opening an account or keeping an account without transactions, etc.
Interestingly, neither the Civil Code nor the Law on Banks and Banking Activity has the concept of fee: in fact, it is illegal.
The legislation envisages only the following types of payments:
- interest on a loan;
- interest on deposit;
- payment for a bank’s services for transactions with money on the account.
However, any bank clients have faced the formulation “the bank’s fee” in documents for signature. This implies a payment for services in transactions on the client’s accounts. It is either a fixed rate (for instance, 1,000 rubles a month for keeping an account) or interest on the amount of the transaction (for example, 1% of the cash transaction). It should be noted that for banks, the income from all kinds of fees is the second biggest after loan interest. It is a considerable amount of incomes.
In fact, fees for services provided are legal, in particular:
- cash transfers, for instance, from a credit card;
- currency exchange, let’s say, in case of paying with a ruble card abroad, the amount of automatically converted according to the bank’s fixed tariffs;
- cash withdrawal in other banks or from a credit card;
- trade finance transactions, i.e. if a legal entity has credit, the bank charges a fee for providing a bank guarantee.
Those fees that are an indispensable part of the main service and that are written off by the bank to make an additional income can be considered illegal.
A lot of clients who faced the necessity of paying for such transactions as credit investigation, granting credit, transfer of money to a borrower’s account, early loan repayment, opening and maintenance of a credit account, notification of a debt. All these services are an indispensable part of the main service, and an additional fee for them is illegal. In such cases, judicial practice is on the clients’ side. Now the regulator in the person of CB will oblige banks to disclose the list of possible fees including to the full loan value. The fight against the pressure into buying service is taken to the legislative level.
Life insurance in a mortgage is a separate topic in imposed services: as a rule, the client can choose only an insurance company linked with the bank. It would be good to separate these services from the banking business so that the client has a chance of taking out a loan without additional services and choose an alternative insurance company. In any case, this kind of insurance (life, job loss) is crucial in a mortgage. This helps repaying the loan in case of problems. But the client must have a choice.
There is another example of a hard sell of additional services, the so-called POS financing, that’s to say, to buy equipment and other things in stores. For instance, it is impossible to buy expensive technologically sophisticated products on credit without filling out an extended guarantee. In this case, a bank and a chain store have an agreement according to which additional incomes are divided between them.
With the introduction of amendments, there will probably be more denials of loans because clients will fully evaluate the burden after receiving the settlement from the bank. Now clients often have to resort to various aggregators to compare loan terms.
While this leads to a disclosure of one’s personal data on these websites that are stored uncontrollably and can be then used by malefactors. There will be no need of comparison with the introduction of a fixed way of calculating the full loan value.
The essence of amendments
According to the amendments that are offered, now banks will be obliged to provide two options of loans — with hidden services and without them. Now such a requirement is in force only for mortgages. However, it will be necessary to provide the full sum of the loan so a client can clearly see his possible spending throughout the repayment period. The changes will also affect ads of loan products in order to give clients accurate information about loan terms. We all have seen big banks’ ads of loans at 5% a year. If we go into details, it becomes obvious that such a rate is possible only after arranging insurance, which significantly raises the cost of the loan.
The task is to protect clients from dishonest ads. At first, it lures a client to a bank office by all means, and then managers make sure he is granted a loan with the help of effective scripts providing his with a lot of unnecessary services.
Besides the inclusion of any additional services to the cost the loan, CB plans to regulate the situation when depending on the borrower’s behaviour the agreement spells out different numbers of the full value of the loan and different interest rates. The amendments suggest that the full loan value will be calculated as the biggest possible sum of payments that can appear in the agreement.
According to the idea of the amendments’ authors, a borrower must also have the right to refuse additional services within up to five calendar days after the first payment in the agreement. As for insurance contracts, the shortest “cooling period” remains as 14 calendar days. A client often finds out that the loan repayment is unbearable only when paying the first payment. The initiative of CB and the Ministry of Finance makes the market more client-oriented.
Simultaneously, the regulator pursues a goal of cooling the lending market down: Russians have taken out a huge number of loans, while a further growth of overdue debts has a negative impact on the sector’s standards.
It should be reminded that earlier Russian President Vladimir Putin tasked the government and the State Duma with providing CB with the authority to restrict consumer loans, which are granted by banks and microfinance institutions.
To sum up, I would like to note that the scheduled amendments will certainly make the lending market more transparent, increase clients’ trust in banks. Banks will have to lose their incomes a bit because incomes of the so-called transaction business (fees, etc.) account for a significant part of the general pattern of incomes.
Interest rates should be expected to rise, since banks will compensate for lost incomes by raising interest incomes. Life and job loss insurance remain the most reasonable among all the additional services: this should be taken seriously, and one shouldn’t refuse the insurance.
Car loan insurance is also logical: a new car can be hijacked or lost in another way. All other “offers” of banks can be brushed off. One should keep in mind that the sale of insurance in consumer loans in an insistent way, the bank violates the law and you deal with the manager whose reward depends on the number of insurances sold too. With the adoption of amendments, ordinary clients will have an absolutely clear possibility of refusing any extra services and getting the main service — a loan.
The novelties will come into force in the second half of 2022.
The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.