Household Over-Indebtedness Cannot Be Measured as a Share of GDP

I have wanted to write about household over-indebtedness for a long time. The debate has been going on for years, and I hear a range of opinions. Naturally, financial institutions will say that we have no over-indebtedness problem, pointing to the ratio of loans to GDP, while the state and troubled borrowers say that we do. Let us take it step by step.

First, measuring over-indebtedness as a share of GDP is wrong, because GDP shows how much a country has earned as a whole, and it consists broadly of profits and wages. The core of our GDP is the mining sector, which generates mostly profits rather than wages. The wage share in our GDP is extremely small compared with developed countries, yet the ability to repay loans depends on the level of pay. Comparing, say, Sweden's and Kazakhstan's indebtedness through GDP is therefore simply incorrect.

Second, over-indebtedness also depends on the type of loans. In developed countries, mortgages and car loans, which are issued for long terms, dominate the loan mix. In our case, these are consumer loans for goods, with much shorter repayment terms. So, for the same volume of debt, the monthly burden will be completely different: a mortgage is repaid over, say, 20 years, while a consumer loan is repaid over 3 years. The monthly payment burden will be 7 times higher.

Third, high loan rates in developing countries also increase the monthly payment burden. If our rate is around 40%, while in developed countries it is around 10%, the effect on the monthly payment is far greater. For example, on a loan of KZT 1 million for 36 months, interest will account for more than 50% of the payment, which means our lending capacity is significantly lower.

Fourth, over-indebtedness should not be looked at across the whole population; we need to look at segments and see for whom the share of loan payments in income exceeds a certain threshold. Nor can we look only at the share of income. For example, with an income of KZT 300 thousand and debt payments of 50% of income, the borrower is left with KZT 150 thousand, whereas someone earning KZT 2 million, at the same debt level, is left with KZT 1 million.

One can live decently on KZT 1 million, whereas it is much harder to live on KZT 150 thousand. This also explains why indebtedness is much higher in developed countries, where incomes are high: people there can afford to put even 70% of their income toward loan repayment.

We should therefore compare the share of income going toward debt service after deducting the subsistence minimum.

So, a large part of our population really is over-indebted, but the problem cannot be solved by bans and restrictions, because most people borrow not out of a comfortable life but out of desperation. If regulated financial institutions do not lend to them, unregulated black-market and grey-market loan sharks will.

The main cause of over-indebtedness lies in low household incomes, inflation and the lack of competition. And all of this is the result of misguided economic policy in recent years.

For example, inflation in recent years has severely eroded household incomes: incomes have grown, but not for everyone, and income inequality has increased, even though on average everything seems fine. High inflation was the result of a number of government programs that drove up inflation inside the country: preferential mortgage programs, the handout of pension savings, preferential car loans, the forgiveness of consumer loans, growth in unproductive government spending out of proportion to the growth of the economy and labor productivity, and so on.

High inflation has led to high interest rates for both businesses and households. Yet high rates for households are also the result of weak competition in this sector, as well as of high risks stemming from government policy that constantly protects troubled borrowers. Every unpaid loan lands on the shoulders of a good borrower in the form of a higher rate.

In addition, the installment and marketplace segment is insufficiently regulated: when people buy in installments, they do not always understand the financial side of the purchase. That is a separate topic that requires more careful analysis.

Therefore, to solve the problem of over-indebtedness, we must, first, address the real incomes of the population, which have fallen as a result of inflation in recent years. Second, we must fight inflation and end all these preferential lending programs, which benefit only those who can obtain a preferential loan, while making goods unaffordable for everyone else because those very preferences push up their prices.

Third, we must increase competition by lowering the entry requirements for other players in the financial market. For example, we should introduce separate requirements for niche banks and neobanks in order to lower their barriers to market entry, which would increase competition and reduce banks' margins, which affect loan interest rates.

Fourth, we must tighten requirements for troubled borrowers in order to reduce risks in the industry and thereby lower rates.

I would also recommend replacing the debt burden ratio (DBR) with a minimum deductible subsistence income, which should not be counted when loans are issued. This should not apply to credit cards with a small limit, but for all other loans only amounts above KZT 200 thousand, for example, should be recognized as income for lending purposes.