National Bank frets over consumer loans
As of January 1st, 2014 the risk assessment methodology on the credit debt by individuals will change.
A growth in wages and more advertising about consumer loans have led to greater consumer lending The population’s low level of financial literacy may bring precedents of individuals going bankrupt with potential social consequences. The National Bank is trying to preempt the situation, and credit institutions dealing with consumer lending will have to review their interest rate policies.
Wage growth among Belarusians has led to higher consumer demand. Durable goods have become more accessible, and a variety of ads in the media and shopping centres have increased the number of consumer loans users. The debt of consumer loans in Belarusian rubles since early 2013 has increased by 27.6%, as of September 1st it was BYR 12.7 trillion. Citizens are not entitled to foreign currency consumer loans.
As a rule, consumer loans clients have low financial literacy. Consumer loan interest rates start at 50% per annum. Some loans are issued at 90% per annum. Servicing such loans requires considerable financial resources, which affects the user’s financial state. The growth of outstanding consumer debt demonstrates an increase in the number of borrowers who could not assess their financial capabilities. Gross impaired consumer loans in January - August 2013 grew by 2.5 times from BYR 65.1 billion to BYR 161.2 billion, and the share of overdue consumer loans in the national currency increased from 0.65% to 1.27% of the total consumer debt. These values are not yet critical, but the dynamics of growth have raised timely concerns in the National Bank. On September 20th, 2013 the National Bank passed a resolution No 544, envisaging adjustments to the risk assessment methodology for consumer loans.
The resolution aims to limit the number of loans at high interest rates. The benchmark upper limit of interest rates on such loans is three times the National Bank’s discount rate, or 70.5% per annum. Loans issued with interest rate higher than this value will fall in risk group No 9. The restriction will also affect the loans issued at the interest rate 1.5 times the discount rate. This rule will stop the expansion of banks, which focus on consumer lending, in the regions and will reduce the risks of growing number of insolvent borrowers.
Banks will therefore need to review their loan portfolio. The new rules envisage a more rigorous approach to assessing a borrower’s reliability, which may result in loans becoming unaffordable for those with low and unstable incomes. However, this measure will stop them from falling into a financial trap they cannot escape.
The Labour and the Tax Ministries are considering the possibility to include persons engaged in some economic activity without forming a legal entity in the social security system. When the decree No 337 comes into effect, the number of private entrepreneurs is likely to reduce due to the possibility of reducing the tax burden when switching to a tax payment as an individual. 95% of self-employed, including PE, pay insurance premiums on the basis of the minimum wage. The number of self-employed citizens is expected to increase, the number of insurance contributions to the pension system from PE will decrease, the number of citizens who will pay a fee to finance government spending will decrease by several tens. Self-employed citizens have the alternative not to pay social security fees and save resources for future pensions, which, given the gradual restriction by the state of pension requirements could be a more long-sighted option.