Ben Aris in Moscow -
Russia's consumer lending was running white hot in 2012, but it seems that punters have overdone it: experts say that as much as 80 kopeks of every ruble borrowed this year is to repay old debts. As a consequence, in 2013 this rapid growth in consumer loans could actually end up hurting rather than boosting consumption and GDP growth.
Russian corporations are depressed and they are neither borrowing nor investing. Growth slowed sharply in the last quarter of 2012 and the economy is starting to stagnate. The main thing keeping the economy buoyant is consumer spending fuelled by debt, which soared by 39% year on year, well into the Central Bank of Russia's "overheating" territory.
Strong growth in consumer loans was also propping up the increasingly wobbly banking sector, which earned record profits of RUB1 trillion ($33bn) in 2012, largely thanks to retail loans. But going forward, the fast lending is starting to do more damage than good and the CBR is determined to slow the pace this year.
Only half the population have ever taken out a bank loan, yet according to Public Opinion Fund one in four Russians currently have an outstanding one - the same level as before the 2008 crisis. The most popular type of loans are the point-of-sale (POS) loans where banks set up a stand in a shop and sell loans to customers eyeing a new washing machine in the display window of the store.
Russia's economy is doing relatively well, thanks to the resilience of consumer spending, which is now a huge part of the economy. The quarter of a trillion dollars that consumers borrowed in 2012 accounted for almost a third of the $680bn total consumer spending in the country last year. The loan portfolio of the top 100 biggest lenders in Russia soared by 41% in 2012, or by about RUB2 trillion ($66bn).
The government has been supporting all this borrowing by pumping money into the banking sector and the CBR is now the main source of funds for banks, providing RUB2.7 trillion ($90bn) of financing for banks - more than twice as much as the CBR made available a year earlier and more than it was lending to the sector in the depths of the crisis in 2009.
In effect, the CBR has sought to prop up the economy by allowing banks access to cheap money, which the banks lend on to consumers. The upshot is the shops are full, companies have orders, and banks are earning a healthy profit so don't need help from the state.
But this is not a sustainable model on which to run an economy - and the first cracks are already starting to appear. The most obvious problem is that the Russian bank sector's capital adequacy ratio (a measure regulators use to watch a bank's health) have fallen from around 20% of total deposits pre-crisis to just 13.3% by the end of 2012 - a tad above the Central Bank of Russia's mandatory minimum of 10%.
Neither lender nor borrower be
Bad loans are starting to climb and if the volume of non-performing loans (NPL) gets out of hand Russia will face another financial crisis. The International Monetary Fund (IMF) already warned in the middle of last year that the rapid rise in lending was starting to look bubble-like and could have serious consequences when it eventually bursts.
The proportion of bad loans (overdue by at least 30 days) in the portfolio of total loans granted in January 2012 rose to 13.4% versus 6.7% a year earlier. Arrears of consumer loans are growing more slowly, from 7.9% in 2011 to 9.6% of total loans in 2012, according to the National Credit History Bureau (NBKI), but that is partly because the volume of consumer loans is growing so fast they are diluting the problem loans.
Indeed, the only segment of the market where Russians seem to take their obligations seriously and bad debt is falling is with homebuyers: mortgage borrowers improved their payment discipline last year with the proportion of overdue loans in the segment falling from 0.54% to 0.15%.
And the number of Russian under water with debt could be a lot higher than the official statistics suggest; some experts believe that more and more Russians are taking out new loans to pay off old ones. Alfa Bank says that around 80% of non-mortgage loan growth in 2012 might have been used to finance existing debt servicing, while before 2007 this ratio was only 40%. "An increasing number of individuals have more than one loan, which is an alarming trend itself," Economist Dmitri Miroshnichenko told Novye Izvestia. "It would be no problem if personal income were increasing at the same pace as the people take loans, but it isn't. So, part of loan portfolios is phony. The statistics shows that lending is growing, but the growth is actually due to the increase in fines and penalties for overdue loans."
The deterioration in the health of Russian household finances is already starting to show up in the retail statistics; retail sales growth slowed sharply in the last quarter of 2012, despite the still strong growth in new credits. "The key paradox of 2012 is that the deceleration in retail trade from 7.0% year on year in 2011 to 5.9% year on year in 2012 was accompanied by a significant acceleration of income growth. Real wages grew 7.8% year on year and real disposable income was up 4.2% year on year in 2012," Alfa Bank chief economist Natalia Orlova said in a note in January. "It could be that the increase in interest rates last year was so substantial that the fast retail loan growth hindered rather than supported consumption growth."
At the same time, it seems that banks are starting to get nervous about the rising level of bad debts, but most prefer to sweep the problem under the carpet by simply selling them on to debt collection agencies, rather than improve their credit quality control: banks are expected to sell RUB165bn ($5.13bn) of bad debts this year - or about two-thirds of the entire lending portfolio in 2012 - up from the RUB148bn of bad debts sold to collection agencies in 2012, according to RBC Daily.
The problems are particularly acute with credit cards, which were the hot new financial product in 2012. Russia's credit card market grew by a massive 82.5% in 2012, with the total credit card portfolio reaching RUB671.3bn ($22.4bn). The trouble is that one in eight Russians who signed up for a credit card simply walked away from their debt. "We think the growth of late payments on credit cards arises primarily from a rapid development of point-of-sales loans," says Nikolai Myasnikov, deputy general director of the United Credit Bureau, cited by Kommersant. "A lot of banks entered this high-risk segment. They grant POS loans through bank cards whose holders don't repay loans properly."
Credit histories are still a relatively new phenomena in Russia (68% of borrowers are now included in a database), but the two biggest bureaux estimate that bad loans on old debt more than doubled in 2012, although the proportion of total bad debt is masked by the fact that the volume of loan growth is still running so much faster and diluting the problem. However, like the retail lending boom, once the music stops Russia could be in for a nasty shock.
Experts expect the lending frenzy to slow this year, as the CBR is becoming increasingly concerned with the rise in bad debt and has moved to slow the growth in credit to a more sustainable 25-30%, which is in line with deposit growth of about 20% a year.
Still, with retail loans only accounting for 12% of GDP, a very low level, Russia has a lot of wiggle room. But as Kazakhstan found out to its cost in 2008, fast loan growth is a problem at relatively low levels if there is an external shock to contend with.
In July, the CBR will introduce much stricter Basel III prudential rules for the sector, which will force banks to hold more cash in reserve and thus slow loan growth. This could, ironically, help consumer sales in the longer run. "Russian households are spending 20% of their income on servicing debt, including 16% on principal redemption and 4% on interest payments," says Alfa's Orlova. "This level is higher not only than in Turkey, Russia's peer country, but also in more advanced countries such as France, Germany, the USA and the UK. Moreover, Russia's household debt service ratio is higher than in troubled Italy and Spain... The combination of a high share of short-term debt and high interest rates put significant pressure on households through the cost of servicing debt."
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