On Household Over-Indebtedness

The problem of household over-indebtedness in Kazakhstan has recently been discussed intensively at every level, and as the saying goes, "where you stand depends on where you sit." Bankers cite statistics and say that all is well and there is no over-indebtedness; the regulator and the state see risks and try to minimize them; and so on. But every one of these positions has a catch and its own peculiarities of interpretation. I would not look at it this way: the problem of over-indebtedness does exist, but in certain segments, and it needs to be broken down into more precise components. I will not go into the statistics themselves, since I do not have complete data, but I can offer several general, logical observations that deserve attention.

First, people generally take out consumer loans because their incomes are falling, and banks have no direct influence on that. The main role here is played by inflation, which eats away at nominal incomes. Plenty of articles and publications have already been written about inflation, but until we defeat it, simply raising wages for certain groups of the population will not solve the problem, because such a solution will always be one of catching up. Banks and retailers will always be the beneficiaries of inflation, and the gap between the poor and the rich will keep growing. Therefore, to resolve the consumer lending problem through market mechanisms, we need to fight inflation and raise incomes, but only through growth in labor productivity.

Second, most consumer loans do not stimulate domestic production; they stimulate imports. The biggest problem in Kazakhstan is that these days you can buy even toilet paper in installments, while the bank's interest margin is built into the price of the goods and we have no regulation of BNPL (buy now, pay later) at all. Banks, through their marketplaces, strike deals with sellers and embed interest in the price of goods, and it can be very high. For example, a 15% cashback on the price of a product with a one-year installment plan gives the bank an effective interest rate of 30% or more. If the customer falls behind on the repayment schedule, the standard interest rate kicks in as well, the installment plan is converted into a loan, and the effective rate rises above 50%. And if the customer pays off the installment plan early, the effective rate also rises significantly. Interest is not consumer spending, and it sharply reduces purchasing power in the future. So from a macroeconomic standpoint, we need to regulate installment plans and marketplaces so that, through full disclosure of the effective rate, people are given the option of paying in full immediately, but at a discount. Today even people who do not need credit take installment plans, believing it to be a good deal. Without market information about the product, there is some truth in that, but in reality, if consumers were given the choice between buying at a discount and buying in installments with interest built in, solvent people would choose the discount.

Third, simply capping interest rates on consumer loans will only lead to further monopolization of the industry by large players, who build their earnings not into interest but into other income items. A cap on the interest rate alone will therefore have little effect. On the contrary, we need to increase the number of players and give second-tier banks and microfinance organizations access to more information, because greater competition will bring interest rates down.

In other words, to overcome over-indebtedness, we need to fight inflation, raise incomes through growth in labor productivity, regulate BNPL, and increase competition. So far, we have pro-inflationary decisions, an absence of regulation, and shrinking competition. I think that in this way we will not overcome over-indebtedness but only increase it, which may have very different consequences in the future.