Credit crunch stretches lending to the limit

Lending rates are jumping to painfully high levels as bank credit runs dry. Sberbank has increased its interest rate for loans of all types. And dollar-linked interbank rates remain short of the record reached on Tuesday. Such tensions on the market wil

Rising interest rates result from the fact that Russian banks are finding it harder to access funds on the wholesale money markets.  That’s despite repeated efforts by the Central Bank to supply liquidity. Mark Rubinstein, Banking Analyst at Metropol, says other factors are also playing a part.

“There is plenty of liquidity in the system, but unfortunately it is still sort of constrained between the banks of the first tier.  And it is having a hard time reaching the banks of the second and third tier.  There are trust issues now in the sector.”

Put simply, the central bank is lending money to banks, hoping to supply the broader economy. But banks are hoarding cash, rebuilding their asset base, and don’t lend to each other.  This leaves mid-size banks short of funding – and the Russian Central Bank expects that to lead to consolidation according to Deputy Chairman Aleksey Ulyukaev.

“We expect massive consolidation in the banking sector and will encourage this process by simplifying merging procedures.”

However that could also come at a heavy cost to companies. Anatoly Maksakov, Deputy Chairman at Absolut Bank says his bank is telling clients to be wary.

“We will consider new corporate clients only after the third Q financial results when we can see how the crisis is affecting them. Banks cut credits to corporates and don’t give out new credits. So companies should quickly revise their budgets for this and next year.”

Analysts say the government may be able to fund companies through to next spring but the funding famine is expected to last for at least another year.