Banks May lose a High-Yielding Segment of the Money Market

The Ministry of Finance of the Russian Federation supported the other day the idea of limiting the rates on unsecured retail loans in the amount of 30% of the average market rate.

It means that with the average rate of 20% per annum sanctions - which are not yet defined -- will be applied to banks which extend loans to individuals at rates over 26% per annum.

On the basis of the outputs of the 2nd quarter, the average value of individuals' loan debt to banks exceeded 18% per annum, while the value of other loans to individuals without taking into account housing loans amounted to about 20% per annum.

It is to be noted that interest rates vary a great deal depending on the period of lending. So, in July 2013 the weighted average rates on ruble loans to individuals varied in the range of from 16% to 27% per annum. In addition to the above, in July-August 2013 banks extended minimum Rb 320bn worth of loans at the rates higher than 25% per annum, including over Rb 35bn worth of loans having the value of over 60% per annum.

However, in our view introduction of special regulation of credit interest rates should be applied to all the entities which extend unsecured loans to individuals. On the contrary, banks risk losing a high-yielding segment of the money market, while customers whose financial solvency does not permit them to receive a bank loan at reduced rates, but, anyway, they still demonstrate demand in loans will have to apply to other financial institutions.

In addition to the above, the interest rates limitation alone enhances by no means financial literacy of the population, nor does it encourage a more responsible management of personal finances.

М. Yu. Khromov, Leading Expert of the Structural Research Center