Russia's personal bankruptcies double in 1H21 as moratorium runs out

Russia's personal bankruptcies double in 1H21 as moratorium runs out
Personal bankruptcies are on the rise as Russians borrow more to make up for shrinking real incomes / wiki
By bne IntelliNews July 8, 2021

As the moratorium on personal bankruptcies that was introduced at the peak of the COVID pandemic expired, the number of personal bankruptcies in Russia more than doubled in 1H21, with 88,000 people declared bankrupt in court, according to a report by RBC business portal.

Part of the reason for the rise in bankruptcies is the end of the moratorium, which was in effect from April 2020 to January 2021 and delayed the fall of many businesses.

As reported by bne IntelliNews, in March 2020 the Russian government placed a moratorium on bankruptcies, forbidding the opening of such cases.

For the legal entities, the number of insolvencies was also on the rise in 1H21, up by 9.2% to 4,900 cases, according to Kommersant, which notes that previously in 2018-2020 the cases were on a downward trend. The number of preliminary appeals by creditors also increased in 1H21 by 30% to 15,900.

The sharp increase in the number of personal bankruptcies in the Ministry of Economic Development is explained by the “low start trap”. The institution of bankruptcy is gradually becoming "a more popular legal mechanism for freeing citizens from bad debts," explained Deputy Minister of Economic Development Ilya Torosov.

Nevertheless, real incomes have been falling for at least six years, putting Russians under increasing pressure. At the same time, the level of credit has been rising to the point where the Central Bank of Russia (CBR) is becoming concerned about the emergence of a consumer credit bubble.

Real disposable incomes dropped 3.6% during 2020, as the pandemic saw a temporary jump in unemployment and wage cuts for millions across the economy. And real disposable income decreased by 3.6% in the first quarter of 2021 compared to the same period of 2020.

The regulator began to note the acceleration of lending to the population in the spring and has already announced the tightening of requirements for banks.

In May, the growth rate of unsecured consumer lending rose further up to 2.2% (according to preliminary data) from 1.6% in April. To mitigate risks, the Bank of Russia previously made a decision to put into effect from 1 July, 2021 restraining macroprudential measures that provide for the application of premiums to risk ratios at the level of effectiveness before the pandemic.

In total, since the beginning of the year, the volume of retail loans reached RUB5.3 trillion ($7.1bn). For comparison: for the same period of 2020, banks issued loans only for RUB3.3 trillion.

While the level of indebtedness of the average Russia is the equivalent of about two monthly incomes, and so not a huge amount, personal debts have been rising steadily as many Russians attempt to compensate for falling real incomes by borrowing more to maintain their lifestyles.

From July 1, the CBR has ordered banks to apply higher risk ratios when issuing unsecured loans. The risk weights returned to pre-crisis values to "cool" lending in this segment, explained Governor of the Central Bank Elvira Nabiullina. And starting from August 1, the requirements for mortgages will be tightened for banks: the increase in premiums will affect loans with a low down payment of 15–20%.

This year, the population's debt burden has grown rapidly. Between January to April, the portfolio of loans to individuals grew by 6.8%, said Roman Rybalkin, deputy director of the S&P Financial Institutions Group as cited by RBC.

But Rybalkin believes the rate of credit will slow on its own, without the need for the CBR to tighten conditions, as the rate of borrowing is sensitive to interest rate dynamics and the CBR has also already started to tighten its monetary policy as a result of sharply rising inflation. The CBR has already hiked rates in March (25bp), April (50bp) and June (50bp), and is widely expected to hike rates again in July, possibly by a full percentage point, to curb soaring inflation.  

 

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