03.03.2016, 00:40
Bank of Russia Answers Federation Council's Request on MFO Regulation
OREANDA-NEWS. The Bank of Russia comments on the measures to regulate interest rates on short-term loans at microfinance organisations (MFOs), its proposals to lower the debt burden of households, and the results of its supervisory activity in the MFO market.
In their request senators asked the Bank of Russia to pay attention to extremely high interest rates (up to 800% p.a.) on certain consumer loans most frequently used by low-income and financially illiterate citizens and suggested that the Bank of Russia take measures to bring the situation with interest rates back to normal.
The Bank of Russia answers, in particular, that the microfinance lending market comprises three segments:
* 38% are loans to back small businesses and startuppers with interest rates from 10% p.a. (owing to government support programmes);
* 44% are consumer loans with interest rates from 40% p.a.; and
* only 18% are the so-called 'loans pending wages' (in the amount up to 30,000 rubles for a term up to a month).
'The value of such loans may account for 2% per day, which is caused by a high risk of default, - Mikhail Mamuta, Head of the Bank of Russia's Main Office of Microfinance Market and Financial Inclusion Methodology, explained. - A citizen may promptly and with minimum formalities obtain the required amount to finance urgent expenses. If such loans are returned on time, in several days or weeks, interests on them will be insignificant. Provision of such loans is practised in many countries of the world and interest rates on 'loans pending wages' amount to 0.8%-2% per day. However, this picture has the dark side: quick growth of debt in case of arrears'.
The Bank of Russia was authorised to regulate the MFO market in late 2013 and steps up work to lower the debt burden of households and withdraw unconscientious MFOs from the market. Following the constraint on the effective interest rate from 1 July 2015, the cost of many loans, including 'loans pending wages' has been declining gradually. The megaregulator's supervisory activity allowed to strike off the register 898 unconscientious MFOs in 2015 alone, the letter says.
Moreover, to lower the debt burden of households even more the Bank of Russia drafted and approved amendments to the law 'On Microfinancing and Mocrofinance Organisations', the regulator answers. According to these amendments, already from 29 March 2016 interests and other payments on short-term loans will not exceed the fourfold amount of the loan. The Bank of Russia will continue this work aimed at reducing the ratio to the twofold amount of the loan.
The Bank of Russia also deems it expedient to consider a possibility of determining (together with self-regulatory organisations) the number of loans provided to one borrower and the number of loan agreement extention. This will help prevent the situation when the borrower repays one loan at the expense of a newly taken loan thus making his/her debt burden even worse.
The measures adopted may serve as an incentive for microfinance organisations to choose a borrower more thoroughly to lower the risk of default.
It would also be expedient to provide MFOs access (of course, by the borrower's consent) to data of the Pension Fund of the Russian Federation and the Federal Tax Service. A number of banks use this information cooperation in the course of a pilot project, which allows them to reduce credit risks considerably.
In case of strengthening the regulation of the microfinance sector, the Bank of Russia takes account of the risk of MFO exit from the legal market and the growing number of illegal creditors with increased demand for their services. The letter also notes that as a result of the Bank of Russia supervisory measures, including the use of a specially designed automated technology, a significant number of illegal creditors, i.e. organisations that provide short-term loans to citizens not having the right to be engaged in this activity and not having the MFO status, have already been exposed.
In view of the above, apart from additional measures to regulate MFOs the Bank of Russia deems it important to enhance the activities of law-enforcement agencies to suppress illegal provision of consumer loans.
'At the same time, the settlement of the problem of MFO regulation in the 'loans pending wages' segment does not mean an automatic resolution of the procedure for recovering overdue debts, which is of independent systemic nature, - the regulator answers the senators. - The Bank of Russia believes that the collection of overdue debts should be regulated by tough standards irrespective of who is in charge of this - a special agency, bank, microfinance organisation, or consumer credit cooperative. The Bank of Russia assumes that under the law on collectors the Russian Federation Government should determine a federal executive body responsible for regulation and supervision over the collectors' activity'.
In their request senators asked the Bank of Russia to pay attention to extremely high interest rates (up to 800% p.a.) on certain consumer loans most frequently used by low-income and financially illiterate citizens and suggested that the Bank of Russia take measures to bring the situation with interest rates back to normal.
The Bank of Russia answers, in particular, that the microfinance lending market comprises three segments:
* 38% are loans to back small businesses and startuppers with interest rates from 10% p.a. (owing to government support programmes);
* 44% are consumer loans with interest rates from 40% p.a.; and
* only 18% are the so-called 'loans pending wages' (in the amount up to 30,000 rubles for a term up to a month).
'The value of such loans may account for 2% per day, which is caused by a high risk of default, - Mikhail Mamuta, Head of the Bank of Russia's Main Office of Microfinance Market and Financial Inclusion Methodology, explained. - A citizen may promptly and with minimum formalities obtain the required amount to finance urgent expenses. If such loans are returned on time, in several days or weeks, interests on them will be insignificant. Provision of such loans is practised in many countries of the world and interest rates on 'loans pending wages' amount to 0.8%-2% per day. However, this picture has the dark side: quick growth of debt in case of arrears'.
The Bank of Russia was authorised to regulate the MFO market in late 2013 and steps up work to lower the debt burden of households and withdraw unconscientious MFOs from the market. Following the constraint on the effective interest rate from 1 July 2015, the cost of many loans, including 'loans pending wages' has been declining gradually. The megaregulator's supervisory activity allowed to strike off the register 898 unconscientious MFOs in 2015 alone, the letter says.
Moreover, to lower the debt burden of households even more the Bank of Russia drafted and approved amendments to the law 'On Microfinancing and Mocrofinance Organisations', the regulator answers. According to these amendments, already from 29 March 2016 interests and other payments on short-term loans will not exceed the fourfold amount of the loan. The Bank of Russia will continue this work aimed at reducing the ratio to the twofold amount of the loan.
The Bank of Russia also deems it expedient to consider a possibility of determining (together with self-regulatory organisations) the number of loans provided to one borrower and the number of loan agreement extention. This will help prevent the situation when the borrower repays one loan at the expense of a newly taken loan thus making his/her debt burden even worse.
The measures adopted may serve as an incentive for microfinance organisations to choose a borrower more thoroughly to lower the risk of default.
It would also be expedient to provide MFOs access (of course, by the borrower's consent) to data of the Pension Fund of the Russian Federation and the Federal Tax Service. A number of banks use this information cooperation in the course of a pilot project, which allows them to reduce credit risks considerably.
In case of strengthening the regulation of the microfinance sector, the Bank of Russia takes account of the risk of MFO exit from the legal market and the growing number of illegal creditors with increased demand for their services. The letter also notes that as a result of the Bank of Russia supervisory measures, including the use of a specially designed automated technology, a significant number of illegal creditors, i.e. organisations that provide short-term loans to citizens not having the right to be engaged in this activity and not having the MFO status, have already been exposed.
In view of the above, apart from additional measures to regulate MFOs the Bank of Russia deems it important to enhance the activities of law-enforcement agencies to suppress illegal provision of consumer loans.
'At the same time, the settlement of the problem of MFO regulation in the 'loans pending wages' segment does not mean an automatic resolution of the procedure for recovering overdue debts, which is of independent systemic nature, - the regulator answers the senators. - The Bank of Russia believes that the collection of overdue debts should be regulated by tough standards irrespective of who is in charge of this - a special agency, bank, microfinance organisation, or consumer credit cooperative. The Bank of Russia assumes that under the law on collectors the Russian Federation Government should determine a federal executive body responsible for regulation and supervision over the collectors' activity'.
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