OREANDA-NEWS. The interest-rate caps for Russian retail loans issued after January 2015 will be negative for consumer finance banks in the long term, although the immediate effect on margins is likely to be limited, Fitch Ratings says. As the rate caps become progressively more of a constraint, pressure on already weak profitability could force the specialised retail banks to alter their business models.

The immediate effect of the rate caps is likely to be muted because many banks have already reduced their issuance of expensive loans following the introduction of prohibitive risk weights on high-margin unsecured loans in 2013. Also, the new caps only apply to originations from 2015, so it will take time to hit margins as the back book is likely to reprice slowly given sluggish growth and more cautious underwriting.

In the long term, credit card lenders are likely to be most affected since they have a large proportion of very high margin loans that are above the 35% maximum all-in-interest rate (APR) allowed under the new rules. Among the banks Fitch rate, the level of loans issued above this cap is particularly high at Tinkoff (47% of September issuance) and Russian Standard (53% based on latest available January data). The actual APR cap will depend on the credit card limit and ranges from 30% to 35%, excluding premium cards (not a typical consumer finance product).

Banks focused on general purpose retail loans have a lower share of high-margin loans, so appear less vulnerable to the new cap. Fitch estimate Home Credit & Finance and Orient Express originated a modest 18% of loans with APRs above 35% in September, while Sovcombank only had 14%. These levels should be manageable, especially since the cap will range from 29% to 47% for general purpose retail loans, depending on size and tenor.

Point-of-sales loans (instalment loans made at retail shops) have higher maximum rates of 43%-55% for loans less than RUB30,000 (USD639). For loans between RUB30,000 and RUB100,000 the rates vary from 37%-42%. OTP bank, which focuses on smaller-ticket POS lending, had 19% of new loans issued above a 45% rate in September.

Banks could adapt their business models to offset some of the margin squeeze by focusing on smaller loans, where APRs can be higher. Credit card lenders usually increase limits gradually and Fitch believe in such cases, the maximum rate the banks can charge will depend only on the smaller initial limit. Banks could also provide general purpose cash loans in tranches, so that the maximum APR for each tranche is higher.

Nevertheless, the rate caps are another constraint for specialised retail lenders in Russia, and some may need to adjust their business models by focusing on lower-risk, lower-return clients, or they could also shift some lending to their less-regulated captive microfinance companies. The sector faces strong pressure on asset quality, profitability and (in some cases) capital from increased consumer leverage, seasoning loan books, a weaker economy and greater regulatory scrutiny, so the sector outlook is negative.

The Central Bank of Russia announced the maximum APRs allowed for retail loans on 14 November. The rate caps vary depending on loan type, size and tenor and are set at 30% above average market rates. Maximum allowed rates will be updated each quarter.