On Cutting the Interest Rate Caps on Loans
Translated from Russian with the help of AI. Original: Russian version
On the proposed reduction of interest rate caps on consumer loans and household over-indebtedness; the problem of unregulated instalment plans and the hidden rates in BNPL.
An initiative has been put forward to lower the interest rate caps on consumer loans, which, in the regulator's view, should help reduce household over-indebtedness. It will help in part, but it will not radically improve the picture, for a number of reasons I have written about many times before.
The problem of household over-indebtedness in Kazakhstan lies in the low incomes of certain segments of the population. Even if we lower the rate caps, these people will take out loans anyway.
It seems to me that, apart from the high rates on conventional loans, instalment plans are not regulated at all, and in them the effective interest rate can easily be hidden in commission income. Admittedly, with leverage, many more people will buy the goods. Many buyers also assume that the price is the same with or without an instalment plan, so they take one even when they could avoid the debt burden and keep their spending down. But this is a purely nominal saving, because the consumer will pay the interest anyway, through the markup on the goods.
For example, if a seller pays a 15% commission on a six-month instalment plan, the effective rate is 60% per annum, which is clearly above 46%.
In this respect, it would be logical to give buyers the chance to avoid paying the markup that sellers pay to the bank when they pay without credit. For instance, if payment is made without a loan, the seller should be required to offer a discount of 10–15%. BNPL should also be required to calculate the effective interest rate. But then this business model would become wholly unprofitable for the large banks that earn money on BNPL.
There is one more point I find entirely baffling: why were the rate caps not tied to the base rate? After all, no one can rule out hyperinflation or, conversely, very low inflation, either of which would make the current caps irrelevant and force yet another review. For example, if inflation reaches 30% or more and the National Bank sets the base rate at, say, 40%, a cap of 46% would simply make lending impossible. Or, conversely, if inflation falls to 5% and the base rate to 7%, the current caps would look perfectly proportionate, as they did when the base rate stood at 16.75%.