28.11.22 Review

Lending For The Poor: loan portfolio dynamics indicates rising business costs and shrinking consumers' demand

According to the Russian Central Bank's October review of the banking sector, the corporate loan portfolio of banks is increasing, while the growth in consumer lending is much lower than inflation, which means these loans can be used to buy fewer goods. The most active corporate lenders are developers, who continue to borrow despite the falling demand. However, the credit demand of enterprises does not indicate an increase in business activity. Businesses need money to adapt to new conditions: logistics have become more complicated, prepayments for import contracts have grown, and external borrowings become impossible. All these costs will be embedded in the prices. At the same time, the population, disoriented by the course of the war and mobilisation, is postponing major purchases, and a third of all loans are taken by those who do not have enough to live on.

In October, banks continued to increase lending to businesses, according to the Russian Central Bank review "On the development of the banking sector of the Russian Federation". Over the month, the corporate portfolio has grown by 2.4%, or by 1.3 trillion rubles. After the shock pause in the March-June period when lending was stagnating, the portfolio started to grow in July and since August the monthly increase reached the current level. The Central Bank explains this high dynamics by "substitution of external borrowings, as well as an active lending to housing construction". Since the beginning of the year, the growth reached 10.7% or 5.4 trillion rubles, which is slightly less than in 2021 (11.7%).

However, the increase in credit does not necessarily mean an upturn in business activity — it can equally reflect the growth of producer costs. "The increased demand for loans is caused, among other things, by substituting external borrowing... The need for resources is also associated with investments in business transformation and adaptation, the complexity of supply chains, and an increase in prepayments for import contracts," the Central Bank itself commented on the situation. In the October small and medium business activity index RSBI (prepared by "Opora Rossii", PSB Bank and Magram Market Research agency) of all its components, only loans are growing, while sales, human resources, and investments are in decline.

Construction is credited more active than other sectors. The increase in October reached 4.6% or 200 billion rubles. At the same time, the net inflow to escrow accounts in October was 59% lower than a year ago (an escrow is a special account from which money can be withdrawn only after the keys to the apartment are handed over). Construction is carried out at the expense of the loan, the rate of which varies depending on the sales results. The former chief analyst of "Dom.rf" Sergei Skatov, in a column for The Bell, points out that in recent months the debt portfolio growth of developers is three to four times higher than the growth of the escrow portfolio. As new housing is commissioned, older accounts are opening up, and overall sales are falling. According to Skatov's estimates, by the end of 2023, the coverage of developers' debt with money in escrow accounts may drop to 50-60%, which "will sharply increase the credit cost and will be included in the production cost, limiting the possibility of price reductions." 

Lending to citizens is stagnating in nominal terms. Mortgages are also slowing down (from 2.3% in September to 1.8% growth in October). The Central Bank links this to the "increased uncertainty for both borrowers and banks. Mortgage lending has declined by 13% — to 448 billion rubles.

The increase in unsecured consumer lending in October amounted to 0.3% against 0.9% in September. The Central Bank explains this as "a decrease in demand from the population, which has postponed large purchases due to the growing uncertainty, and the tightening of banks' credit policy. Year-on-year consumer lending has increased by 3.9%, which is much lower than inflation (12.6%). This means that citizens will buy fewer goods with these loans. Data from retailers show that citizens are saving even on food and daily necessities (Re: Russia wrote about this in detail here). At the same time, from January 1st, 2023, the regulator will limit unsecured loans by introducing so-called macro-prudential limits.

Consumer lending portfolio dynamics in nominal and real terms, January 2021 — September 2022, billion rubles

Frank Media notes that a third of consumer loans falls on the most indebted borrowers, that is, those who spend more than 80% of their earnings to pay off debts. In the third quarter, the percentage of loans issued to such borrowers rose to 32% from 28% in the second. In addition, the share of consumer credits issued for more than five years remains quite high (15%). 

As for the funds of legal entities and individuals on their accounts, they have generally decreased, although there are some nuances. In October, funds of legal entities decreased by 1.1%, or by 500 billion rubles. In September, there was an increase of 2.3%. The Central Bank calls these figures "moderate". The main reason for this is dividend and tax payments in the oil and gas industry. At the same time, ruble balances have slightly increased, while foreign currency balances have decreased. 

The outflow of individuals' funds (excluding escrow accounts) in October reached 0.3% or 98 billion rubles. In September, against the background of "partial mobilisation", citizens withdrew from their accounts nearly half a trillion rubles (a record 458 billion). In October, as we can see, at a much lower rate, but the outflow continued. Meanwhile, ruble accounts showed a slight increase of 113 billion (+0.4%), while foreign currency balances decreased by 211 billion (-6%), which is "related to the conversion into rubles, as well as transfers abroad," the Russian Central Bank notes.