The Bank of Russia will take a close look at the action of macroprudential instruments used to curb the growth of consumer lending and recalibrate them if necessary, said Elizaveta Danilova, Director of the Financial Stability Department of the Central Bank, at a meeting of the Presidium of the Council of the Association of Banks of Russia (ABR).

The Central Bank has three tools in its arsenal to slow down the consumer lending market: macroprudential surcharges to risk coefficients, restrictions on the full cost of credit (TCC) and macroprudential limits (MPL). From mid-2022, the regulator wants to limit consumer loans with a debt burden ratio (DLR) above 80% to a share of 25% of unsecured loans, and 35% for microfinance organizations. The share of consumer loans with a term of more than 5 years may be limited to the 25% bar.

“Macroprudential limits and MPL restrictions fulfill the same function of protecting the banking system from borrowers of low credit quality. With the introduction of MPL, it is possible to do away with imposing a TCOP cap on banks altogether. With the removal of the MPL restriction, banks could lend to vulnerable borrowers whose credit quality is below average but still allows them to rely on regular debt service. Even if the MSRP for such loans exceeds the current average market MSRP for bank loans, it will still be 7-10 times lower than in MFIs,” said Pavel Vysotsky, Deputy Chairman of Alfa Bank, during the Presidium.

Alfa Bank estimates that in the case of abolishing the PSC restriction, about 4 million out of 12 million current MFI borrowers could return to banks and reduce their debt burden by 10 times. “Why leave in regulation three instruments aimed at achieving the same goal? A regulatory guillotine is called for,” Vysotsky said.

Danilova, in turn, said that right now it would be wrong to abandon the already proven tools. “But, of course, for our part, we will look very carefully and we are already looking at how these tools work together – macroprudential surcharges and limits – we will do recalibration if necessary. I would like to remind you that in late 2021 we already noted that we were concerned about the share of high IOR, and we wanted to increase the surcharges, but we did not take this step, we did not increase the surcharges on high IOR, just counting on the fact that we will use the instrument of limits. Naturally, we will also continuously watch when the calculation of PSC will change, the law will be adopted, and we will also need to adjust the surcharges to a different level of PSC. We will do all this so that there is no double counting of risks in our regulation,” she said.

Another issue of concern for banks is regulatory arbitrage in setting limits for lending institutions and MFIs. “The overall share of disbursements with PDN above 80% is around 30%. If you introduce a limit of 25% in the middle of this year, there are such tough measures there in case of exceeding this level that banks will certainly tighten their lending policies, will follow this limit. Other options are hardly possible. This means that some customers will have to go to MFIs and the shadow lending market. This, of course, will make the retail lending market worse. And some clients will simply not get loans,” said Dzhangir Dzhangirov, senior vice president of Sberbank.

In his opinion, the Central Bank could equalize macroprudential limits for banks and MFIs.

“Already now the regulatory act lays down the maximum difference that can be between the limits of banks and MFIs. As you can see from our regulatory proposals that we posted in December, we went much more stringent, we have MFIs with only 35% of this limit, given that the distribution is even worse for them than for banks, they traditionally lend to even more borrowers, they have more risks, this limits MFIs to the same extent as banks. So it seems to us that these proposals are enough to reduce the risks of regulatory arbitrage,” Danilova said in turn.