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. Last Updated: 07/27/2016

State Duma Moves to Regulate Pawnshops

Need cash fast? A bank loan may be the first thing that comes to mind, but for many people banks are not an option.

People who are working in this country illegally, as well as those who receive all or part of their income under the table, have little access to the banking system. For others, a small income makes them nearly invisible to the banks.

"A huge number of people still don't have access to banks," said Natalya Orlova, an analyst with Alfa Bank.

This is where pawnbrokers come in.

Some 3,000 pawnshops nationwide make around 500,000 small loans each year, some charging upwards of 100 percent in annual interest, according to Nikolai Bobrov, president of the St. Petersburg-based Transregional Association of Pawnbrokers.

These kind of numbers have caught the interest of the State Duma, which is expected to take up a new law on pawnbroking this fall in an attempt to tighten regulation of the industry and to promote the image of pawnshops as legitimate lending institutions.

That may take some doing, since pawnshops are often perceived as shady lenders of last resort.

Bobrov, who is also chairman of the board of Obyedinyonny Lombard, or United Pawnbrokers, a chain of pawnshops in St. Petersburg and Moscow, paints a rather stark picture of his industry's clientele.

"In the center of Moscow, everyone wants the beautiful life -- expensive cars and nice clothes. But go take a look at how people live in Tekstilshchiki," he said, referring to a working-class district in southwest Moscow.

People who live in areas like Tekstilshchiki often have to pawn their wedding rings to get money for groceries and to tide them over until payday, Bobrov said.

The volume of retail loans given by the country's banks is expected to reach $80 billion by the end of this year, Alfa's Orlova said. Yet some small towns and villages have no banks, and when banks are available, many people cannot make use of their services.

Low-income applicants, such as pensioners, often find it difficult to obtain a bank loan, Orlova said. The average pensioner receives just 3,100 rubles ($116) per month. The average monthly wage in September, the last month for which figures are available, was 11,070 rubles ($414), according to the Federal Statistics Service.

Applicants whose incomes cannot be verified are also routinely turned down, Orlova said.

While it is on the wane, under-the-table salaries are generally considered to account for roughly one-fifth of all earned income.

Given the transaction costs and the risks, Orlova said, it is more profitable for banks to give a single large loan to one dependable customer than to provide smaller loans to a number of borrowers.

Such low-income borrowers are the pawnbroker's bread and butter.

"What's a pawnbroker? It's the best barometer of our life," said Svetlana Limberova, deputy general director of Mosgorlombard, a city-run pawnshop on Ulitsa Bolshaya Dmitrovka.

Limberova's shop first opened its doors in 1905 and operated throughout the Soviet era.

Apart from friends and family, state-run pawnshops were the only legal place to get a loan in the Soviet Union.

In the 1990s, soldiers and professionals frequented pawnshops as wage delays and runaway inflation left them in need of ready cash, Limberova said. Tragedies and other dire situations, such as emergency surgery, still send people to pawnshops, of course, but on the whole, Mosgorlombard's clients seem more cheerful these days, she said.

"People are feistier today, more willing to join the rat race and to borrow, [so as] not to miss a good opportunity," she said, adjusting the dragonfly brooch on her sweater.

At a monthly interest rate of 6 percent, some people pawn their cars to raise startup capital for small business ventures.

Others use the shop to store furs or electronics when going on vacation, Limberova said, while also borrowing extra cash for the trip.

With the exception of state-run pawnshops, most accept only gold and diamond jewelry as collateral because it is cheaper to appraise and store.

"Given today's real estate prices, storing anything that's larger than an ashtray for more than a day makes no financial sense," Bobrov said.

Alexander Dyomin, a staffer on the State Duma's Credit Organizations and Financial Markets Committee, said the proposed law on pawnbroking was intended to protect the rights of people who pawn their valuables.

Pawnshops are currently regulated by the Civil Code, which spells out their right to lend money in exchange for collateral.

The Code also refers to the law on pawnbroking, which has yet to be passed. This creates confusion, Dyomin said.

The proposed law imposes a ceiling of 180 days on pawnbrokers' loans, and it requires pawnbrokers to notify defaulting clients in writing before they simply put their pledges up for sale.

The bill also protects clients from fraud by requiring pawnshops to pay clients the difference between the appraisal value of pledges and the sale price, if the sale price is higher.

The law will lend credibility to pawnshops by emphasizing their role as financial institutions, pawnbrokers said.

Pawnbrokers in this country are still thought of as "tattooed men sitting in metal kiosks and dangling gold rings from their pinkies," Bobrov said.

But pawnbrokers expressed concern that some of the law's provisions could make giving small loans unprofitable.

A pawnbroker's typical loan is less than 1,000 rubles ($37), Bobrov said. "The Bangladeshi banker [Mohammed Yunus] just got a Nobel Prize for making small loans," he said.

The law also retains a current requirement for pawnbrokers to notarize all documents involved in transactions.

Notaries' fees, plus the cost of paper and printing, exceeded the value of the transactions themselves in the case of very small loans, meaning that loans under 100 rubles would be discontinued, Bobrov said.

Limberova said legislators should consult with pawnbrokers before proposing wide-ranging regulations that might very well need to be amended in the future.

The contentious provisions requiring written notices and notarized slips would most likely remain in the final version of the bill, Dyomin said. "These requirements are essential to enforcing private property rights and protecting the clients of pawnshops," he said.