Individual bankruptcy law aims to reduce bad debts

Consumer credit has been growing in Russia, but bad debts have been growing at twice the rate. With a boom in the retail sector, banks’ retail loans portfolios doubled last year and show no sign of slowing. Officials say while consumer credit grew 5 perce

However, statistics suggest Russians are more responsible when it comes to paying their mortgages. Bad debts account only for one percent of the whole credit portfolio.

The figure rises when it comes to car loans and credit cards, but the percentage of bad debts is highest in express loans, which is the most risky type of credit.

The express loan service arrived in Russia six years ago and was designed to encourage people to buy more expensive products and make so-called unplanned purchases.

Analysts say most people do not think about interest rates when they take out such loans. Defaulters usually fail to pay their debts because they're having temporary financial difficulties or simply forget. However, some people take out express loans with no intention of repaying. They do so because they do not think banks will bother taking them to court for just 400 dollars.

The growing popularity of consumer credit has prompted the government to draft a new law on individual bankruptcy. It will regulate relations between banks and borrowers and establish legal procedures for banks and collection agencies to recover debts. According to the draft law, the bank will be able to initiate legal proceedings on bankruptcy if the client falls into arrears of more than four hundred dollars over 3 months. The debtor will have up to five years to repay the money. Otherwise, the debtor will be declared bankrupt and all his possessions except for his home may be sold to pay creditors. Debt collection agencies say the new law will benefit both sides. It will introduce clear bankruptcy regulations and lower banks risks. Moreover, it will protect borrowers, while providing a means of recovery for debtors.