Banks earn less for macroeconomic stability

Until recently, consumer loans were one of the few rapidly developing and profitable services provided by banks. However, the new regulation adopted by the National Bank virtually prevents banks from developing the consumer loans market. The National Bank opines that this ‘painful’ measure will solve a number of important macroeconomic issues.

In January – October 2013, consumer debt in Belarusian rubles increased by 41%, totalling $1.5bln. The consumer loans sector was one of the fastest growing areas in the banking system in 2013. Banks have high yield from consumer loans – interest rates sometimes exceed 100% per annum. Banks which focused on consumer lending produced outstanding financial results and rapidly developed their regional networks. The share of bad consumer loans is very small – 1.4% of total consumer loans in Belarusian rubles.

On December 9^th, the National Bank adopted a regulation which de facto restricted banks in issuing consumer loans. If a bank issues a consumer loan at 47% per annum or more, it will have to form a special reserve to cover potential losses on assets subject to credit risk. The special reserve’s size should be 100% of the total debt on relevant asset. Previously, banks formed such special reserves only for overdue debts. As of December 13^th, consumer loans at 48% per annum and higher will become unprofitable.

With this regulation, the National Bank attempts to address several issues. Firstly, to restrict consumer imports (due to the unavailability of consumer loans) – one of the reasons why there is a deficit in foreign trade in goods. Secondly, to reduce risks of social tension (in case wages are delayed).

As a result, banks will have to restructure their profiles and focus on corporate lending, as well as reduce deposit interest rates. Competition on the corporate lending market will increase, leading to lower interest rates. Banks will take some time to adapt to the new environment and smaller banks might even suffer substantial losses. But the National Bank is not really bothered by the banks’ profitability.

Some economic sectors may feel the consequences of reduced consumer lending, in particular, the retail trade and banking. In the future, the National Bank may introduce additional measures which will continue to undermine banks’ positions on the market.