Payday loan industry thrives during Russia’s recession

By Jake Rudnitsky

Bloomberg

Russian payday lenders are having their day.

Suffering through a serious recession and unable to get standard bank loans, cash-strepped Russians are turning to largely unregulated lenders — and often paying annual interest of nearly 800 percent.

“Our model is recession-proof,” said Yuri Provkin, head of the country’s biggest payday lender, Bistrodengi — meaning Fast Money in Russian. “Our customers come to us when they bust a tire, if they need to put out a spread for some relative from the village, or when they run out of money on their mobile phone.”

These businesses have sidestepped the official crackdowns that throttled credit and closed many banks. In contrast, Russia’s payday lenders grew by 65 percent in 2016 and tripled the volume of outstanding loans over the last two years.

But that could change.

Patriarch Kirill, leader of 150 million Russian Orthodox and an ally of President Vladimir Putin, recently labeled the microfinance organizations “bloodsuckers” and amoral predators, calling for Russia to create banks that will cater to the poor.

Payday lenders are already facing increased scrutiny, with the central bank in December forming a working group together with industry associations to address a growing number of consumer complaints. Since 2014, two out of three such lenders has been purged as unsustainable or unscrupulous, according to the Bank of Russia’s press service.

One course of action available is to follow the example of regulators in the U.S., who are seeking to curtail fees and high-interest lending with new rules that ensure customers can pay back loans before they are approved. Payday loans are unaffordable for most clients, leading to a cycle of repeat borrowing and high levels of indebtedness, according to the Pew Charitable Trusts. The Consumer Financial Protection Bureau has proposed requiring small loans to be repaid in installments, reducing the burden on borrowers.

Currently, the Russian central bank requires payday lenders to register and forbids levying hidden fines, although interest rates of 2.2 percent a day are allowed. By contrast, the regulator’s key rate is expected to remain at 10 percent when policy makers meet to review it on Friday, according to 32 of 36 economists surveyed by Bloomberg.

With such rules, the microfinance industry — which also includes installment loans for consumer goods — almost doubled to over 1 percent of all consumer debt in Russia last year, according to the National Bureau of Credit Histories.

For now, in Russia lenders are thriving in hardscrabble regions like Vladimir Lenin’s home town of Ulyanovsk, where Bistrodengi is based, that have seen wages and average work hours drop sharply during two years of recession.

Bistrodengi’s Ulyanovsk call center, which handles overdue loans at its 500 branches across Russia, prominently displays the portraits of the most successful collectors of the month. Top employees can earn four to five times the city’s average monthly salary in bonuses.

The collection process starts as friendly reminders for loans overdue by a few days, but gets more aggressive as payments balloon to multiples of the original loan, often inspiring obscenity-laced rejoinders from clients who are unable to return the money.

Excessive interest payments contribute to lagging consumer demand in Russia, according to Natalia Orlova, chief economist at Alfa Bank in Moscow. Retail sales in December fell for a record 24th month even as real wages are beginning to grow again.

“People pay extra for credits and that additionally worsens the outlook for economic growth,” Orlova said. “Instead of consumption they use their resources to service their expensive debt.”

According to Provkin, Bistrodengi offers a safety valve for people without access to traditional loans after local banks tightened standards, reducing the availability of financial services for people who live hand-to-mouth. There are currently over 2,500 microfinance organizations in Russia, compared to fewer than 600 banks.

“The Patriarch’s comments aren’t likely to have much of an impact on microfinance,” Provkin said. “The central bank has already purged the shady players from the market and other countries’ experience shows that banning the industry only leads to the growth of illegal lending.”

— Bloomberg