Russian Borrowers: Between Wants and Needs

Russians are relatively new to bank loans, which became widespread as late as the mid-2000s. Now, 44% of Russian households have loans, but Russia’s indices of household debt load, in particular, the share of indebted population, are much lower than in developed countries.

Over the last years, loans have gained a negative reputation among the general public: most Russians think that loans make their life tougher and borrowing is only appropriate in cases of extreme need; interestingly enough, even those who are already in debt share this view (see Chart 1). ‘Draconian interest rates’, ‘significant overpayment’, ‘voluntary slavery’, ‘debt hole’, ‘debt servitude’, ‘decrease monthly comfort’, ‘debts bring anxiety’, and ‘psychological pressure’ are just a few of the accusations made against loans.

Chart 1. Attitude toward loans

It is therefore no wonder that loans are far from consumers’ first choice even in the event of financial constraints: when they do not have enough money to buy the things they need (this year, it has been the case for 59% of Russians), one-third turn to their relatives and friends for money, almost as many simply do not buy them, and a mere 14% borrow from lending entities.

Economic conditions force people to take loans: stagnating incomes do not cover everyday needs. A clear sign of that is the increasing share of those who have to spend their savings to make both ends meet: 9–10% in the autumn of 2019 compared to 4–5% in 2017.Moreover, five years after yet another crisis, people are psychologically ready to return to pre-crisis consumption levels, but since their incomes are not growing, they have to seek other available means to return to the levels of the ‘fat’ years. These sentiments overlap with the objective reality of today’s consumer economy, which demands replacement of goods that go out of date or service rather quickly. Although only 43% of current borrowers have so-called ‘forced’ borrowing motivation: they argue that they had no other option (see Chart 2). A few more mention ‘voluntary’ borrowing motivation, including willingness to ‘use an item right away rather than save for it’, notion that ’taking a loan is more economically advantageous than saving’, aversion to borrowing from relatives, simplicity of the procedure, and advertising. Almost all of the aforementioned reasons (except for the one related to economic advantages) are emotional, and more often, they are cited by relatively recent borrowers, i.e. those who took loans a year ago or later. At the same time, almost half of current borrowers have taken loans this year, while the rest are paying off the loans taken earlier.

Chart 2. Reasons to borrow

As a rule, when people need something they cannot afford, they have many ways to get money for it apart from borrowing from banks: for example, they can borrow from their relatives or change their lifestyle to increase their income. However, their attempts to turn to their inner circle for money can meet rejection and disapproval of the need they are trying to satisfy with borrowed money. For example, a husband may disapprove of his wife’s wish to buy a new fur coat, and parents may disapprove of their child’s dream to buy a new smartphone, etc. In this case, borrowing from a depersonalized entity secures them from potential disapproval of their relatives or dependence from them in the event of borrowing.

A lending institution, in its turn, is interested in legitimizing the wishes of borrowers, even if through controversial advertising. Lending institutions, too, stimulate customer emotions by using all means to make people take loans: by November 2019, 65% of Russians had received personal loan offers compared to 45% in early 2018. To what extent is Russians’ credit behavior rational and reasonable when they are compelled to borrow by their financial circumstances on the one hand, and pushed to do so by financial institutions on the other?

According to research, 64% of borrowers acknowledge that they took loans on the spur of the moment, impulsively, and a mere 35% had planned to borrow. Interestingly, the share of impulsive borrowers is the same among voluntary and forced borrowers; a large number of those who claim to have had no other choice seems to have decided on a loan without giving it much thought or comparing all available options. Impulsive borrowers account for a predictably large share of short-term borrowers: 74% of those who took point-of-sale loans, 68% of those who took emergency loans. However, a lot of long-term borrowers, too, are impulsive: 51% of car loan takers, and 37% of mortgage takers. In other words, even as serious an obligation as a long-term mortgage does not make some (and quite a few) Russians think twice. The majority of impulsive borrowers belong to the least indebted groups, i.e. low-income and middle-aged groups (46–60 years old), which often overlap. Here, forced borrowing motivation is the most evident.

Members of other social groups behave similarly, but reasons for their impulsiveness can be different. For instance, for Muscovites, who also engage in impulsive borrowing more often than the rest, the key factors are likely to be a wide range of loan options and prevalence of borrowing, which is not often the case for smaller settlements. Finally, singles borrow more often than the rest: having no family to rely on, they have few other options and their appetite for loans faces little resistance, as big families’ borrowing decisions are subject to needs of other family members.

Another particular trait of Russians’ credit behaviour is that they tend not to do detailed calculation of their debt obligations. For instance, only 51% of borrowers argue that they had calculated total income and expenses of the family for the whole repayment period; it is also worth taking into account that it is likely to be an overstatement due to socially desirable responding. Among the rest, 27% ‘have a general idea of how they are going to pay off the loan’, while 19% ‘have not given it much thought’. Notably, these shares vary insignificantly across different borrower groups: little more than a half of those who buy fridges and pay later or take mortgage loans have thoroughly calculated the financial consequences of borrowing, one in five does not think about it at all. However, even if the loan is planned, there is no guarantee that it is well calculated: only 64% of those who took planned loans had done detailed calculations, a quarter had done a rough estimate, while 8% did not think about it. However, this unwillingness to make a thorough calculation of their financial abilities and obligations is not only and not so much their carelessness. It seems that poor financial literacy and numeracy play their part, and it is no coincidence that the least educated respondents had the hardest time answering this question.

Despite being emotional about loans, impulsive, and short-sighted, the majority of borrowers cope with their debt load and during the last 6 months have never lacked money for loan payments, and a quarter has faced this problem once or twice. Only 16% end up in the risk zone, having lacked money for loan payments three or more times over the last 6 months (see Chart 3). These are mostly point-of-sale and emergency borrowers but some of them are mortgage borrowers.

Chart 3. Sufficiency of funds

The least well-off groups face this problem more often. At the same time, most of them (73%) did not plan to take a loan, and 50% have not done any detailed repayment calculation. Moreover, these borrowers have a higher debt load than others: one-third of them have two or more outstanding loans. It is the combination of two factors (low standard of living and ill-considered borrowing) that seems to cause significant repayment issues; on the other hand, in case of relative financial well-being, even emotional borrowing does not turn into a serious problem.

21% of borrowers who have lacked money for loan payments three or more times entertain the possibility of taking a new loan to pay off the outstanding one. In other words, one in five already troubled borrowers has every chance of falling deeper into a debt hole; these figures are the most alarming (even though they account for a mere 1.3% of population). At the same time, it is often quite difficult to get out of the credit trap. Here, several factors come into play. One of them is a high debt load of the inner circle, which otherwise could lend to the borrower. Another is the aforementioned inclination to satisfy personal needs with no regard to the inner circle, i.e. through loans rather than private borrowing, and if this person fails to service their debt, it becomes even more difficult to turn to their inner circle. Finally, a low standard of living also remains an important factor that forces people turn to loans in the first place and then causes their default.