Payday loan interest rates going down: microfinance market trends
The Bank of Russia continues to assess how the amendments to laws effective since January 2019 have been influencing the microfinance market. A lower daily interest rate on payday loans has become the most important aspect of the new regulation. Payday loans are the most expensive category of borrowings. The interest rate on such loans equalled 1.5% per day at the end of January, and since July it has decreased to 1% per day.
As a result of the implemented limitations, payday lenders’ proceeds reduced by 7% over 2019 H1, according to the 2019 Q2 Microfinance Market Trends, an information and analytical commentary prepared by the Bank of Russia's Microfinance Market Department. The recorded trends show that well-established companies planning to continue their business have been gradually exiting the payday lending segment, diversifying their portfolios and developing
The remaining MFOs in this segment have been focusing their efforts on the improvement of digital channels: 58 companies grant a larger total amount of loans online than 557 MFOs operating solely through physical offices. The migration of payday lending to the digital environment is a positive trend — it results in a smaller number of microloan disbursement offices in public places and decreases the probability of individuals making spontaneous decisions to take out a loan.
In addition, the microfinance market showed positive dynamics again in 2019 Q2: both the portfolio and total disbursements increased by more than 9% during the quarter. Moreover, the segment of lending to small and medium businesses demonstrated substantial growth for the first time in a long period (+33% by total disbursements).
The next stage of the restrictions will commence in January 2020. In anticipation of this, microfinance market players are actively building up their client base, according to the analytical commentary.
Yet, overdue loans also resumed their upward trend (+2.2 pp over the quarter). According to the regulator, businesses should perceive this as a sign that they should review their strategy for market capture at the expense of portfolio quality and their long-term presence in the market.
After 9 stable months, the number of MFOs in the Bank of Russia's register continued to decline in the second quarter: 160 companies exited the market (whether voluntarily, or due to violations), and 121 firms were put on the register. Although regulation is getting tighter, this segment of the financial market remains attractive for new participants, provided they have clear business planning, diversified business models and up-to-date risk assessment approaches.
After the legal restrictions became effective, the regulator recorded that more clients submitted complaints about MFOs exceeding the established limits. However, the investigation revealed that most of those complaints were related to loans granted before the effective date of the amendments to the legislation, and the new restrictions are therefore not applicable to them.