MILES AXLE Translation. Region: Russian Federation –
Source: Central Bank of Russia –
MFIs will have to eliminate practices that lead to citizens becoming over-indebted
Director of the Central Bank Department Ilya Kochetkov talks about how people are drawn into a chain of endless borrowing and what measures the regulator will use to combat this.
About 20% of loans issued by microfinance organizations are spent by so-called dependent clients of organizations on sports betting, online casinos, etc. — this estimate was given in an interview with Izvestia by the head of the non-bank lending department of the Central Bank, Ilya Kochetkov. He also reported that a third of expensive loans — with an overpayment of 100% or more — can be classified as usurious, when organizations bypass regulations and drag people into a debt hole. In order to stop this vicious practice, the Central Bank proposes to introduce a number of measures, in particular, the mechanism of “one loan in one hand.” However, as Ilya Kochetkov stated, this restriction will only apply to expensive loans. It is also planned to establish a three-day “cooling-off period” after the repayment of obligations to microfinance organizations.
“First of all, measures will be taken to protect citizens”
— In August, the Central Bank published a report for public discussion describing what was effectively a reform of the microfinance market. The changes proposed by the regulator are indeed serious, which is why they caused a strong reaction from the market. How is the discussion going with industry participants?
— The main goal of the changes proposed in the report is to create conditions for the development of companies that provide loans to businesses, but at the same time it is necessary to eliminate practices that lead to an increase in the indebtedness of citizens on consumer loans.
Indeed, the market has responded actively to our proposals. We have received feedback from self-regulatory organizations (SROs) and most of the largest industry participants. Several stages of discussion have already taken place. In early September, we held a meeting with representatives of microfinance organizations, SROs, infrastructure and public organizations, and the scientific and expert community. Last week, the proposals described in the report were conceptually supported at a meeting of the Financial Market Committee in the State Duma. And on October 14, we plan to discuss the feedback received with market representatives.
— Did any of the proposals from market representatives interest the Central Bank and will they be taken into account when preparing amendments to the legislation?
— Speaking about preliminary results, among the comments received there are proposals that we are ready to listen to. For example, the market suggests reducing the period for providing information to credit history bureaus. Currently, it is two days. We support this initiative. This will allow companies to track the receipt and repayment of loans in real time.
Also, a number of MFIs pointed out excessively strict requirements for capital and investment attraction. We are ready to take these proposals into account and adjust individual prudential requirements (aimed at avoiding risks and ensuring stability. — Izvestia) taking into account the opinions of companies.
— As I understood from the discussion of your proposals in the State Duma, the deputies are extremely determined and are ready to prepare and adopt a bill in the near future, almost in the autumn session. Will this be a separate law or will amendments be made to existing ones? When can we expect the bill to be adopted?
— Changing the configuration of the MFI market will require a comprehensive revision of legislation and regulations. They will be introduced into the law on microfinance activities and microfinance organizations, the law on consumer credit (loan), the law on the Bank of Russia and about 20 more laws. It is assumed that this will take place in several stages over three years.
First of all, measures aimed at protecting citizens will be implemented: the introduction of the “one loan per hand until repayment” rule, the establishment of a “cooling-off period” and a reduction in the maximum overpayment on consumer loans.
“The ban will only apply to the most expensive loans”
— Has the Central Bank already decided how the “one loan per person” rule will work? Will the restriction apply to all MFIs and will liabilities in banks, many of which now offer the “money until payday” product, be taken into account?
— It is planned that the ban will apply only to the most expensive MFI loans, for which the total cost of credit (TCC) exceeds 100% per annum. A person will not be able to have two such obligations. The purpose of this measure is to protect citizens from excessive indebtedness. If a person already has one such loan, then until it is repaid, no MFI will have the right to issue him a second expensive loan. At the same time, if a person has a bank loan or a loan with TCC up to 100%, the ban will not apply.
In addition, it is planned to establish a “cooling-off period” between receiving loans. This is done so that the borrower has the opportunity to take a more thoughtful and balanced approach to their obligations, and companies cannot issue new loans to pay off current debts.
— What kind of “cooling off period” will this be?
— We plan for it to be three days.
— Recently, in a review of retail lending trends, the Central Bank indicated that many borrowers have both a bank loan and a loan from an MFI. The regulator has consistently tightened macroprudential measures for borrowers with a high debt burden, who, having been refused by a bank, went to refinance in an MFI, where money is more expensive. Doesn’t it make sense to also take into account obligations to banks when imposing restrictions?
— Requirements for calculating the debt burden ratio (DBR) and macroprudential limits (MPL) for issuing loans to the most indebted borrowers are established not only for banks, but also for microfinance organizations. Yes, the limits were initially different — they were more lenient for microfinance organizations. But since the fourth quarter of this year, the same MPL values for loans with a high DBR have been in effect for microfinance organizations. This allows us to avoid regulatory arbitrage and limit the growth of indebtedness.
When calculating the borrower’s DTI, MFIs are required to include in his monthly expenses all payments on existing loans and credits. If the DTI is more than 50%, MFIs will be able to issue such a person a loan only within the limits established by the MPL.
— You recently said that restrictions on the maximum daily interest rate for microfinance organizations may be introduced. To what extent?
— For several years, we have been systematically working to reduce the cost of loans for individuals. During this time, the APR has been reduced from more than 1000% to 292% per annum, and the maximum overpayment has been reduced from four times the loan amount to 130%. But even now, MFI loans remain quite expensive for individuals, since most of them are issued at the maximum possible rate. We see potential for further reduction of the daily interest rate; specific values are currently being worked out. We are also considering various options for prudential regulation to encourage MFIs to differentiate rates and provide more favorable conditions for quality clients.
According to our estimates, a more effective measure to reduce debt load could be to limit the maximum amount of borrower overpayment. Currently, it is 130% of the loan amount. As an operational measure to reduce the cost of loans for citizens, we propose reducing the borrower overpayment to 100% of the amount. That is, conditionally: if you took a loan from an MFO for 1,000 rubles, then taking into account all interest, penalties, etc., you will still return no more than 2,000 rubles.
— SRO “Mir” proposes to review the criteria for “loans until payday”, reducing them to 15 thousand rubles and shortening the term of issue, and only then introduce a limit on them. Do you agree with this proposal?
— Indeed, the criteria for a payday loan — up to 30 thousand rubles and up to 30 days — are outdated. MFIs artificially extend loan terms or increase their amounts in order to circumvent regulatory restrictions. That is why a comprehensive review of consumer loan regulation is required, and restrictions should be introduced based not on formal criteria, but on the cost of the product. Therefore, we propose introducing stricter regulation for loans with an APR greater than 100%.
“Companies that do not accept the new rules of the game will have to leave the market”
— The head of the Central Bank Elvira Nabiullina has repeatedly said that usurious microfinance organizations should leave the market. What kind of organizations are these and what is their share?
— In a number of cases, consumer loans from microfinance organizations remain quite burdensome for citizens. High-quality, conscientious borrowers receive money on the same terms as less reliable clients. Although, based on the risks, the conditions for the former should be more favorable. The current model creates an excessive burden on solvent citizens and does not encourage companies to more carefully select borrowers.
Moreover, there is a practice of hidden loan refinancing on the market. Instead of stopping the accrual of interest when the overpayment reaches 130%, MFIs issue a new loan to a person and include previously accrued interest in its body. So-called loan chains are formed. As a result, the MFI client’s debt grows like a snowball.
According to our estimates, about a third of all expensive consumer loans issued by MFIs are part of such “chains” that lead to an increase in the indebtedness of citizens. The introduction of a limit on one loan per person and a cooling-off period is aimed at curbing such practices. Companies that do not accept the new rules of the game will have to leave the market.
— In your report, you indicated that many people have developed an “addiction to microfinance organization loans”; they borrow money to bet on sports or in online casinos. Are there any estimates of how much is borrowed for these purposes?
— Based on the analysis of actual spending on bank cards of several million MFI clients, we conclude that up to 20% of the amount of issued loans is spent on these purposes. At the same time, for some companies, the share of such loans may significantly exceed the average value, and individual clients spend all the funds they borrowed from the MFI on these purposes.
— Won’t it turn out that by squeezing unscrupulous players out of the market, you will simultaneously push MFIs and their clients into the “gray” and even “black” zone?
— This question is asked every time there is a plan to strengthen regulation in the MFI sector. We expect that the market will hear our arguments and respond to them by changing approaches and eliminating negative practices. We expect that this will be a change in the essence of business models, product lines, approaches to assessing the quality of borrowers, and not a search for various options to bypass regulation. This is important both for the image of the market and for its future, given the constantly emerging initiatives to ban MFIs.
As for “going into the shadows”, it is very important that citizens understand all the risks of turning to “black” creditors. Such companies operate outside the legal field and do not comply with the requirements established by law. Citizens are threatened with high rates, incorrect collection methods and other risks.
The Bank of Russia is working to combat the activities of illegal lenders. Last year, almost 2,000 illegal lenders were identified, and in the first nine months of this year, more than 1,300. We publish information about them on our website, where there is a special section. This helps promptly warn citizens about the risks.
We work closely with law enforcement agencies — we pass on all the data on the identified illegals. The organizers are brought to administrative responsibility. There are facts of initiating criminal cases. Together with the Prosecutor General’s Office and Roskomnadzor, we block the websites of illegal companies. Now this happens very quickly — within a few days.
— Since you yourself mentioned the ban on microfinance organizations… A corresponding bill has been introduced for many years, but as far as I understand, it has not been seriously considered. Why can’t the idea of closing the microfinance organization market be realized?
— We understand that MFIs are often associated with something dubious and semi-criminal. This image is largely formed by illegal lenders operating outside the legal field, as well as high rates and negative practices on the market, which I have already mentioned. But let’s look at the market as a whole. MFIs are an important part of the country’s financial market; they allow people to quickly and easily get money for a short period. It is also important to note that the MFI market is not only expensive loans, but also money for business, POS lending for large purchases. The rates on them are comparable to those of banks.
We proposed a concept for changing this market to eliminate negative aspects, make it more transparent and regulated. MFIs will have to adapt to new restrictions, eliminate practices that lead to citizens becoming over-indebted.
Anna Kaledina, News
Please note: This information is raw content directly from the source of the information. It is exactly what the source states and does not reflect the position of MIL-OSI or its clients.
Please note; This information is raw content directly from the information source. It is accurate to what the source is stating and does not reflect the position of MIL-OSI or its clients.
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