Pocket money with risk

Instant loans are advertised at almost every subway station / Photo: Christopher Braemer.

15 Minutes, half an hour at most. This is how long it takes to take out an instant or short-term loan. Only identification is required for this purpose. No waiting in line, no awkward questions. However, there is a catch: up to two percent interest. Per day, mind you. This would correspond to up to 732 percent annually. In the city of Omutninsk, Kirov region, even a loan at 2379 percent interest is now reported to have been granted. This is according to a notice of the regional court here, as reported by Ria Novosti. The borrower has seven days to four weeks to repay the money. Despite the high financial risk, many go for the deal.

The nation's debt trap

According to the National Credit History Bureau, about nine million Russian citizens have currently taken out an instant loan. The share grew by ten percent in the fourth quarter of 2016 alone. The average amount borrowed is 10,000 to 18,000 rubles, the equivalent of about 162 to 280 euros. Central bank says total bonds rose more than 20 percent in 2016. Since the beginning of the year even mobile phone providers offer short-term loans at two percent daily interest rate. They can also be taken out online via a variety of providers such as "E-Saim.

Small loans, big risk

According to an official statement by the Central Bank in response to a request from the Federation Council, the target group for instant loans includes, in particular, private individuals with small incomes who have already been rejected by the bank. However, these lack any financial expertise to assess risk, he said. The high interest rate "inevitably leads to a high risk of non-payment of the debt," explains Mikhail Mamut, head of the microcredit department of the Central Bank. The statistics confirm his statement. According to 2015 statistics from rating agency Raex, about half of bonds could not be repaid on time. Financial institutions were surveyed in the period from July 2014 to July 2015.

"On the one hand, the loans reduce poverty slightly. Through them, even those who have been rejected by the bank receive support," says Maria Semyonova, professor at the Institute of Finance of the Higher School of Economics. "On the other hand, the loans only help the short-term debt repayment. But they are not incentives for long-term wealth-building initiatives," Semyonova points out.

Central bank cleans up market

Most recently, a new central bank regulation caused a stir. According to this, in the future no more than twelve instant loans per capita can be taken out. In addition, the amount borrowed may not exceed the annual salary. If the market remained unregulated for a long time, at the end of 2013 the Central Bank said with the law "On the use of microcredits (bonds)" to fight dubious providers. The decision was aimed primarily at the level of interest rates. As a result, since 2014, a total of nearly 5,000 "black" providers have been excluded from the market for not complying with the central bank's requirements. At the beginning of the year, there were officially just under 2,700 financial institutions. Now even Patriarch Kirill asked before the State Duma for a complete ban on the debt trap, as only "alcoholics or drug addicts in need" would take advantage of the loans.

According to Elvira Nabiullina, head of the central bank, a complete ban would not be far-sighted. This only leads to an evasion of illegal loans. Instead, the market would have to be gradually regulated. Semyonova from the Higher School of Economics gives a positive assessment of the central bank policy. "The idea of providing more money just doesn't work if the credits are of poor quality. In this case, both investors and borrowers lose money. This leads to the opposite of prosperity: poverty," Semyonova explains. At the same time the demand is increasing. "The central bank's risk control positively stimulates the credit market," adds the expert.

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