‘New Normal’ in Russia Leaves Bad Consumer Debt at Record High

(Bloomberg) -- Russian banks are trapped in the “new normal” of bad consumer debt languishing at a record high.

While the level of retail loan delinquencies has stabilized after increasing for seven years running, it may remain stuck at the same 16 percent rate where it’s been for the past 12 months, according to U.S.-based credit scorer FICO.

“This ‘new normal’ reflects the evolution of the Russian credit market, as lenders moved from secured credit to credit cards and other products that carry higher risk,” Evgeni Shtemanetyan, who directs FICO’s operations in Russia, said in an e-mailed statement Tuesday.

Consumers have borne the brunt of Russia’s longest recession in two decades as wages collapsed amid a currency crisis, with their earning power further eroded by high interest rates and inflation that was in double digits throughout 2015. While the economy is poised to return to growth by the end of the year, the decline in real incomes will continue to weigh on people’s ability to repay their debts, according to Russia’s National Bureau of Credit Histories.

FICO’s Credit Health Index, which measures Russia’s overall credit health based on the number of consumer loans that are overdue by more than 60 days, was at 90 last month, unchanged since July 2015 and the highest since it began compiling the data in 2007.

Building Reserves

Russian banks have accumulated reserves for about 90 percent of their non-performing loans, according to Alexander Danilov, a Fitch Ratings analyst in Moscow. However, lenders haven’t set aside enough money for loans that have been restructured and remain problematic, representing a bigger risk, he said.

VTB Group, Russia’s second-largest bank, said in its second quarter results last week that its ratio of non-performing loans for consumer credit fell to 7.1 percent at the end of the period from a peak of 7.2 percent at the end of March. Retail loans grew 4.2 percent in the first half.

As the economy returns to growth after the recession, the delinquency rate will start to fall, according to Sergey Voronenko, an analyst at S&P Global Ratings in Moscow.

“Most of the risks in retail for 2015 and 2016 were linked to the reduction or loss of income, and new loans weren’t issued en masse, while banks had to issue reserves as problems appeared,” Voronenko said. “Now we see that retail portfolios are stabilizing with growth and subsequent dilution of the overdue loan ratio possible by year-end.”

To contact the reporters on this story: Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net, Anna Baraulina in Moscow at abaraulina@bloomberg.net. To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net, Paul Abelsky, Tony Halpin