Credit Overheating in Russia: What It Is and How It Threatens Companies and Citizens

Credit Overheating in Russia: What It Is and Its Implications for Companies and Citizens' Economies

What is Credit Overheating?

Credit overheating is a situation where the growth rates of lending begin to significantly exceed sustainable indicators of the economy. As a result, companies and individuals start to take out loans actively, often under less favorable conditions, without considering future risks and the possibility of servicing debts. This process creates increased pressure on the country's financial system and raises the likelihood of a financial crisis if companies or citizens fail to meet their debt obligations on time.

Credit Overheating and the Current Situation in Russia

Currently, the Central Bank of Russia is observing signs of credit overheating in the corporate lending market. As reported by the head of the department at the Central Bank, annual growth rates of loans in this sector remain high, exceeding 20%. This indicates that many companies are taking out loans despite the high key interest rate and the associated increase in borrowing costs. However, the central bank emphasizes that we have not yet reached a credit bubble, as measures have been implemented to curtail further growth.

Why Is This Happening?

1. High Interest Rates: The Central Bank raises the key interest rate, making borrowing more expensive. Nevertheless, a significant portion of companies continues to take loans, indicating a reduced sensitivity of businesses to interest rates.

2. Increasing Debt Burden on Companies: Many enterprises rely on credit resources to maintain working capital and expand their businesses. In the context of sanctions and limited access to foreign financing, the Russian lending market remains one of the few pillars for companies.

3. Inflationary Expectations: High inflation risks and rising prices for essential goods compel companies to strive for expansion and investments, including through borrowed funds.

Why Is Credit Overheating Dangerous?

Credit overheating increases the likelihood of financial crises. This situation can lead to a credit bubble— a state where the volume of debt exceeds that which can sustainably be serviced. If the economy encounters further difficulties, companies may become unable to service their loans. This, in turn, can trigger a chain reaction: increased defaults, liquidity shortages in banks, and a decrease in business activity.

For the population, the consequences may include slowed wage growth and job cuts in companies with high debt burdens.

Central Bank Measures and Their Importance

To prevent a credit bubble, the Central Bank of Russia is taking measures to control corporate lending. Here are the key steps:

• Raising the Key Interest Rate: This acts as a deterrent aimed at limiting lending activity by increasing loan costs. However, against a backdrop of high inflationary expectations, companies continue to borrow despite the interest rates.

• Reserve Requirements for Banks: The Central Bank may require banks to create additional reserves in case borrowers fail to meet their obligations. This provides a form of protection for the banking system in the face of rising credit risks.

• Monitoring Debt Burden Indicators: The Central Bank monitors the level of debt burden on companies and is ready to act quickly to limit the growth of lending if overheating reaches a critical level.

How Can Companies Protect Themselves from Credit Overheating Risks?

• Reducing Dependence on Borrowed Funds: It is important to optimize internal processes, enhance efficiency, and minimize expenses.

• Reassessing Investment Projects: In an environment of high interest rates, companies should consider the current economic situation when making decisions about large investments to avoid excessive debt burdens.

• Establishing a Financial Cushion: To enhance business resilience, it is essential to ensure funds are available for servicing short-term obligations even under adverse conditions.