‘This kind of growth cannot be sustained’ As inflation rises, payday loans are undermining the Russian economy and threatening a new crisis – Meduza

Inflation is rising in Russia. At the same time, banks are increasingly rejecting citizens’ requests for loans. As a result, Russians are increasingly turning to payday lenders to buy basic necessities like food and clothing — and that’s not good for the country’s economy. Reporters from the independent Russian newspaper Holod spoke to two economists and a lawyer about how Russian payday loan services work and what their future growth might bring. Meduza shares an English-language summary of their reporting.

In 2023, Russians received a record one trillion rubles (roughly $11.2 billion) in payday loans – 30% more than in 2022. Some experts predict that this figure could rise again to 25 percent in 2024 By the end of 2023, the number of Russians using “microfinance organizations” (MFOs) had reached 19.9 million, which is 2.7 million more than a year ago. And at the end of the first quarter of 2024, about 32 percent of these loans were in arrears.

Payday loans in Russia are limited to one million rubles (about $11,250) and generally have a repayment period of one week to 60 days. Interest rates on these loans are high, averaging around 0.5–0.8 percent per day, or up to 292 percent per year. They can be secured easily and quickly both online and offline, with applications often processed in less than an hour and money often disbursed the same day. Traditional bank loans, by contrast, can take days to process, and the rejection rate from Russian banks reached 80 percent in October last year.

Currently, the average monthly income of Russians applying for payday loans is 50,000 rubles, or about $562, while the average size of these loans is 9,990 rubles ($112). In general, Russians turn to payday loans to buy food and clothing, as well as to pay off old loans, economist Nikolai Kulbak told Holod. Most people who use payday loans in Russia use them more than once: in 2023, about 83.4 percent of payday loan recipients were repeat customers.

A house of cards

According to economist Yevgeny Nadorshin, the current rate of growth of the lending industry in Russia is a bad sign for the health of the Russian economy. He said to Holod:

According to Nadorshin, MFOs currently have a greater influence on the market than banks. “This is due to the tightening of credit policies and the increase in the basic interest rate, which affects the interest rate at which banks lend money”, he explained. “As a result, MFOs have seen an additional flow of clients, which has enabled them to set a new record in loan volumes. According to data from the Central Bank, some of the people who received payday loans in the first quarter of 2024 had previously received bank loans.

Kulbak told Holod that he also expects to see continued growth in the number of payday loans being issued in Russia. “Banks also gave loans to customers who already devoted most of their income to paying off existing loans; now they’re turning people down more and more,” he said, adding that he expects the trend to continue for the next six months as inflation doesn’t appear to be slowing down. “The fewer loans banks approve, the more people turn to MFOs. After all, this leads to an increase in bankruptcies”, said the economist.

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A vicious circle

MFOs in Russia often bundle their loans with other services, from text message alerts to life insurance and legal advice. The cost of these services can be as high as the loan amount itself and also incurs interest.

Failure to pay these fees can lead to fines, legal proceedings and damage to one’s credit history. “If you stop making payments, interest and penalties will start to accumulate in addition to the principal debt,” lawyer Filipp Pokrovsky told Holod. “According to [Russian] By law, the amount of fines and interest for contracts lasting less than a year cannot exceed 130 percent of the principal debt, which means that for a loan of 10,000 rubles, MFOs can request repayment of up to 23,000 rubles .

One of the main risks MFO clients face is the accumulation of too many loans. “When a person starts to extend their debts, it can turn into a vicious circle: they are forced to take out additional loans to pay off previous debts,” Pokrovsky explained.

In addition to the traditional personal bankruptcy process, Russian law allows certain categories of the population, such as pensioners, to go through a simplified bankruptcy process outside of court. More than 12,000 people started this process in the first quarter of 2024 – more than five times the number of people who did so in the same period a year ago. The number of court bankruptcies rose by 18.2 percent to 89,800 over the same period.

Since Russia first gave individuals the right to file for bankruptcy in 2015, over a million Russians have declared themselves bankrupt.