Consumer Bankruptcy Law Poised to Circle the Globe

If the Russian Duma adopts the pending consumer bankruptcy bill, it will fill in the final (very large) link in an unbroken chain of countries circling the globe who have adopted a debt relief law. No country seems to have taken this step as an early planning measure. Only the impeding doom of a huge credit bubble or, more likely, the aftermath of the bursting of such a bubble has spurred lawmakers to action. Russia seems perfectly poised to follow that path.

First regional banks and credit reporting agencies and now the Central Bank have begun to sound alarm bells about the rapid rise of consumer (over)-indebtedness in Russia. According to a study of credit reports from summer 2013, the number of consumer borrowers with five or more loans increased to nearly 20% in 2012, with average debt mounting to over US$15,000 (average annual income in Russia is only US$7500). In only the first nine months of 2013, consumer lending rose nearly 40%, and about 8% of those loans are already non-performing (an increase of about 33% in NPLs from the beginning of 2013). Standard & Poor's expects Russian consumer credit to expand another 30% in 2014.

Generally, lawmakers won't act before the pain becomes widespread, and that is also true in Russia. According to the reports above, 45% of the economically active Russian population has engaged the consumer lending market, though credit usage is not evenly spread among regions. I suspect the large urban areas like Moscow, St. Petersburg and Vladivostok have credit penetration nearing 100% of the economically active population.

The challenge, as usual, will be overcoming the standard line from banks that offering discharge relief from some of these debts will bring down the economy. The Central Bank is concerned that elevated consumer lending now threatens the financial stability of the country, but the question of whether non-performing loans are held by "can't pay" or "won't pay" borrowers looms. We can expect the banks' opposition to consumer bankruptcy relief to be especially aggressive in Russia--when the Central Bank launched money laundering investigations of several banks in 2006, the head of the CB was shot dead, and the head of one of the banks was convicted of his murder. In terms of finance and legal regulation of debtor-creditor relations, Russia is the final Wild West frontier in more than one way. 

Money Around the World image courtesy of Shutterstock

Comments

[Bob Lawless]

Extremely interesting, Jason. As countries get U.S.-style consumer debt, they eventually get U.S.-style solutions to deal with the problems of overindebtedness. It is not that the U.S. solutions are the best. We were just first movers in creating over-indebtedness problems.

Separating out the "can't" and "won't" pays is always the frame for the debate over a consumer insolvency regime. The debate narrative that gets constructed in each country will reflect local conditions, but I am beginning to think the narrative has certain core elements that are the same no matter where you are.