Banks in Russia could until recently increase interest rates unilaterally for loan agreements concluded with both legal entities (ie, corporate loans) and private individuals (ie, consumer loans). Generally, consumer loan agreements included provisions that allowed banks to increase interest rates unilaterally.(1) During the credit crunch, many banks increased their interest rates on consumer loans. In these cases, banks mostly posted notifications of the increased interest rates on their websites and at branches and only rarely notified borrowers by text message.(2)
The consumer boom in Russia in the 2000s led to a significant increase in consumer loan portfolios and the issue of banks unilaterally increasing interest rates required state regulation. Although there were no restrictions on increasing interest rates on consumer loans, borrowers attempted to challenge such decisions as contrary to consumer protection rules.(3) The Federal Service for Supervision of Consumer Rights Protection and Human Welfare actively protected private individuals who took out consumer loans from banks and also interpreted court practice.(4)
In 2010 Article 29 of Federal Law 395-1 on Banks and Banking Activity (December 2 1990) was amended to prohibit banks from unilaterally increasing interest rates and 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 Supreme Arbitrazh Court Presidium clarified that it is legitimate to specify the default interest (which is higher than 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 also can increase the interest rate on consumer loans with a floating interest rate.(7) A floating interest rate is allowed under federal law and has been cited 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 calculated on the basis of circumstances beyond the lender's control and regularly disclosed in publicly available information sources.(9)
In other cases, a lender offering less profitable loan terms to a borrower that refuses to enter into an insurance agreement is deemed to be illegal.(10) However, the insurance provisions in the loan agreement are not illegal per se from a consumer protection perspective if the borrower entered 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.
There are no statutory restrictions on unilaterally increasing interest rates on corporate loans. In practice, the general abuse of rights principles of bona fides and reasonable behaviour(12) were used a decade ago(13) to limit a lender's freedom and its right to increase interest rates for loan agreements unilaterally. This approach was later reconfirmed by the Supreme Arbitrazh Court in further decisions.(14)
In December 2014 – after an increase in the base rate by the Central Bank of Russia from 10.5% to 17% per year – banks also increased interest rates on corporate loans:
- from between 14% and 16% to 30% per year for large corporates; and
- from between 12% and 16% to between 25% and 35% per year for small and medium-sized corporates.
Corporate borrowers attempted to challenge the rise in interest rates. However, although the number of lawsuits increased significantly (320 lawsuits in 2014 compared to 130 lawsuits in 2013), the borrowers' lawsuits succeeded in only about 30% of cases.(15)
In 2014 Draft Law 6841310-6 was proposed by some State Duma members. Under the draft law, lenders could not change interest rates on corporate loans unilaterally unless otherwise specified by the applicable law. However, the government gave the State Duma negative feedback on the draft because Article 310 of the Civil Code allows unilateral changes to the terms and conditions of contracts concluded between entrepreneurs. In addition, the government emphasised that corporate borrowers can 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 a result, the draft law was subsequently rejected in January 2016.
Conditions and procedures
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) and the increase must be justified – that is, the bank must have contractual reasons for unilaterally increasing the interest rate.(17)
In practice, there have been some cases in which a unilateral increase in the creditor's interest rate was considered justified:
- when there was an increase in the Central Bank of Russia's refinancing or repo rates;(18)
- when a borrower failed to perform or was late in performing his or her obligations;(19)
- when there were changes to the loan market environment;(20) and
- when there were changes to financial market conditions which led to an increase in interbank market rates.(21)
A creditor bank cannot 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 cannot impose unreasonable restrictions on the borrower or specify unjustified conditions for the assertion of the borrower's rights.(22)
In practice, the courts consider an increased interest rate on a loan to be unjustified if it is based only on the amended 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 could not forecast losses and plan its business activity, and the creditor would receive unjust enrichment by receiving more from the borrower than it had expected to on signing 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 it does not agree with the new loan conditions. In practice, a period of two days after notification is deemed unreasonable,(25) enslaving and void.(26) However, it is still unclear what period is deemed reasonable. In certain cases, a period of five days 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 courts have considered that the absence of such provisions does not contradict the existing law,(28) others have ruled that banks must specify the limits of any increase (in a maximum interest rate) in the loan agreement.(29)
Thus, creditor banks can increase interest rates on corporate loans unilaterally. Such increases are permitted if the creditor acts reasonably and in good faith and includes the necessary justifications in the loan agreement. However, there are a number of unresolved issues, such as the period for early repayment and the necessity of specifying a maximum interest rate. These unresolved issues should soon be clarified in Russian court practice.
For further information on this topic please contact Kirill Lelchitskiy at Noerr by telephone (+7 495 799 56 96) or email (email@example.com). The Noerr website can be accessed at www.noerr.com.
(15) "Central Bank and Government confirmed that banks are allowed to increase interest rates on corporate loans", available at www.izvestia.ru/news/586675.
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