Credit Where Credit Is Due

In the short time that I have been in Russia, I have been blessed with students who gave me interesting glimpses into many parts of Russian society. From Volodya, I learned quite a bit about the Russian legal system. Another class described for me "Soviet-style management" in state enterprises and their successor privately-held companies. And from Gulia, I am learning quite a bit about the Russian banking system.

Gulia and I got into a discussion about Russian and American banking practices tonight after she asked me what I understood about the current economic crisis. While I did not attempt to explain to her the intricacies of mortgage-backed securities or credit default swaps, I did tell her my overall impression of what has causes this mess--namely, total recklessness on the part of the banks. To try to make clear to her what had happened, I asked her how one goes about getting a credit card in Russia. What she had to say was surprising.

First, it would seem, Russians are not inundated, as Americans are, by a never-ending stream of credit card solicitations. The would-be credit card holder has to request a card from a bank (often in person, but increasingly an application can be filled out online). The bank will then obtain what information it can about the person's income and creditworthiness. Within the last three years, this step has become somewhat easier, because credit bureaus on the American model have been established in Russia. Prior to that time, however, the banks had to request information directly from other banks.

According to Gulia, the retail (consumer) credit market in Russia has been, until recently, a rather small business. In fact, lending to nearly everything except the government, large businesses, and quasi-private enterprises like Gazprom and Lukoil (Russia's largest natural gas and oil producers, respectively, in which the government has more than a 70% stake), is small potatoes in the credit market. But the ersatz wealth Russia acquired through rising oil prices the last few years has caused this market to expand.

Gulia's job within her bank is to assess the riskiness of would-be retail loans and lenders. From what I gathered, the president of her bank, to whom she reports, actually listens to her. And what she tells him, at the moment, is to be cautious. Recently, for instance, she recommended that her bank stop giving credit cards to people under age 24. Her recomendation was based on statistical analysis showing that 80 percent of university students who were granted credit cards defaulted on them at some point.

But the really shocking thing is, the bank actually listened to her. As a result, one of the largest banks in Russia no longer lets university students obtain credit cards, with or without a co-signer.

I cannot imagine any bank making a similar decision in America. Or at least, I couldn't imagine it until the current financial crisis hit. I told Gulia my own story of getting my first credit card: at the tender age of eighteen, I applied for one with a vendor on my college campus who was giving out free t-shirts. Gulia was aghast that American banks would give out credit so freely.

The strange thing is: I am too.

In banking, as in many other things, then, Russia seems a land frozen in time as well as in temperature. Once upon a time in America, we used to joke that a bank was a place that would give you a loan if you could prove you didn't need it. Now, we see to give credit to anyone and everyone, whether they have any real chance of repaying or not. We've let cashiers at Home Depot get mortages to buy $500,000 houses. We raise spending limits, so that people who have maxed out their cards can keep right on charging. And when they're done, we let them consolidate their debts as "home equity loans" ("second mortgage sounds so passe) and charge even more.

But in Russia, it would seem, the banks only give credit where credit is due.