Consumer lending in Russia: prospects and risks based on household finance survey

As our calculations show, borrowers with incomes above the median level, who did not apply for loans earlier, could represent 2/3 of extensive growth in the volume of consumer lending. But in the new environment it is difficult to rely on individuals who did not apply for loans even during the boom period of 2010-2012, in the context of rising oil prices and growing incomes. Banks’ choice of this area will necessitate additional costs that will make credit more expensive and thus less attractive to this group. As regards intensive credit growth, the debt burden of borrowers with incomes below the median level has growth potential. Due to the interestrate sensitivity of this group’s demand for credit, the Bank of Russia’s transition to a neutral key rate may provide some support to credit growth, provided that banks are willing to choose business models with lower profit margins. Macroprudential policy measures can incentivise banks to adapt less risky business models, helping them lower interest rates and thus making loans more attractive to creditworthy borrowers. The identified structural features of loan supply and demand make it possible to draw a number of conclusions for the regulator’s policy: 1. The transmission of monetary policy to consumer lending may prove weaker than commonly assumed. First, the reduction of the key rate by the Bank of Russia may modestly translate to a decline in banks’ interest rates due to the fact that high interest rates reflect the particularity of banks’ business models, which target high-risk borrowers. In order to enhance the trans mission, banks will have to adapt to a different model. Second, the level of loan interest rates per se has only a limited impact on demand for loans of this kind, the structures of which are governed to a significant extent by demand from low-income borrowers who are largely insensitive to interest rate levels. 2. The growth of lending in a context of magnified inflation expectations facilitates the accumulation of vulnerabilities in the consumer lending segment, posing risks to financial stability and requiring macroprudential policy adjustment. Magnified inflation expectations can prompt borrowers who evaluate real interest rates as extremely low to take further risks and accumulate excess debt. When these borrowers possess predominantly low and unstable incomes that are sensitive to macroeconomic shocks, banks find themselves exposed to increased credit risks, which, in certain circumstances, can have systemic consequences. In these situations, macroprudential policy measures are capable of protecting both banks and borrowers from taking excess risks, directing banks towards less risky groups of borrowers and thus increasing their resilience in the new environment.