According to Bank of Russia statistics, retail bank lending has been growing in Russia since 2009, with annual growth rates peaking at more than 40% in mid-2012. Outstanding debt on unsecured consumer loans has been increasing even faster, at a 60% annual growth rate.
Concerned about the lending market getting overheated, the Russian Central Bank introduced tighter regulations, including higher required loan loss reserve allocations on unsecured consumer loans, which helped to slow their growth rate to 33% in December 2013. Nevertheless, both regulators and economists continue to talk about the ongoing high risk of default on retail loans.
The sources she used for her study included surveys conducted by the Levada Centre between 2003 and 2013 as well as data from the HSE's Monitoring of Trust in Financial Institutions and the Public's Financial Behaviour. That data came from nationwide surveys administered to a consistent representative sample using identical questionnaires, making it possible to analyse the dynamics of a variety of indicators for 2009-2013.
In particular, Kuzina examined responses to questions on attitudes towards borrowing, different loan sizes, default on bank loans, credit encumbrance, financial literacy, etc, and compared the Russian data with similar indicators in other countries.
Kuzina's analysis showed that indicators such as loan coverage and loan size are lowest in Russia. In October 2013, just 27% of Russians surveyed reported having outstanding loans. In comparison, 75% of U.S. citizens had outstanding loans in 2010, and loan debt rates in Western Europe ranged from 25% in Italy to 66% in the Netherlands.
According to the Russian respondents, their total amount of outstanding debt to banks and private individuals was fairly low: in 2013, only 4% had outstanding debt exceeding ten times their average monthly income, while 66% of respondents had no outstanding bank loans or other debt.
In November 2013, 6% of Russians were 60 or more days late on debt (including credit card debt) payments.
Statistical data also indicates that the loan debt burden is relatively low in Russia: in January 2013, the total outstanding individual debt to banks, including past-due loan payments, stood at 19.7% of total household income. In the OECD countries, this figure ranged from 9% in Mexico to 309% in Denmark in 2010, and stood at 122% in the U.S., 55% in Poland, 61% in the Czech Republic, and 76% in Hungary.
Based on the above data, one could say that over-indebtedness has not affected Russia's retail lending market were it not for one detail: most retail loans in Russia are not mortgage loans, but short-term consumer loans with high interest rates, Kuzina notes. The cost of servicing such loans is much higher for consumers; therefore, the proportion of borrowers facing loan service charges equal to or exceeding 50% of their current cash incomeis much higher in Russia than in other countries.
The proportion of Russians with outstanding loans who reported loan payments equal to or exceeding half of their current household income increased from 23% in 2011 to 31% in 2012. In comparison, according to the U.S. Survey of Consumer Finances, 14% of U.S. borrowers faced a loan debt burden exceeding 40% in 2010.
The European Survey of Consumer Finances, conducted between 2010 and 2011, found that some 30% of the respondents in the group with the lowest incomes were spending 50% or more of their current incomeon servicing outstanding loans; in other income groups, the proportion of such borrowers did not exceed 15%."Defining over-indebtedness is a challenge," says Kuzina. There is no consensus about this term either in academic literature or among practitioners. Despite the differences, over-indebtedness is generally associated with a high risk of default, and warning indicators of over-indebtedness include variables that increase the probability of such a default," she explained. "To define and measure over-indebtedness, we used an approach first developed in a study commissioned by the European Commission and applied by our Italian colleagues."
Using household over-indebtedness indicators described in a paper by Giovanni D'Alessio and Stefano Iezzi, Kuzina determined that only a quarter of Russian borrowers had no over-indebtedness indicators in 2013. At the same time, 58% of the borrowers considered loan repayment to be a heavy burden for their household, and 41% found that their per capita income dropped below the subsistence level after loan payments were made.
Over-indebtedness is particularly high in small towns. One in five residents of smaller communities of 10,000 to 100,000 inhabitants spend more than half of their household income on loan servicing, where as just 13% of borrowers in big cities do.
There exists a common stereotype that borrowers often lack financial literacy. However, Kuzina found that people who have taken out bank loans in the past three years answer questions designed to test financial literacy better than those who have not.
"We cannot tell from the available information whether borrowing promotes financial literacy or whether financially literate people tend to take out more loans," says Kuzina. "Interestingly, the association between financial literacy and having taken out bank loans was only found in people who had no college or university education; no difference exists in financial literacy test performance among people with higher education, whether or not they have taken out bank loans."