According to the Federal Bailiff Service, during the first six months of 2023, the number of loan defaulters reached 17.7 million people, which is 25%, or 3.3 million, more year-on-year. Invest Foresight interviewed financial ombudsman Pavel Medvedev to find out why the population’s growing debt is dangerous and how to prevent situations that make it impossible to pay back loans.
— The Federal Bailiff Service plans to collect a total of 2.5 trillion rubles from non-payers. Does this amount of debt indicate that people lack financial knowledge or that it is impossible to live normally without borrowing?
— First of all, I want to say that housing and utility debts account for an enormous part of this total amount, almost 1 trillion rubles. In most cases, it is a result of people’s poverty.
For example, I myself live in a rather good neighborhood in Moscow, in a five-story building. There are 20 apartments in my block and every now and then, ten of them receive debt notices. And this happens in Moscow, where people’s earnings and pensions are sufficiently high. However, half of the people in my block of flats can’t pay for housing and utilities.
Certainly, these notices do not mean that these people are being chased by court bailiffs. Although it means that they have at least several months’ worth of unpaid utilities. And the general situation in the country is similar, unfortunately.
— What other categories of defaulters are included in this amount?
— A lot of runaway dads. As far as I remember, there are huge statistics of alimony non-payers. Unfortunately, it is very difficult to collect this money because many runaway dads try to trick the system to avoid paying alimonies.
— And finally, people who take out loans.
— Yes, the share of people who take out loans and can’t make regular payments is also significant.
It is hard to say who of these people are naïve and who were pushed into a corner. But before the crisis, the latest study I conducted was about seven years ago, and it concluded that more than 90 percent pay more or less carefully. This figure applies to bank loans because it is very difficult to conduct a similar study among clients of microfinance organizations. The remaining 6-8 percent are non-payers. But about half of them are simply forgetful slackers.
— Please, explain this term.
— It is very simple. Say, a bank manager calls this person and asks, “Mr. Ivanov, why haven’t you made your loan payment?” Mr. Ivanov grabs his head and exclaims, “I simply forgot!” And then he goes to the bank and makes the payment on the same day or the next day at the latest.
But a half of these people do not pay. Why? It is difficult to say whether they do not have the money or that they are unscrupulous. But there are no more than 5% of such borrowers.
Naturally, the situation has changed because people have less money. So, it is not about financial illiteracy or dishonesty, but about having immediate needs and no money.
— What kind of immediate needs?
— I learned about this case from a private conversation and it is probably a wrong statistics sample. But still; one woman told me about half a year ago that she took a loan to purchase coal because otherwise she would have nothing to heat her house with. Another woman took a loan to buy a painkiller medicine for her husband. He would have received it for free, but in the next 1.5 months. And both of these women are having problems with repaying these loans with their small pensions.
— The Central Bank said in August that the debt load of Russians has hit the record, with the total loan portfolio exceeding 30 trillion rubles. How would you comment on this information?
— It’s not like this statement is correct or wrong, it is partly pointless. The Central Bank knows this, and it knows that say, the distance between Moscow and St Petersburg cannot be measured in kilograms, but it still measures debt load in this incorrect way.
By the way, there is a Central Bank brochure on the net that says that the debt load should not be measured by the debt-to-income ratio of gross income to the monthly payments. It explains why one should not measure it this way.
— And why is that?
— Let’s say, we are talking about a person whose income equals the subsistence rate. By definition, even a kopeck cannot be withdrawn from this sum. But is considered okay if one half of it, that is, 50% of this person’s income goes to loan payments; 60% is not allowed.
This brochure also says that this index can be significantly improved. To that end, we need to subtract the subsistence rate from the income. Then, if the income equals the subsistence rate, this decimal will turn into infinity with any loan burden because we cannot divide by zero. Therefore, one should not give loans to such potential borrower.
Naturally, this is not the best way to measure debt load, but the current one is also not too accurate.
— Is living on credit the result of copying the Western consumerist society or one cannot live without loans?
— There is much talk that the Central Bank increased the interest rate and now people will take fewer loans. Therefore, purchasing power will drop.
I can tell you that loans do not increase purchasing power but reduce it because of conservation law. By giving your money away with an interest rate, you don’t become richer, and cannot afford spending more. You will buy less by the exact same amount of money that you pay to the bank.
In most cases, borrowers take a loan to deal with a particular issue. And the only thing they buy is time. Say, if a young family plans to have children and wants to buy an apartment so that the kids would have their own workspace and the parents would sleep in a separate room so they would have the energy to work – this is a normal rational measure.
Loans make sense because life is finite. And sometimes it is very viable to buy time. Buying time through mortgage is very rational in this case. In this sense, purchasing coal to stay warm in the winter is also rational.
— Are there any rules to follow when assessing your borrowing capacity?
— There are such ways. Say, I explained as a financial ombudsman to that woman who bought medicine for her husband that she needed to discuss the loan and their loan capacity with him.
However, it happens too often that loans are taken for this very moment because money is needed urgently. It often happens that people take loans when they have no other choice.
And these rules that say “loan payment must not exceed 30% of the borrower’s income” or some percentages, it is all about measuring kilograms to St. Petersburg.
— And why is that?
— It’s all very simple: 30% of a monthly income of 1 million rubles and 30% of, say, a pension of 11,000 rubles is a very different 330%. The maximum loan burden must be calculated in different way.