Hundreds of percent per year: NBU requires microfinance companies to transparently disclose loan information

The financial regulator has set detailed requirements for disclosing information about microloans.

The National Bank of Ukraine has approved requirements for non-bank microfinance institutions to disclose full information about consumer credit services and the full cost of the loan for the consumer. 

They apply to lenders' websites, the dissemination of information in advertising, informing borrowers while a loan is in use, and the specifics of disclosing information about microloans. 

Three months after the new rules take effect, all non-bank financial institutions authorized to provide consumer loans must publish full information about their services on their websites in a single standardized format. 

Consumers, in turn, must be able to download a file with comprehensive information on the full cost, the terms of obtaining the service, the consequences of breaching the loan agreement, and so on.  

Within six months, websites of all non-bank financial institutions must feature loan calculators showing the costs of the loan based on the terms chosen by the consumer.  

The websites of financial institutions must contain sufficiently comprehensive and reliable information on the terms of consumer loans, namely:

• the total cost of the loan including all fees and payments (including fees of third parties and payments for ancillary services, such as those of an insurance company, state registrar, notary, or appraiser);
• the real annual interest rate;
  
• terms and amounts;
  
• conditions for early repayment;
  
• penalties for breaching the lending terms, and so on. 
  

Already at the stage of choosing a loan, the consumer must be able to obtain full and clear information from a financial institution's website in order to compare it with a similar credit product from another financial institution or bank. 

Therefore, within just three months, the websites of financial institutions must contain a clear list of the minimum information the consumer needs. 

In particular, while a loan is in use, financial institutions must inform the consumer through a communication channel agreed with them, for example via SMS notifications, a messenger, or the client's personal account on the financial institution's website.

Advertising of loans by financial institutions must not mislead consumers. For example, indicating only an interest rate that is attractive to consumers, such as 0% or 0.01%, for the first days after receiving a loan is not permitted.

Advertising for a consumer loan must state the real annual interest rate (which usually exceeds several hundred percent per year), the maximum amount, and the loan term. 

These requirements do not apply to brand image advertising of financial institutions that does not specify the terms of particular credit products. 

In addition, the way information is presented in advertising must not make it harder to perceive visually, so requirements are proposed for fonts, the color of advertising text and its background, placement, and so on. 

Similar requirements already apply to banks providing consumer lending services. The resolution takes effect on October 8, 2021.

Why this matters

The microloan sector in Ukraine is known for its lack of scruples. Loans are often issued online without identity verification. As a result, fraudsters who obtain third parties' data take out loans in the names of strangers.

Also, such companies, of which many have appeared in recent years, profit from people's financial illiteracy. Interest terms in the contract are usually written in small print or in a veiled form, while only the attractive terms of the grace period are put up front.

Meanwhile, the loan is structured so that after a short grace period the principal begins to accumulate huge interest, changing the amount owed significantly every day. As a result, interest rates sometimes reach 1000% per year. 

And for failing to meet payment obligations, the borrower faces a harsh debt-collection system based on intimidation, blackmail, and threats against relatives and friends. The terror against loved ones continues even in the event of the borrower's death.