Getting Credit Where Credit Is Overdue

When Sergei Devyatovsky bought his first car four years ago, he had to borrow thousands of dollars from friends and family. Then he had to fear getting mugged as he toted his satchel of cash from home to currency exchange offices and finally to the car dealer.

To pay back those he’d borrowed from, he worked overtime every weekend for a year, leaving hardly any time to enjoy the newfound mobility that came with his decade-old Volkswagen Passat.

But Devyatovsky’s recent trade-up was “much more civilized,” says the 31-year-old bachelor, who has acquired, along with his new Fiat Punto, another badge of middle-class arrival: personal debt.

The $7,000 car loan he must pay off in two years at $350 a month is a cutting-edge development in cash-obsessed Russia, where credit is just beginning to emerge on the thriving consumer scene.

Reasons for Skepticism

Russians with goods or services to sell are still deeply distrustful of transactions involving anything but cash, because millions have been burned by the last decade’s bank failures, currency reform fiascoes, credit card forgeries and general flimflam.

Checking accounts are nonexistent here, only the most wealthy have real credit cards, and few people trust banks to even fleetingly handle the cash they keep stashed at home in sock drawers and mattresses.

But as urban incomes rise and big-ticket items such as cars and apartments go unsold for lack of financing, banks and government agencies are trying to clear away the obstacles to consumer credit.

Devyatovsky is one of only a few hundred clients of Moscow’s ProbusinessBank to have taken advantage of the new car loans. But bankers and dealers predict a boom in long-term financing as soon as Russians get used to the alien concept of being in debt.

They also may have to get used to the equally alien concept of paying income taxes.

In its quest to boost revenue by cracking down on tax evasion, the government has proposed legislation that would require buyers of cars, homes, furniture and other items of significant expense to document the source of the funds and prove they paid taxes on that income.

Economists are doubtful that such intrusive methods will actually be introduced to Russia’s fledgling consumer markets, but they note that the convenience of paying off a large purchase over time and avoiding the security pitfalls of cash transactions are likely to lure Russians eventually toward more truthful disclosure of personal income.

“If an individual wants to qualify for credit, he will have to show that he earns enough to pay back the debt, and this should lure people out of the black and gray zones of the economy,” says Valery Shipilov, head of credit technology development for the Assn. of Russian Banks.

State statistics on average income for Russians are grossly unreliable because of the common practice of employers paying workers under the table to avoid payroll taxes and employees hiding those black-market earnings to shirk the income tax.

“Those who would be in the credit market are middle-class Russians who mostly live by ‘gray money,’ and banks don’t recognize illegal income for purposes of extending credit,” says Mikhail Berger, an economic analyst for the daily newspaper Sevodnya.

Berger considers tax dodging the biggest barrier to wider availability of credit, alongside the country’s current liquidity crisis, which makes it far more profitable for banks to lend to the government than to consumers. Because the state must borrow huge sums each month to retire earlier loans that have come due, banks have been able to demand as much as 120% interest on short-term treasury bills. Consumers, on the other hand, tend to put off big purchases when interest rates climb much above 20%.

Lack of ‘Track Record’

Russia’s communist past also continues to hold back the evolution of credit. “The problem now is that no one has any personal credit history, and the banks have nothing to go on in judging a client’s credit-worthiness,” says Andrei Ustinov, director of payment means for Most Bank. “And this absence of a track record occurs against a backdrop of general economic instability and widespread distrust between the population and institutions.”

Another major impediment to credit use is a federal law that prevents seizure of property for nonpayment. That law, which prohibits depriving any Russian citizen of his or her living space, has complicated the creation of a mortgage-lending program because real estate is traditionally used as collateral for long-term loans.

But Moscow city government officials have revoked a similar municipal law and encouraged the federal government to do likewise, giving rise to hopes that “Natasha Mae,” a Russian cousin of the U.S. Federal National Mortgage Assn.--popularly known as Fannie Mae--will be at work here by autumn.

“A lot of things have to happen in a short amount of time and amid rather unstable financial conditions, but with luck this municipal mortgage program should be assuming a massive character by the middle of next year,” says Lyudmila Stebenkova, author of the Moscow City Council bill creating the prototype for Natasha Mae. “The real income of most Muscovites is quite high, and we estimate that at least 100,000 families could qualify for mortgages right away.”

The push in Moscow for mortgage lending is in part accelerated by Mayor Yuri M. Luzhkov’s misguided home-building boom of the last few years.

Encouraged by the brisk sales of new city-built apartments in the first few years of this decade, when pent-up demand from the Soviet era boosted prices to astronomical heights, Luzhkov’s real-estate empire has been grossly overbuilding since 1995. At least a million square yards of housing space--about 15,000 apartments by Moscow’s cramped standards--stand empty in the capital’s outer suburbs because too few residents can afford a 100% cash payment.

Eager to recoup his investments, Luzhkov has been at the forefront of efforts to offer mortgages to home buyers. In January, he forged a deal with Harvard University and U.S. financial institutions, including Fannie Mae, to assist Russia in creating a mortgage agency.

Russian buyers are likely to have to put down at least 30% of the purchase price at the outset, but 10- to 20-year mortgages at 10% interest should be offered within the next few months, Stebenkova says.

Mortgage Concerns

Some banking industry officials say they welcome Luzhkov’s push to provide mortgages but fear that the glut of low-quality housing is destabilizing the market by discouraging builders from initiating new and better construction.

“This doesn’t help develop a mortgage system because prices aren’t relevant to the actual costs, and buyers don’t want these surplus apartments in any case,” says Alexei Grigoriev, board chairman of SBS-Agro bank.

SBS-Agro has already extended four-year mortgages to a few hundred clients, but a lending program aimed at the general public remains hostage to numerous legislative changes and a lowering of Russia’s high and erratic interest rates, Grigoriev says.

ProbusinessBank’s pilot car-loan program began only a year ago and remains an infrequent alternative among consumers. Fewer than 1% of the cars sold in Russia are bought on credit, in contrast with 95% in the United States and other Western countries, says the bank’s credit policy chief, Valery Lukin.

All that stands in the way of a boom in financed car purchases is the psychological hurdle of assuming debt.

Even those whose sales volumes and personal income might benefit from broader use of credit concede that Russians have valid reasons for hesitation.

“People are used to the idea that once they’ve bought something, it’s theirs right away,” says Igor Makovsky, a Subaru dealer whose showroom occupies an otherwise unused hall of Moscow’s cavernous Zvezdny movie theater. “There’s a general attitude that if you don’t have the money for something, you shouldn’t buy it. And maybe that’s the right way of looking at it.”

Insurance and car registration officials also are still feeling their way through the advent of financed car purchases, says Makovsky, whose dealership sells about 40 cars a month but seldom more than three or four on credit.

Only a handful of banks are already engaged in small-scale consumer financing, although all major lending institutions have been investing in computer and capital equipment for an expected boom in credit use in Russia during the next five years.

Economic Upheaval

Economic analysts confirm that banks are eager to develop the promising sphere of consumer lending but that the chaotic reality of Russia’s economy is staunching the flow of credit.

“Even among people with the best of intentions, there can be no real assurances of repayment in such conditions as we have today,” says Shipilov of the banking association. “Inflation could take an unexpected rise, pay can be held up for months even for those with steady jobs; there are just too many places in the economic chain that can break and force the client to default on a loan.”

More prevalent than loans or mortgages are the 5 million or so Visa and MasterCard charge cards in circulation in Russia and accepted at thousands of restaurants, shops and services.

“Merchants love the emergence of credit cards because they get their money within a couple of days and customers tend to buy more when they are paying with plastic cards,” says Most Bank’s Ustinov.

But charge accounts opened through Russian banks are not usually conventional credit cards but debit instruments, explains Yevgeny Platonov of Russia’s Central Bank. Only about 10% of the cards are issued with credit limits that allow the cardholder to pay only a fraction of the debt each month with interest. The majority of Russian cardholders must deposit money into their accounts and use their cards to draw down those funds.

Consumers’ latent mistrust of banks discourages most cardholders from depositing more than a couple hundred dollars at a time into the debit accounts. But bankers expect the convenience of reliable cashless transactions to gradually win back the trust of consumers and lure more of their nest eggs out of the mattress.

While bankers are doubtful that real credit cards will be in widespread use for another two years or more, they have unanimously dismissed introducing checking accounts as an interim step.

“We think paper technology is already outdated and has been effectively replaced by the debit cards,” says Konstantin Gamayunov, credit-card department chief for Rossiysky Kredit Bank.

Cash Payments

For the time being, the absence of checking accounts means consumers like Devyatovsky must pay monthly loan installments in cash.

But with the one-step-at-a-time philosophy prevailing among Moscow’s long-frustrated consumers, the very existence of long-term financing is a welcome advance.

“I could have bought this car the same way I bought the Volkswagen--by going into debt with my friends,” Devyatovsky says. “But the loan means I can maintain my normal lifestyle. I can make the payments and still have money to take out my girlfriend.”