Banks in Russia report that they’re increasingly refusing loans to Russian citizens, even as inflation is outpacing income growth. This dynamic is forcing people to turn to microfinance organizations (MFOs). Holod spoke with economists and lawyers, as well as individuals who owed extremely high sums to MFOs to find out what we can expect not only in the scope of new bankruptcies, but also a nationwide economic recession.
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Over the past year, Russians have taken out microloans for a record one trillion rubles ($11.4 billion) – 30% more than in 2022. Experts suggest that by the end of 2024, this figure will increase by another 25%. At the end of 2023, the number of MFO clients grew to 19.9 million people, which is 2.7 million more than in 2022.The proportion of overdue microloans in the first quarter of 2024 was 32%.
A microloan is a small loan (up to one million rubles, $11,250) given for a short period, between a week and 60 days on average. It is issued at a high interest rate – around 0.5–0.8% per day, or up to 292% annually. In Russia, you can get a microloan quickly, both offline and online, and at any time of the day or night. It takes between 15 minutes to an hour to process applications, and money is issued on the same day, whereas the procedure for obtaining a regular loan can take several days and the proportion of bank refusals last year reached 80%.
The average monthly income of Russians who turn to MFOs is 50,000 rubles ($565).The average loan size is just under 10,000 rubles ($110). Economist Nikolai Kulbaka explains that this money is typically taken out to buy food and clothing and repay old loans. Many people turn to MFOs more than once: at the end of last year, the proportion of repeat borrowers was 83.4%.
An economy fueled by loans
Evgeniy Nadorshin, another economist, believes the current rate of growth of lending in Russia is unhealthy. “Russians are aggressively taking out loans and microloans, despite increased rates, which are not offset by income growth. The country’s economy is now growing not because of investment and import substitution that replaces foreign goods with domestic production, but due to growth in consumer demand, which is fueled by loans,” he explains. “Such economic growth cannot be supported for long.”
At the same time, Nadorshin is confident that MFOs now have greater influence on the market than banks. “This is due to the tightening of credit policy and a key interest rate hike, which affects the interest rate at which banks issue loans. As a result, there is an additional influx of clients to MFOs, which is allowing them to set a new record for the volume of loans issued. According to data from the Russian Federation’s Central Bank, a part of those who took out a microloan in the first quarter of 2024 had previously received bank loans, the economist explains.
Nikolai Kulbaka also believes that the number of microloans will grow: “Previously, banks issued loans even to those clients who already spent most of their income on loan repayments, but today they refuse people more and more often.” He believes this trend will continue for another six months because the situation with inflation is not improving — and the annual inflation in Russia has exceeded 8%.
“The fewer loans banks issue, the more people turn to MFOs,” Kulbaka says. “This ultimately leads to more bankruptcies.”
Microloans before payday: the risks
MFOs often offer other services alongside a loan, from text notifications to life insurance and legal advice. Sometimes the cost of services is equal to the loan amount, and they also charge interest on service fees.
The client may fall behind on payments and, as a result, face fines, lawsuits and damage to his credit rating. “If you stop paying, you will accrue interest and fines in addition to the principal debt. If you have been charged an excessive penalty, you should go to court – it will help reduce the percentage,” Filipp Pokrovsky, a lawyer and curator of a Telegram channel about legal issues, says.
By law, the sum of penalties and the interest on a contract for up to one year cannot exceed 130% of the principal debt – that is, for a loan of 10,000 rubles (3), MFOs may require a maximum repayment of 23,000 (0).
Microloans are a hole of debt from which it seems impossible to escape
One of the main risks is a buildup of loans. “When a person begins to prolong debts, it turns into a vicious circle: he is forced to take out other microloans in order to close out the previous ones,” the expert emphasizes.
19-year-old with 20 loans
Vadim, 19, works as a deputy director at a grocery store. “Often, the salary was not enough – I borrowed small amounts from friends and my parents,” he recalled. “A year ago, I decided to get a microloan for 3,000 rubles () and take my chance on betting. I won about 40,000 (2), withdrew the money and paid off the debt. I spent the rest on food, clothing and a trip to Moscow,” Vadim recalled. “I was broke for a while. Then I took out a second microloan, bet the money and lost. So everything went downhill from there”
Vadim and his family started getting threats from debt collectors. They said that they would call up my relatives and friends, create a group chat so they could decide how I would pay off my debts.
The night after my decision to declare bankruptcy was the first time in a long time that I slept peacefully.
“Microloans are a hole of depth from which it seems impossible to escape,” he concludes. “If you do not repay the debt, it will grow, and sooner or later you will have to deal with debt collectors.”
A debt collectors’ rights
In case of microloan non-payments, MFOs may sell the debt to collection agencies. This usually happens to those who are more than 120 days behind on their payments. “First, the collectors call the debtor and his friends, colleagues and relatives whose contact information is recorded on the application form. If the borrower does not respond to their contact attempts, they begin searching for them,” lawyer Filipp Pokrovsky says.
Collectors have the right to come to the address that the borrower indicated in the loan agreement.
By law, collectors have the right to come to the address that the borrower indicated in the loan agreement. At the same time, they cannot enter the apartment without the consent of the debtor. If debt collectors try to break in, behave aggressively or make threats, you should immediately contact the police.
“If you are ready to pay off the debt yourself and do not intend to resort to bankruptcy, you can sign a settlement agreement with the collection agency where you pay the microloan debt and a penalty acceptable to both parties,” lawyer Philip Pokrovsky says.
Five-fold jump
There are two types of bankruptcy: extrajudicial and judicial. In the first case, the state grants you the right to cancel your debts free of charge, for which you need to submit an application to the MFC. The bankruptcy procedure takes seven to 12 months, and during this time the court has the right to prohibit the debtor from leaving the country.
Ultimately, the entire amount is written off, including any penalties and interest. After this, the debtor cannot manage a legal entity for three years or declare themselves bankrupt for five years. In the future, they will most likely be denied a bank loan.
In the first quarter of 2024, more than 12,000 extrajudicial bankruptcy procedures were initiated in Russia. This is five times more than a year earlier, which numbered only 2,500. More than half of those who applied are retirees. The number of judicial bankruptcies over the same period increased by 18.2% to 89,000. Since 2015 when the bankruptcy procedure for individuals first came into force, more than one million Russians have declared themselves insolvent.
