The proposed interest rate cap for Russian retail lending will only moderately reduce the risks of market overheating. While it may slow down loan growth at Russian banks and the rise in the consumer debt burden, it is likely to reduce pricing transparency and could also shift some lending to the less-regulated microfinance sector, Fitch Ratings says.
Russian banks with a large proportion of expensive loans could be most affected. Among the banks rated by Fitch, the proportion of expensive loans, with the interest rate above 35%, is particularly high at Tinkoff and Home Credit (around 50% of recent loan issuance), OTP (40%) and Russian Standard (15%).
However, the full extent to which unsecured retail lending will be affected by the new rules will largely depend on how the Central Bank of Russia (CBR) segments loans and calculates the all-in-interest rates (APRs) for them. The CBR will define loan types based on size, tenor, purpose and other features, such as revolving or non-revolving, according to the draft law.
Fitch estimates that interest rates on unsecured loans in 3Q13 ranged from 25% to 60%, with state and specialised consumer finance banks being at the lower and upper end, respectively.
Fitch expects that the CBR would distinguish between these groups' different client bases, which result in different risk costs and hence pricing, in its loan segmentation. However, if this distinction is not made, consumer finance banks may have to adjust their business models.
The new regulation could reduce pricing transparency as consumer banks may comply with the proposed cap by reducing interest rates in favour of certain commissions.
Fitch has highlighted previously the exclusion of some commissions and fees from the APR calculation, such as insurance-related fees, fines and penalties, cash withdrawals and other card related payments, which form a significant part of retail banking revenues. The new regulation permits these payments to be omitted from the APR as loan approval is not based on these, so Fitch does not expect any changes in the way the APR is calculated.
Some high-margin business could migrate to the less regulated microfinance segment, since the demand for consumer loans is unlikely to change as a result of new bank regulations. While the Russian microfinance sector is small, it has grown quickly.
The interest-rate cap is one of several proposed measures to slow retail loan growth in the medium term. For example, risk-weights for new unsecured retail loans could be raised further in 1Q14 following an earlier increase in July 2013.
Fitch already expected Russian retail loan growth to slow from 32% in 2013, to 22% in 2014 and 19% in 2015 as the market becomes more saturated, banks reduce risk appetite and new regulation takes effect. But this would still be higher than personal income growth (about 10% per annum), so would result in a further increase in leverage for retail borrowers and hence elevated risks of credit losses for banks.
The aim of the new legislation is to restrict very high margin unsecured lending, which the CBR sees as riskier, while mortgages and car loans should be unaffected as their interest rates are significantly lower and do not vary significantly between banks. The APR for retail loans should not exceed the market average by more than one-third, as measured by the CBR, according to the draft legislation. This is currently under review in parliament and is expected to come into force on 1 July 2014.
"AK&M", 12.12.2013 13:07