Banking system facing structural and funding limitations on lending

Sluggish loan growth by Russia’s banks is placing them in the spotlight over the issues they face in looking to get more money into the economy, with the number of banks and system funding holding them back.

Russian Bank lending to companies, excluding loans from major player, Sberbank, rose by 1.5% in March according to Central Bank data, with overdue loans falling 2.4%, and banks boosting their reserves. Central Bank first deputy chairman Gennady Melikyan believes the lending figures would be higher with Sberbank included, but Anatoly Aksakov, president of the regional association of banks, says the banking system faces key issues in looking to boost lending.

“There are three problems which the banking system remains facing – we have too little reliable borrowers, bad loans which total about 6% according to official statistics, however the real figure is much higher. And the third problem is the lack of long-term money.”

Richard Hainsworth from Rusrating says the Russian banking system is still too reliant on short term funding, but that this is slowly changing.

“In most developed economies long-term money come from pension funds and insurance companies. In addition retail deposits, even if all individual deposits are short-term, when you take them overall, they turn into long-term deposits. Retail deposits are becoming a source of long-term funding for the banks now. This current crisis has demonstrated that the population is willing to hold the money in the banks because of deposit insurance."

Stuart Lawson, CEO of HSBC Russia, believes another complicating factor in Russia is the sheer number of banks, and lack of emphasis at how they operate as a system.

“For 15 years we’ve been saying that we need to reform the banking system… unfortunately we still have today far too many banks. The question is where to draw the line to say these are the banks ready to continue their role in the economy, and these are not. We need to focus at what the role of the banks is, how these banks function within the financial system and are they really at this point in time providing economic motivation.”

The central bank is also concerned about risky lending by banks and has told its regional branches to monitor banks more closely. But with a range of issues needing address the banking system will be under close scrutiny for some time to come.