By credit to social explosion

Two years ago, it fell by 1.7 percent, last year by only 0.2 percentage points, and in the first half of this year it fell again by 1.3 percent: The real disposable income of Russians has shrunk once again. This is reported by Rosstat, the state statistics agency, in a report issued at the end of July. After a brief breather, this continues a trend that has been going on since 2014. The news portal lenta comments that this is now the longest-lasting decline in incomes in recent Russian history.Ru.

Those in need turn to credit

To make ends meet under these conditions, many Russians are forced to take out loans from banks. "Most often citizens with a low income level take out loans," explains Anton Pokatovich, chief analyst of the financial services company "BKS" in an interview with the daily newspaper Izvestia. Microloans with short terms and instant disbursements are particularly common. For the debtors, these loans are in many cases the last available instrument to get any money at all for food or rent.

However, in most cases, small loans provide only a brief respite for low-income earners. Because the accruing installments ensure that the debtors have even less money left to live on their already low incomes. For example, Russians with an average budget of around 700 euros – seven million people, or ten percent of Russian borrowers – have to spend more than half of their income on repayments.

Living at subsistence level

As a result, those affected would have to limit themselves to only the absolute necessities in terms of clothing and food, for example. About 2.3 million debtors are left with no more than the subsistence level to live on, "Izvestia" quotes from a study by Napka, the national association of debt collection agencies. A total of ten percent of borrowers lived on the edge of poverty or were threatened by it.
To meet everyday expenses, low-income Russians usually have to take out new loans – and get deeper and deeper into debt.

In the first five months of this year alone, Russian banks extended the equivalent of nearly 228 billion euros in loans to private households. This corresponds to an increase of about 23 percent compared to the same period of the previous year, calculates "Izvestia".
Eleven monthly salaries are needed on average by a Russian borrower to pay off his debts. In regions with little work and low incomes, borrowers take longer to repay their debts. This is how borrowers in the Republic of Tuva on the Mongolian border have to pay 124 monthly salaries to pay off their debts.

Loans magnify problems

Not only analysts and financial experts are worried by the practice of lending. The Russian government has also recognized the problem. Each new loan multiplies the problem and increases the amount of debt, Russian Economy Minister Maxim Oreshkin recently warned in an interview with radio station "Echo Moscow". If the practice is continued, there will be an "explosion" in 2021, the politician predicted in the conversation at the end of July.

The reason for the pessimistic prediction: The banks would drastically restrict the granting of loans in two years at the latest because of the debts of the citizens. In the consequence these could not serve their credits any longer. Russia is facing serious social problems. The solution to the problem should therefore not be postponed further into the future, the minister appealed. Government and central bank already working on reforms. But these are not yet ready for discussion.

Central bank fights against credit glut

In order to slow down the unrestrained pace of granting small loans, the Russian Central Bank is already taking regular steps. Thus, this fall, several corresponding regulations will come into force. From October, for example, institutions will have to calculate a coefficient of the debt burden of their clients when granting new loans. If this exceeds a critical value, the financial institutions get a higher risk rating from the central bank. To avoid this step, banks would hold back on granting bad loans with high interest rates and short terms to low-income earners, according to the hope of central bank head Elvira Nabiullina.

However, experts say the central bank's steps alone will not be enough to curb the practice of mass lending. For real changes, the problem must be tackled at the root – and the income situation of the population must be changed. To do this, the state must stimulate domestic demand, increase salaries, support small businesses and set up social programs for the needy.

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