Bank of Russia raises macroprudential requirements for unsecured consumer loans with high EIR and DTI
The Bank of Russia Board of Directors has made the decision to increase risk-weight add-ons for unsecured consumer loans in rubles issued beginning from 1 October 2021.
Approving this decision on risk-weight add-ons, the Bank of Russia Board of Directors relied on the following factors.
Amid the fast recovery of the Russian economy, debt in unsecured consumer lending continues to soar. As compared to April 2021 when the Bank of Russia made the decision to return macroprudential add-ons to the pre-pandemic level from 1 July 2021, lending sped up considerably: in May and June, households’ debt on unsecured loans expanded by 2.2% and 2.0%, respectively.1 The leading indicator of lending trends, that is, the annualised growth of outstanding loans over the last three months, reached 22.5% as of 1 July 2021.2 The most significant rise in lending (over 30% year-on-year) was recorded by large universal banks actively ramping up consumer lending to diversify their business. A number of retail banks also demonstrate fast lending growth.
According to 2021 Q2 statistics, the surge in lending is coupled with a weakening of lending standards, which includes a rise in borrowers’ debt-to-income ratios (DTI), a larger portion of long-term unsecured loans (with maturities of over five years), and an easing of other credit policy terms by banks.
The average DTI ratio of consumer loans issued in 2021 Q2 reached a record high of 61.1%,3 which is 0.4 pp and 1.8 pp more than in 2021 Q1 and 2020 Q1, respectively. Furthermore, loans with DTI higher than 80% accounted for 30.3% in 2021 Q2 disbursements, which is 0.6 pp and 3.6 pp more than in 2021 Q1 and 2020 Q1, respectively.
Maturities in cash lending, which is the largest segment in unsecured consumer lending, extended: the portion of bank loans issued for over five years totalled 18% in 2021 Q1, which is 3 pp4 more than in the previous period. In 2020 Q1, the portion of such loans made 12%. The extension of maturities limits borrowers’ monthly DTI, but simultaneously increases total payments over the entire credit period. Banks’ historical data on the quality of loans show that defaults on long-term unsecured consumer loans are much more frequent.5
Coupled with lower lending standards, a surge in unsecured consumer lending, when this trend is not supported by a proportionate rise in households’ incomes and an inflow of new borrowers, makes banks accumulate risks and increases households’ debt burden.
To discourage banks to increase high-risk lending and to hinder the growth of households’ debt burden, it is necessary to tighten macroprudential measures, namely increase risk-weight add-ons for loans with high effective interest rates (EIR) and loans disbursed to borrowers with high DTI ratios. Increased add-ons lower credit institutions’ return on such loans, as compared to other types of lending. When adjusting add-ons and estimating the regulatory effect on credit institutions, the Bank of Russia takes into consideration expected changes in the structure of lending as a result of a rise in EIR following the key rate increase.
Risk-weight add-ons for unsecured consumer loans in rubles issued beginning from 1 October 2021
| Add-on | Borrowers’ DTI, % | ||||||||
| W/o DTI | (80+) | ||||||||
| EIR, % p.a. | 0.7 | 0.3 | 0.3 | 0.3 | 0.7 | 0.9 | 1.2 | 1.5 | |
| 0.8 | 0.5 | 0.5 | 0.5 | 0.8 | 1.0 | 1.3 | 1.6 | ||
| 1.2 | 0.7 | 0.7 | 0.7 | 1.2 | 1.5 | 1.7 | 2.0 | ||
| 1.6 | 1.0 | 1.0 | 1.0 | 1.6 | 1.9 | 2.1 | 2.4 | ||
| 2.0 | 1.5 | 1.5 | 1.5 | 2.0 | 2.1 | 2.3 | 2.6 | ||
| 2.7 | 2.5 | 2.5 | 2.5 | 2.7 | 2.9 | 3.1 | 3.4 | ||
| 35+ | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | |
Memo item:
Risk-weight add-ons for unsecured consumer loans in rubles issued from 1 July through 30 September 2021
| Add-on | Borrowers’ DTI, % | ||||||||
| W/o DTI | (80+) | ||||||||
| EIR, % p.a. | 0.6 | 0.3 | 0.3 | 0.3 | 0.6 | 0.7 | 0.9 | 1.1 | |
| 0.7 | 0.5 | 0.5 | 0.5 | 0.7 | 0.8 | 1.0 | 1.2 | ||
| 1.1 | 0.7 | 0.7 | 0.7 | 1.1 | 1.3 | 1.4 | 1.6 | ||
| 1.5 | 1.0 | 1.0 | 1.0 | 1.5 | 1.7 | 1.8 | 2.0 | ||
| 1.8 | 1.3 | 1.3 | 1.3 | 1.8 | 1.9 | 2.0 | 2.2 | ||
| 2.1 | 2.0 | 2.0 | 2.0 | 2.1 | 2.2 | 2.3 | 2.5 | ||
| 35+ | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | |
1 According to Section 3 of Reporting Form 0409115 (for operating credit institutions, including reorganised ones).
2 Seasonally adjusted.
3 According to Reporting Form 0409704. Data for 2021 Q1 were revised due to changes in DTI calculation methods by some banks.
4 According to the quarterly survey of the largest banks (2021 Q2 statistics are currently unavailable).
5 In order to limit banks’ practice to issue long-term unsecured consumer loans (for over five years), average monthly payments on such loans are calculated, when DTI is measured, based on the assumption that the maximum maturity is five years.
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