Banks told to come clean on interest rates

From Monday, all Russian banks will have to disclose their effective interest rate for loans. The Central Bank introduced new regulations after it was discovered the actual rate in some banks was twice as much as the declared one.

In recent times, Russians have been shocked to discover that they're paying up to twice what they agreed to pay for loans.

Ten years ago the Russian Standard bank began giving consumer loans in Russia.

That time the amount of money available for consumer loans was relatively small, but the demand very high.  It gave banks the opportunity to sell their products to customers at a very high price.

“One calculation we made at the beginning, perhaps In 2001, was that one of the banks was effectively charging an interest rate of up to 80 %, although advertised rates were only about 50 %,” said Richard Hainsworth, General Director of Rusrating Agency, Moscow.

Since that time a lot of banks, including ones from overseas, have entered the market.  But experts say the situation has barely changed as demand for consumer loans in Russia is still growing at a fast rate.

Banks, for example, can borrow money at an interest rate of 7% – sell it to its clients at 15 % and additionally charge them different commissions that effectively double the rate.

The Central Bank has now told commercial banks to come clean on the true cost of loans, to reveal the interest rate the borrower will actually pay, including all commissions.

“For mortgage and car loans the difference will be insignificant.  It will mainly have an impact on credit cards and consumer loans.  We can expect 10 to 30 % interest rates on different products,” said Viktor Skvortsov, deputy Chairman of Absolutbank.

The new regulations will also change clients’ mentality. Although clients are expected to benefit from the disclosure of the effective rate – the problem is how to calculate it and what commissions to include.

“In order to calculate the effective interest rate, things like the charge for opening a bank account, or a charge for insurance that is paid to another company, have to be taken into consideration.   All of these things complicate the issue, making it difficult for Russian banks to agree on how to calculate the single effective interst rate.   And it will be difficult for the Central Bank to impose an agreed method of calculatinig it on the Russian banks,” said Richard Hainsworth

Financial experts say some commissions and extras will still come as a surprise to clients. They're calling for all extras to be listed in the monthly statements sent to clients, so that the precise amount being paid is clear.

“I think there are two things that are taking place here.  One is that consumers obviously now get to have a choice, get to shop around to make sure they get the most attractive prices for their loan. The second is that it really opens up the doors for competition.  When you are not sure what the pricing is like at the next door bank or if you are not sure of what consumers are getting for free.  It is difficult to be competitive on the pricing side, especially with consumer loans. This actually helps to open up the door for more competition from both Russian banks and from foreign banks looking to expanding products to the consumers in this country,” Aleksandr Kotchoubey, Head of the Investment Committee from Renaissance Investment Management.