Bank of Russia to impose additional measures to limit debt burden in unsecured consumer lending

In order to mitigate the risks associated with an excessive debt burden of households, the Bank of Russia is introducing a debt burden indicator (DBI)¹ for regulation purposes, and intends to set risk-based capital buffers depending on the DBI and effective interest rate (EIR), effective from 1 October 2019.

Unsecured consumer lending is growing at an accelerated pace with the annual growth rate reaching 25.3% as of 1 May 2019. Credit quality of extended loans remains high, which is the one of the key factors behind banks’ interest in this segment. The proportion of loans that are 90+ days overdue at the 12th month is around 2% in the generations of loans formed in the first half of 2018, which is significantly lower than in the generations of loans formed during the previous period of accelerated growth in 2011–2014 (from 3.5% for 2011 Q4 generations to 8% for 2013 generations).

However, in its attempts to prevent a bubble in the unsecured consumer lending market, the Bank of Russia has thrice raised risk-based capital buffers depending on the EIR since the beginning of 2018. As a result, banks increased their capital cushion to cover these risks: as of 1 May, the capital cushion of banks specialised in consumer lending ranged from 1.3 to 3.1 pp. As a side effect of increased capital requirements for high interest loans, credit institutions were encouraged to cut high risk lending and turn to segments with low EIR. Starting 2015 Q2, the average EIR on cash loans (the largest market segment) has dropped 8.6 pp to 16.4%, whereas the key rate has declined by 4.75 pp during this period. Despite growing debt, lower EIR helped maintain debt burden at a moderate level in 2017 and the first half of 2018.

However, in the last few months, growth of households’ debt burden on unsecured consumer loans has accelerated. As of 1 April 2019, debt service ratio (the ratio of loan repayments to the total amount of household disposable income) totalled 8.4%, having increased by 0.9 pp over 12 months. Data from bank surveys show that borrowers are facing increasing debt burden: in 2019 Q1, the share of loans with DBI² of over 80% was 9.7%. This is likely a sign that credit expansion is taking place at the expense of households that already have debts.

To calibrate risk-based capital buffers depending on DBI, the Bank of Russia has studied portfolios of major players in the unsecured consumer lending market with regard to the historic dynamics of credit risk depending on the EIR and DBI. The results show that DBI materially impacts the risk cost in addition to the EIR, which is already used for setting the buffers. The measures proposed by the Bank of Russia to curb debt burden in unsecured consumer lending are based on the conducted analysis.

Increasing capital buffers will help discourage banks from expanding unsecured consumer lending by crediting borrowers with already high DBI. This measure will also result in increasing banks’ capital cushion to cover losses if materialising external or internal risks lead to a drop in household incomes and a deterioration of quality of consumer loans.

To raise the effectiveness of DBI regulation, the Bank of Russia has also prepared the following documents:

1. Information Letter on Calculation of a Borrower’s Debt Burden Indicator Based on Information Received from Credit History Bureaus.

2. Draft amendments to Bank of Russia Ordinance No. 4892-U, dated 31 August 2018.

3. Draft amendments to Bank of Russia Ordinance No. 5072-U, dated 12 February 2019.

4. The Bank of Russia Action Plan (‘Road Map’) for 2019–2020 for Improving the Calculation of Debt Burden Indicator and for Organising the Regulation of the Activity of Financial Institutions with Regard to their Application of an Individual Borrower’s Debt Burden Indicator by the Bank of Russia.

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¹ In accordance with Bank of Russia Ordinance No. 4892-U, dated 31 August 2018, ‘On Types and Characteristics of Assets for Which Risk-based Capital Buffers are Set and on the Methodology for Applying These Buffers to the Said Types of Assets for Credit Institutions to Calculate Their Capital Adequacy Ratios’, starting 1 October 2019, credit institutions must calculate DBI in line with the rules established by the Bank of Russia when extending new loans or increasing credit card limits.

² DBI estimate according to credit institutions’ data; until 1 October 2019, the banks’ methodology may not account for provisions of Bank of Russia Ordinance No. 4892-U, dated 31 August 2018.