Rate of Russian early repayment of credits doubles as incomes improve

Rate of Russian early repayment of credits doubles as incomes improve
Russian income, credit and retail dynamics are improving slowly.
By Ben Aris April 29, 2016

The rate that Russians are choosing to pay off their bank credits has doubled in the first quarter y/y, reports leading Russian retail bank VTB24.

"Our clients behave much more strictly and sometimes prefer to prepay [the loan], which we don't always like," VTB24 CEO Mikhail Zadornov said in an interview with Vedomosti, adding that for the bank, this means a reduction in the portfolio and interest income.

Russian consumers have been deleveraging for more than a year after the Central Bank of Russia (CBR) made it harder to get a consumer loan to deflate a growing consumer lending bubble in 2014. However, what was intended as a move to slow retail crediting quickly turned into a full-scale collapse of consumer loans after the devaluation of the ruble and dramatic slowing of the economy led to the first fall in incomes in two and a half decades.

The banking sector retail portfolio has been in massive decline for more than a year, but has recently started to level out. The portfolio dropped 3.7% in March y/y, a somewhat slower pace of decline than the 4.8% y/y posted in February.

At the same time, Russians are clearly struggling to pay off their debt as non-performing loans (NLPs) have also soared. But here too the rate that NPLs has been growing has slowed and was flat month-on-month in February to March, with bad debt at 8.4% of the total retail loan book.

Zadornov said that last year early repayments of credits were equivalent to about 1% of the loan book a month, but since December the pace has increased to 2-2.5% of the portfolio a month. Russians' income spiked in December as companies paid bonuses, which many people appear to be using to pay off debt.

As the bneChart shows, while unemployment and retail non-performing loans (NLPs) appear to be stable real disposable income, real income and nominal income are all rising again. Real incomes have been negative for at least a year but both went back into the black at the start of this year. This was firstly thanks to the New Year bonuses, but mainly because inflation has fallen from the mid-teens over all of last year to 12.9% in December 2015, but dropped sharply to 7.3% in March on an annualised basis as the last of the December 2014 devaluation effect worked its way through the system.

Going forward, the CBR is expected to hold the policy rate at 11% to ensure inflation continues to fall towards the regulator's target of 4% for this year which will improve the real income situation even further, or if it cuts rates (the next meeting is due on April 29) then the cut will probably be small. 


Improving real income and the end of retail deleveraging improves the situation for consumption this year. Russians currently spend a quarter of their income on credit payments. The average size of debts on loans increased by 1.2 times since 2013 and the average debt jumped in the last two years from about one month's average salary to over 2.5-times an average salary.

Zadornov says the decision to pay off debt early has also been driven by the CBR's emergency interest rate hike in December 2014 that sent the policy rate from 6.5% to 17%, which also massively depressed the demand for consumer credits.

"Interest rates on deposits, on the contrary, grew, and it was more profitable to deposit money than it was to repay loans. There was a similar situation in 2004, when the central bank began to reduce the then refinancing rate: interest rates on loans in some banks were lower than on deposits in others," Zadornov said.

At the end of 2014 it was possible to place funds on deposit at 20% per annum, but banks have been steadily cutting rates to improve their net interest margins (NIMs) and earn a bit more profit. On April 26, Sberbank announced it was cutting its deposit rates up to 1% and it is paying nothing on foreign currency deposits. Sberbank currency has a NIM of 5.3% up from 4% in December.