The Bank of Russia suggests changing the structure of the microfinance market over the next three years by splitting up business and target financing into separate segments. Entities offering the most expensive microloans at over 100% per annum will retain the status of microfinance organizations. The prudential ratios are planned to be reviewed for each category of the organizations.
Today, one of the problems hindering the development of microfinance is still low confidence in this market. This is also true for entities financing entrepreneurs, offering POS microloans and installment plans, and not creating elevated social risks. To the contrary, they promote the supply of goods and services with interest rates being moderate.
Major changes will be in the market of the most expensive consumer microloans. Currently, a considerable proportion of such microloans are issued at the highest possible interest rate regardless of the microloan type and a borrower’s creditworthiness. Nearly a third of such microloans are restructured, while unpaid interest is included in the principal of a new microloan. As a result, people fall into a debt spiral.
The Bank of Russia proposes limiting the number of concurrently effective agreements to one microloan until repayment. The regulator also plans to introduce a cooling-off period between the dates of signing microloan agreements — at least three calendar days. The Bank of Russia will also reduce the maximum amount of overpayment on a microloan from 130% to 100% of the principal.
All these measures will help make microloans more affordable for people and businesses, protect individuals against an uncontrollable rise in outstanding debt, and enhance confidence in market participants.
Please send your comments and suggestions regarding the issues of the microfinance market development brought up in the paper through 20 September 2024.
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