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. Last Updated: 07/27/2016

A New Approach to Consumer Lending

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The relationship between borrowers and credit organizations has captured the attention of the government, the general public and the mass media. This is due to the sharp growth in consumer-credit lending and the subsequent conflicts between financial institutions and their customers.

At some point, the dispute between individual lenders and borrowers risks growing into a larger confrontation of "banks vs. society." Willingly or unwillingly, the Central Bank and the Prosecutor General's Office have assumed the role of arbitrators in this argument.

Russian banks have experienced amazing growth and success in the booming consumer-lending market. It is a well-known fact, however, that many banks have employed somewhat controversial practices in their lending policies, although they do not violate Russian law. In the absence of national rules and standards regulating consumer credit, creditors have a great deal of freedom to create their own terms -- fines, additional commissions, the ability to make unilateral changes to the contract, and so on. In the bank-consumer equation, banks have the clear advantage.

The boom in consumer credit has brought to light several important issues for society. First, existing laws have not adequately protected the interests of borrowers. Neither the current Civil Code nor special laws and consumer safeguards have been able to fulfill this task. In addition, the responsible regulatory agencies -- the Federal Consumer Protection Service and the Central Bank -- have not developed general standards and protections to meet the needs of the consumer-credit market.

Bankers, more than anyone else, have a strong, vested interest in dispelling misunderstandings about the banking process among the general population. Banks are not interested in the short-term gains of taking advantage of inexperienced bank clients. On the contrary, banks would like to see the formation a long-term consumer-lending market composed of diversified, sophisticated and active borrowers.

Russians currently lack access to adequate and unbiased information that would allow them to fully understand the issues related to their personal finances. The result is that consumers experience serious difficulties in choosing among banking services for insurance, mortgages, consumer credit and deposits, and they have only the most superficial understanding of their tax obligations and pension rights.

For this reason, most Russians are still quite distrustful and cynical toward banks, specifically, and the financial sector, in general. From the other side of the conflict, lenders are disappointed in borrowers' lack of knowledge of consumer lending and disturbed by their sometimes irresponsible attitude toward repaying their debts.

The most acute financial literacy problem is in the sphere of consumer lending. This subject remains something of an unknown for a significant percentage of the population, who only recently felt comfortable with the idea of "living in debt." Experience has shown that individuals who want to obtain credit have not always been capable of understanding the subtleties of consumer-credit terms and conditions. At the same time, the fact that general legal provisions for credit contracts exist and are in force has not guaranteed full regulation of the consumer credit market.

The Association of Regional Banks has responded to the situation by developing concrete projects aimed at meeting the needs of government, business and consumers. We are beginning a large-scale venture called "The Financial Alphabet," which is a mass media project involving the Internet, television, outdoor advertising and print media. One of its goals will be to inform young people about the features of new financial services such as bank cards and consumer credit.

The working group of the association includes representatives from the 20 of the most active banks, and it has developed a draft of a new consumer-credit law. The law would introduce for the first time an understanding of effective annual percentage rates, collecting practices for overdue loans, credit brokers and credit cards. At the same time, changes are being made to the law regarding advertising, the Civil and Criminal codes and banking legislation.

In addition, the bill will expand borrowers' right to receive more accurate and clearer information on the real costs of credit services. It will also regulate the terms by which banks may refuse credit to a consumer. At the same time, the legislation includes provisions protecting and guaranteeing the right of lenders in the event borrowers fail to uphold the terms of the loan contract.

Moreover, the law is designed to limit unfair practices on the credit market while preserving the balance between the interests of the lender and the borrower. The law will list all types of fees that the lender may establish, including fines and commissions. It sets out the rights of lenders when providing ancillary services, while making clear that such services cannot be made obligatory or otherwise forced on the client. The right of creditors to freely choose insurance companies is also strengthened.

Regulatory practices are significantly broadened for situations when borrowers do not fulfill their obligations. Lenders are given the right to create a credit history of borrowers, even without their permission. Rules for regulating the operations of collection agencies and credit brokers are also provided.

In accordance with worldwide practice, the legislation contains detailed regulations on the use of advertisements during the signing of the consumer loan contract. Moreover, information concerning the issuance, use and repayment of loans must be provided in writing. The law also provides the consumer with two basic rights: the right to cancel a loan contract within 14 days after receipt of credit and the right to make early repayment of the debt.

This consumer-lending law is necessary for both banks and borrowers. The banking community and the entire financial sector is now ready to declare its priorities and articulate its vision of future prospects.

Russian banks have reaped large dividends from the growth in consumer lending in the last five years. On the other hand, certain clouds have gathered over the consumer-lending market: the rate of growth in consumer credit has dropped from 100 percent to 60 percent annually, interest margins have dropped by almost 50 percent, operating expenses have risen and monetary liquidity has decreased.

It is now time to think of new approaches and new ways to increase the effectiveness of the financial system. This will be possible only when all three of the interested parties -- bankers, society and the government -- begin to trust one another more.

Oleg Ivanov is vice president of the Association of Regional Bankers and adviser to the State Duma Committee on Credit Organizations and Financial Markets.