Unilateral increase in interest rate for loan agreements in Russia

31.05.2016

Until recently, banks in Russia were allowed to unilaterally increase interest rates for loan agreements concluded both with legal entities (corporate loans) and private individuals as borrowers (consumer loans). In most cases, the consumer loan agreements included provisions which allowed the banks (acting as lenders) to increase interest rates unilaterally[1]. During the credit crunch in Russia (2008 –2009), many banks increased their interest rates on consumer loans. In these cases, the lenders mostly posted notifications on their websites and at branches, and only rarely notified borrowers by text message[2].

 

Amendment of terms for consumer loans

The consumer boom in Russia in the 2000s continued and led to a significant increase in consumer loan portfolios. The issue of banks unilaterally increasing the interest rates on consumer loans required state regulation. Although there were no restrictions on increasing the interest rates on consumer loans, borrowers attempted to challenge such decisions by the lenders as being contrary to consumer protection rules[3]. The Federal Service for Supervision of Consumer Rights Protection and Human Welfare (Rospotrebnadzor) actively protected private individuals who took out consumer loans from banks and also interpreted court practice[4].

In 2010, Article 29 of the Federal Law No. 395-1 On Banks and Banking Activity dated 2 December 1990 was amended by adding a clause prohibiting banks from unilaterally increasing interest rates and/or the mechanism for calculating interest rates on consumer loans. However, it is still permissible to make unilateral changes leading to a decrease in interest rates on consumer loans[5]. Later, the Presidium of the Highest Arbitrazh Court RF (“VAS”) clarified that it is legitimate to specify the default interest (which is higher than the standard interest rate or charged in addition to the standard interest rate) on consumer loan agreements, because default interest is considered to be the borrower’s liability for the violation of payment obligations[6]. A lender is also entitled to increase the interest rate on consumer loans with a floating interest rate[7]. A floating interest rate is allowed under federal law and also cited by some authors as an example of when an interest rate increase is allowed[8]. However, the law requires the lender using the floating interest rate to include the calculation mechanism in the loan agreement. Such a mechanism must include a variable, which must be calculated on the basis of circumstances beyond the lender’s control and must be regularly disclosed in publicly available sources of information[9].

In other cases, when a lender offers less profitable (worse) loan terms to a borrower if the latter refuses to enter into an insurance agreement, such actions by the lender are deemed illegal[10]. However, the insurance provisions in the loan agreement are not illegal per se from a consumer protection perspective if the borrower was able to enter into the loan agreement with the credit institute without buying the insurance policy[11].

The issue of unilateral increases in interest rates on consumer loans has therefore finally been settled in law. The mechanism for the increase and permitted exceptions have been specified in court practice.

 

Amendment of terms for corporate loans

There are no statutory restrictions on unilaterally increasing the interest rate on corporate loans. In practice, the general principles of abuse of rights, bona fide and reasonable behaviour[12] were used even a decade ago[13] to limit the lender’s freedom and the lender’s right to unilaterally increase the interest rate for loan agreements. This approach was later reconfirmed by VAS in further court decisions[14].

In December 2014, after an increase in the base rate by the Central Bank of Russia (from 10.5% to 17% p.a.), the banks also increased interest rates on corporate loans (for large corporates from 14-16% p.a. to 30% p.a. and for small and mid-size corporates from 12-16% p.a. to 25-35% p.a.). In practice, corporate borrowers attempted to challenge the rise in interest rates, but even though the number of lawsuits increased significantly (320 lawsuits in 2014 versus 130 lawsuits in 2013), the borrower’s lawsuits only succeeded in about 30% of cases, according to data from the Supreme Court of the Russian Federation[15].

In 2014, a draft law No. 6841310-6 was proposed by a group of State Duma (Russian Parliament) members. According to the draft law, lenders were not allowed to change interest rates on corporate loans unilaterally unless otherwise specified by the applicable law. However, the government of the Russian Federation gave the State Duma negative feedback on the aforementioned draft, because Article 310 Civil Code (“CCRF”) allows unilateral changes in the terms and conditions of contracts concluded between entrepreneurs. Also, the government emphasised that corporate borrowers were entitled to use the mechanism of court proceedings if they consider that their rights have been violated by an unjustified and significant increase in interest rates on corporate loans. As the result, the draft law was subsequently rejected in January 2016.

Since it is permissible to increase interest rates on corporate loans, the conditions and procedures for amending loan conditions must be explained and clarified in court practice. A bank must act reasonably and in good faith when increasing interest rates on corporate loans[16]. The increase in the interest rate must be justified, i.e. the bank must have contractual reasons for unilaterally increasing the interest rate on a corporate loan[17].

In practice there are some cases in which a unilateral increase in the interest rate by a creditor has been considered justified: an increase in refinancing or REPO rates of the Central Bank of Russia[18], failure to perform or overdue performance of obligations by a borrower[19], changes in the loan market environment[20], or changes to market conditions on the financial markets which have led to an increase in rates on the interbank market[21].

At the same time, the creditor bank is not allowed to increase interest rates if this has not been agreed in the loan agreement. Even if the creditor has such a right under the loan agreement, the creditor is not entitled to impose unreasonable restrictions on the borrower or specify unjustified conditions for the assertion of the borrower’s rights[22].

In practice, the courts consider that an increase in the interest rate on a loan is unjustified if such an increase is based only on the amendment of the refinancing rate published by the Central Bank of Russia[23]. In certain cases, the courts may also rule that the loan agreement must include a mechanism for calculating an increase in the interest rate and the maximum interest rate. Otherwise the borrower would not be able to forecast losses and plan its business activity, and at the same time the creditor would receive unjust enrichment by receiving more from the borrower than the creditor expected to receive on the signing date of the loan agreement[24].

If the creditor increases the interest rate, the borrower must have a reasonable period for early repayment of the loan if the borrower does not agree with the new loan conditions. In practice, the period of two days after notification is deemed unreasonable[25], enslaving and void[26]. However, it is still unclear what period is deemed reasonable for the early repayment of the loan if the interest rate is increased. In certain cases, a period of five days for early repayment has not been challenged as unreasonable[27].

It is also unclear whether it is necessary to specify a maximum interest rate or interest rate corridor in the loan agreement. While in some cases the courts consider that the absence of such provisions does not contradict the existing law[28], other courts have ruled that banks must specify the limits of any increase (maximum interest rate) in the loan agreement[29].

Thus, the creditor banks are entitled to unilaterally increase interest rates on corporate loans. Such increases are permitted if the creditor acts in good faith, reasonably and includes the necessary justifications in the loan agreement. At the same time, there are a number of unresolved issues, such as the period for early repayment in the event of an interest rate increase and the necessity of specifying a maximum interest rate for a corporate loan. These unresolved issues should be clarified in Russian court practice in the near future.



[1] Egorov K. 5 major banks US were fined // Real Estate Law. 2012. No. 3. P. 103 - 105

[2] Izofenko R.N, Amendment of interest rates under consumer loans myth or reality? // Regulation of banking operations. Documents and comments. 2009. No. 2

[3] Resolution of the Federal Arbitrazh Court of Eastern-Siberian Circuit dated 31.07.2008 No. А33-1321/08-F02-3569/08 on case No. А33-1321/08

[4] Letter of Rospotrebnadzor dated 23.07.2012 No. 01/8179-12-32

[5] Clause 2 of the Resolution of the Plenum Highest Arbitrazh Court RF ("VAS") No. 16 dated 14.03.2014

[6] Clause 2 of the Information Letter of Presidium VAS No. 146 dated 13.09.2011

[7] Clause 5 of the Information Letter of Presidium VAS No. 146 dated 13.09.2011

[8] Private law and financial market: collected works / L.S. Baleevskih, M.L. Bashkatov, V.A. Belov and others, edited by M.L. Bashkatov. Мoscow, Statut, 2014. Second edition

[9] Art. 9 Federal Law No. 353-FZ On Consumer Loan dated 21.12.2013

[10] Resolution of the Supreme Court RF dated 08.06.2015 No. 306-АD15-3092 on case No. А12-33330/2014

[11] Clause 8 of the Information Letter Presidium VAS No. 146 dated 13.09.2011

[12] Private law and financial market: collected works / L.S. Baleevskih, M.L. Bashkatov, V.A. Belov and others, edited by M.L. Bashkatov. Мoscow, Statut, 2014. Second edition

[13] Resolution of the Federal Arbitrazh Court of North-Caucasian Circuit No. F08-416/2001 dated 01.03.2001

[14] Information Letter Presidium VAS No. 147 dated 13.09.2011; Resolution of the Presidium VAS dated 06.03.2012 No. 13567/11 on case No. А71-10080/2010-G33

[15] Central Bank and Government confirmed that banks are allowed to increase interest rates on corporate loans // http://izvestia.ru/news/586675

[16] Clause 3 of the Information Letter Presidium VAS No. 147 dated 13.09.2011

[17] Resolution of Presidium VAS dated 06.03.2012 No. 13567/11 on case No. А71-10080/2010-G33

[18] Resolution of the Federal Arbitrazh Court of Volgo-Vyatskiy Circuit dated 25.07.2013 on case No. А79-9812/2012

[19] Resolution of the Federal Arbitrazh Court of Moscow Circuit dated 19.02.2015 No. F05-461/2015 on case No. А40-162701/2013

[20] Resolution of Presidium VAS RF dated 06.03.2012 г. No. 13567/11 on case No. А71-10080/2010-G33

[21] Resolution of the Arbitrazh Court of North-Caucasian Circuit dated 23.12.2015 No. F08-8462/2015 on case No. А63-1807/2015

[22] Articles 1, 10 CCRF

[23] Resolution of the Federal Arbitrazh Court of North-Caucasian Circuit dated 18.06.2012 on case No. А53-6703/2011

[24] Resolution of the Twelfth Arbitrazh Appeal Court dated 04.10.2012 г. on case No. А12-10966/2012

[25] Information letter of the Presidium VAS dated 13.09.2011 г. No. 147

[26] Decision of the Arbitrazh Court of Udmurt Region dated 14.09.2012 No. А71-10080/2010

[27] Resolution of the Arbitrazh Court of Volgo-Vyatskiy Circuit dated 16.11.2005 on case No. А79-589/2015

[28] Resolution of the Ninth Arbitrazh Appeal Court dated 02.02.2016 No. 09АP-58093/2015 on case No. А40-95037/15

[29] Resolution of the Arbitrazh Court of Moscow Circuit dated 15.04.2015 г. No. F05-5658/2010 on case No. А41-32493/09