Russian retail bank rate cap plan won't stop 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.
Russian banks with a large proportion of expensive loans could be most affected. Among the banks we rate, 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. The agency expect 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 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. ■