According to Scoring Bureau, Russians are increasingly using credit cards. In August, credit card holders spent up to 33.9% of their limit on average. This figure, as well as its month-on-month increment, have reached a new high since January 2022. Invest Foresight talked to Alexander Abramov, Head of the Laboratory for Analysis of Institutions and Financial Markets at the Presidential Academy’s Institute of Applied Economic Research, about the risks of consumer over-indebtedness.
– Credit cards are the most expensive type of loan. Why are they so popular?
– One of the reasons is that credit cards today come with grace periods when the holder is not charged interest for using them. The reason banks actually issue such cards is that if you lose your grace period by not paying your balance by the due date, the interest they charge you will be very high.
Naturally, people who use their credit card not as a means of payment, but as a means of borrowing, pay exorbitant interest.
As a matter of fact, the popularity of such cards is also due to very aggressive advertising. These ads are all over television shows. There are other incentives, such as cashback, additional bonuses and loyalty programs.
In addition, I would assume that the Central Bank’s reserve and capital adequacy requirements are lower in regard to credit cards. This makes credit cards a kind of loophole for banks, which allows them to lend to the population at a higher interest rate without violating any Central Bank policies.
– Is spending a third of one’s credit limits too much, or is this acceptable financial discipline?
– As far as credit utilization goes, this isn’t too much. However, it is important to look at how this spending is distributed over time before making assessments.
Let’s put it this way – is this a big or a small increment compared to earlier figures? I believe that it is a considerable surge, which should at least alert the Central Bank. Perhaps it is time to think of restricting banks’ lending activity to a certain degree or to try to redirect the money to other types of loan, narrowing this loophole a bit.
– The number of citizens using credit products has reached 50 million, while the working population in Russia is only 81 million. Does this indicate that we’re living beyond our means, or is relying on credit simply a necessity in today’s economy?
– On one hand, these figures aren’t particularly encouraging. However, on the other hand, there’s nothing inherently dangerous about them. In any economy, people rely on credit cards and various loans, and overall, this doesn’t result in anything catastrophic.
I believe these numbers highlight certain flaws in our financial system. Unfortunately, we’ve structured it in a way that a handful of banks and numerous microfinance organizations dominate the landscape. And, it’s important to note that these microfinance institutions are often more focused on extracting money from people, sometimes at almost any cost.
This all generally results in our citizens’ credit overuse – and, importantly, this occurs regardless of whether or not their income is growing and whether it is sufficient enough for them to feel content.
In fact, banks generate more revenue from loans than from deposits. So I believe that our financial system is imbalanced by banks’ excessive marketing pressure on citizens in this regard.
– As of early summer, Russians owed a total of RUR 36 trillion on their credit cards, or RUR 450,000 for every employed citizen, which is a huge amount. Is it posing any risks?
– The Central Bank typically responds to all this by claiming that non-performing loan indicators are not that high even by historical standards – which, according to the financial regulator, proves the absence of red flags in the market.
But basically, I understand that there are several risk indicators, the ratio of non-performing loans being among top ones. Those also include the ratio of credit card payments to an individual’s total disposable income, an equally important measure. These are rather sensitive indicators.
And yet, despite them being generally adjustable parameters, financial authorities should stay alert and perhaps consider measures to reduce citizens’ credit debt. Any unexpected development may occur anywhere, given the current ever-changing global landscape. Today, the growth in income is caused, to a certain extent, by temporary factors. Possible income stagnation could definitely pose financial system risks.
– Are there any guidelines for using credit products wisely?
– I believe the main rule is to use credits only for purchasing things you actually need, and avoid unnecessary purchases. Interest rates are still rather high, with credit users always bearing rate risks. Obviously, mortgage or car loans seem to be reasonable options, while consumer credits should be avoided. Second, you should consider the debt-to-income ratio. I personally recommend spending no more than 30% of your current income on paying off credit debts – although the Central Bank views 60% as a normal maximum amount, with banking risks considered.