Banks Throw Money at Russians in Shadows to Beat Loan Clampdown

(Bloomberg) -- Russian lenders are handing out loans like they’re going out of style in advance of new regulations that will cut millions of informal wage earners out of the consumer lending market.

Banks have been rapidly expanding their unsecured loan portfolios even after five years of stagnant wages, largely thanks to rules that allow them to create their own models for clients’ earnings. Starting Oct. 1, the central bank will force lenders to use only officially declared income.

“Nannies, drivers and Instagram merchants can generally receive loans at banks if they have an account that receives deposits,” said Mikhail Shlemov, an analyst at VTB Capital. Economists at VTB estimate about 12% of income in Russia is earned in the so-called grey economy, with some professions paid almost entirely in the shadows.

The new rules come as Russian officials have grown increasingly concerned about the retail lending market, which grew 25% in the year to July 1 despite the country’s economic malaise. Economy Minister Maxim Oreshkin warned in a July radio interview that “the economy will definitely fall into recession” if a surge in consumer lending continues unchecked until, he predicts, the bubble bursts in 2021.

The central bank has focused its concerns on lenders’ willingness to extend more credit to highly-leveraged people, with nearly 10% of loans in the first quarter going to borrowers who spend at least 80% of their income paying back existing debt.

As the regulator’s deadline approaches, some banks have offered generous promotions to attract clients. The Yekaterinburg-based Ural Bank for Reconstruction and Development cut interest rates on Aug. 21 by more than 4 percentage points to as little as 12% for consumer loans that require only a passport to obtain. Last week, TCS Group Holding Plc raised its growth forecast for its 2019 retail lending portfolio to significantly more than 60%. It expects a steep slowdown next year.

Banks increasingly relied on grey wages in deciding on loans to people in the past five to seven years, especially after some income retreated into the shadows following the ruble’s collapse in 2014, according to Bain & Co. partner Yegor Grygorenko. The central bank’s actions will help fight against a possible credit bubble as well as assist the government’s long-standing attempts to eliminate the informal economy, he said.

To contact the reporter on this story: Anna Baraulina in Moscow at abaraulina@bloomberg.net

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Tony Halpin

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