With a debt noose around your neck: why Russians are not afraid of high interest rates on loans

The volume of household debt on loans to banks in February 2024, according to the Central Bank of the Russian Federation, reached 34 trillion rubles, having increased by 27% over the past 12 months. This is a fantastic figure, approximately corresponding to annual federal budget revenues. That is, if all Russians paid off their debts at the same time, the country could live on this money for a whole year. Neither the increase in the key rate nor the tightening of the regulator’s requirements for banks reduced Russians’ demand for loans. Maxim Osadchy, head of the analytical department of BKF Bank, spoke about the peculiarities of the national thinking of compatriots taking out loans and their economic consequences.

— Why do citizens increase lending volumes even in conditions of high rates?

— On one satirical website I read a message that “the regulator will give banks the right to require a certificate from a psychiatrist when applying for a loan.” This “news” is comic or, if you like, fake, but “the fairy tale is a lie, but there is a hint in it.” In the comments, one of the readers wrote: “If you are not registered with a psychiatrist, do not give a loan.” Another immediately created another fake: “A vacancy has appeared in banks: “Credit Psychiatrist”.”

Russians take out loans with such passion that one can really doubt the mental health of many of them. Especially taking into account the increasing economic risks of the Russian economy. According to preliminary estimates by Frank RG, in February the volume of loans issued to individuals increased by 22.6% (+189 billion rubles compared to January 2024). The volume of lending amounted to 1.024 trillion rubles, which is 3.3% higher than in February 2023.

– But the regulator has taken a number of measures to cool the retail loan market – from raising rates to tightening requirements for banks! Have all these efforts been in vain?

— At the cost of incredible efforts, the Central Bank of the Russian Federation has more or less cooled the mortgage market: the volume of mortgage loans issued in February 2024 amounted to 322.5 billion rubles, which is 24% lower than February 2023. But “nature abhors a vacuum,” and citizens rushed from mortgages to car loans. According to the same Frank RG, the car loan market shows another historical high: in February 2024 it reached 171.4 billion rubles, which is almost 30% more than in January 2024 and 115% higher than in February 2023.

— But such a switch would not have happened without the help of banks?

– Of course, this is why one can doubt the sanity of some bankers who fully invested in inflating the “bubble” in the mortgage market, and now are doing the same in the car loan market. It is highly likely that the authorities will complete the preferential housing lending program at 8% per annum from July 1, 2024; other state mortgage programs (family, rural, Arctic and Far Eastern, IT mortgage) will not close the gap. Meanwhile, market mortgage rates are high – higher than the key rate, which the regulator left at 16% at the last meeting.

In addition, the limits of state subsidies to banks for mortgage programs may be reduced due to the budget deficit, which in 2023 amounted to 3.2 trillion rubles (although it was planned at 2.9 trillion rubles), and in 2024 is planned at 1. 6 trillion rubles.

— Bankers and developers make money and it’s dangerous. Why?

— Yes, it’s dangerous, because a crisis like the Chinese scenario could arise in the housing market. And this scenario means massive bankruptcy of developers, a decrease in housing prices, large volumes of unsold real estate, and the spread of a domino effect to the banking sector.

The head of the Central Bank, Elvira Nabiullina, has repeatedly said that in consumer lending, the increase in loans was largely due to the fact that larger volumes of loans were issued to borrowers with an already high debt load. Statistics show that in the third quarter of 2023, 34% of issuances of mortgage housing loans under DDU (equity participation agreements) were to borrowers with a debt burden above 100%.

– It’s amazing that the banks saw this and nothing bothered them…

“I’ll repeat again: you have to be mentally ill to give a loan to a person who is already overextended.” But they do… Due to the interaction of mentally unhealthy borrowers with mentally unstable bankers, credit “bubbles” are inflated. And everyone suffers from this – not just the sick, but also the healthy. Although with bankers, not everything is so simple: by the time of the collapse, bank owners are usually already in the Alps or London-Paris, often with capital withdrawn in a timely manner.

— People’s behavior that is irrational from an economic point of view is not only a Russian phenomenon. You can also recall the situation with the mortgage crisis in the United States in 2008, and history-loving citizens will also cite the “tulip fever” in Holland in the 17th century as an example…

— The topic of madness in economics is old and well studied; just remember the famous book “The Most Common Misconceptions and Follies of the Crowd” by Charles Mackay, which describes the mechanics of the formation of bubbles in the market. The madness of our fellow citizens around the MMM actions thirty years ago is completely clinical. Immunity appears after such mental epidemics, but, as we see, not for long.

“But there is a rational explanation for Russians’ demand for loans. Analysts often point out that people’s disposable incomes do not keep up with inflation, and Russians, in order to maintain a more or less acceptable standard of living in such conditions, are increasingly resorting to borrowed funds.

— Indeed, the increased activity of the population in the credit market can come not only from a small mind, but also from a great mind: citizens take out loans if they expect a sharp depreciation of money. But this is not our case yet.

— What advice do you have for compatriots who need money? After all, spring is the beginning of the construction and vacation season. Should you rush to the bank for a loan or wait?

— The key rate may go down in the second half of the year. Both the Central Bank’s forecast and the market predict such dynamics, as evidenced by the zero-coupon yield curve of government bonds. So it’s better to wait with market loans.