MFOs to be prohibited from issuing new microloans before old ones are repaid
The restriction will apply to the most expensive consumer microloans where the effective interest rate (EIR) exceeds 100% per annum. The regulator will introduce a cooling-off period of three days after one high-cost loan is repaid and before the next one is granted.
These rules are set out in the law adopted by the State Duma, which stipulates major restrictions for microfinance organisations (MFOs) and a radical reform of the MFO sector. The innovations will put a barrier against unfair practices where people are literally dragged into a debt hole.
‘Around 70% of the most expensive microloans are refinanced into new ones, with more than half of these refinancings involving a rise in the principal amount. This poses a serious problem for people. When they get into a debt spiral, their debts pile up rapidly. The new law curbs these practices, allowing households to repay microloans to MFOs while preventing debts from accumulating. It is important that the ban will not apply to microloans with an EIR of under 100% per annum. This will preserve access to finance, as people will still be able to immediately take out a microloan to cover sudden expenses, but without accumulating problems,’ said Ilya Kochetkov, Director of the Non-bank Lending Department of the Bank of Russia.
In addition, the draft law reduces the maximum amount of overpayment on a microloan from 130% to 100% of the principal amount. This means that having taken out a ₽10,000 microloan, a person will have to pay no more than ₽20,000, including the principal, interest, fees, and penalties.
Furthermore, MFOs will be allowed to issue POS loans for purchases in stores or on marketplaces where the funds are transferred directly to the seller’s account. This will provide people with additional options when choosing a lender, supporting healthy and customer-focused market participants.