Elvira Nabiullina: Review of Russia's economic and financial
developments in 2018
Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the plenary session of the
State Duma of the Russian Federation, Moscow, 30 May 2019.
* * *
Good afternoon, esteemed colleagues.
Today, I draw to your attention the report on the Bank of Russia's activity in 2018.
The Report was sent to the State Duma three weeks ago, and we had a chance to discuss it in
working groups, at parliamentary group meetings and at the joint meeting of relevant committees.
Allow me to express my gratitude for your attentive consideration and deep interest in what we
do.
I would like to dwell on our key activities determined by the Constitution and the Central Bank
Law. They are associated with the national development goals set forth in the Presidential May
decree and strategic goals of the Bank of Russia.
I will start with monetary policy issues. Our main goal is near 4% inflation. This is stipulated in
the Presidential decree. Low inflation is paramount to long-term investments and a rise in public
prosperity.
We first reached the inflation target in 2017, as we had promised. Since that period, our policy
has aimed to keep inflation close to this level.
In 2017 and early 2018, both internal and external factors were favourable and we could cut the
key rate, whereas in the second half of 2018 serious inflation risks emerged. They include rising
petrol prices, ruble depreciation on the back of both capital outflow from emerging markets and a
tougher geopolitical environment, and the decision to raise VAT.
Our monetary policy was aimed at anticipating and preventing these risks. Our key rate
influences future rather than current inflation. As a result, we raised the key rate by 0.5
percentage points. This was sufficient for inflation to deviate slightly from the target at the lower
bound of our forecast and to promptly resume its movement towards the target. Moreover, it was
the prompt response that allowed us to avoid a significant rise in the key rate.
This showed, in particular, that our monetary policy tools have the effect we planned to achieve,
address challenges, and allow us preserve a stable environment that favours economic
development.
The May and April data suggest that monthly price growth (seasonally adjusted) across all core
groups of goods and services has already declined to our target level. Annual inflation is set to
return to target in the first half of 2020.
Now that the proinflationary factors we needed to address have largely faded, we believe it is
possible to resume rate cuts in the second or third quarter.
Financial stability
As you know, both internal and external risks may emerge.
One of the tools the Central Bank has at its disposal to control external risks to financial stability
is foreign currency reserves. Given the geopolitical environment and unstable oil prices, we are
accumulating foreign currency reserves. Currently, our reserves stand at 491 billion US dollars,
which is close to the 500 billion US dollar benchmark we set several years ago. We are pursuing
a policy of reserve diversification in order to ensure both safekeeping of reserves and their
availability at any time. We increased the share of gold and renminbi, while reducing the share of
the US dollar.
We are continuing our pursuit of de-dollarisation policy, or more accurately, a reduction in the
share of foreign currency in the financial system; the proportion of FX loans and deposits is
decreasing. Foreign debt is also reducing, and was down by 12.4% over the year. We are
moving forward with settlements in national currencies with our main trading partners. These
measures mitigate Russia's external risks of both economic and political nature.
In the domestic market, measures to enhance financial stability are aimed at cooling the riskiest
market segments and preventing bubbles.
We are keeping a close watch on mortgage loans with a low down payment of under 20%. As
you may remember, it was high-risk mortgage loans that caused the financial crisis in the US
which then spread worldwide. We introduced increased ratios on such mortgages for banks.
Starting this autumn, we will introduce a debt burden indicator for individuals in the consumer
lending market - the debt-to-income ratio that banks and microfinance organisations will have to
take into account when extending loans. This move should curb growth in household debt: if
customers take more loans than they can service, it is a threat to their personal well-being and
the stability of banks.
We believe that this move is well timed because the consumer lending market is expanding
rapidly, outpacing growth in corporate lending, and we should keep retail lending under control.
The average level of household debt burden for the country may seem low: it is currently roughly
10%, which means that on average, households use this share of their income to repay loans.
However, when measured for borrowers only, the indicator suggests that they have to spend as
much as 44% of their income on repaying loans. Therefore, we need to calculate the debt burden
for each individual borrower.
Development of the banking sector
Last year, banks increased lending and cut interest rates on loans. Lending to the economy rose
by 5.8% compared to 3.7% in 2017. In the first four months of this year, corporate lending
expanded by 2.5%, whereas in the same period of the previous year this figure was 2.3%.
Interest rates on loans went down most of the year until inflation risks turned to growth and the
Bank of Russia raised its key rate. We are currently expecting interest rates to resume their
downward trend on the back of falling inflation.
Banks can further increase lending, as they have both capital and liquidity. We are introducing
incentive-based regulation measures, which should encourage lending to the real sector.
We are placing an increased focus on lending to small businesses, and simplifying regulatory
requirements for banks as regards SME lending. They include the scope for securitisation,
reduced risk ratios for 'good' loans to small businesses, and banks' possibilities to assess small
business customers based on a wide range of data, relieving them of the necessity of preparing
complex document packages.
We also introduced insurance of small businesses' accounts with banks, and I thank the
deputies for adopting this law. This is another factor of small business development.
Last year, we launched proportionate regulation in the banking sector. Currently, 142 banks hold
basic licences. The priority of these banks is lending to small and medium-sized enterprises. We
discuss challenges faced by these banks on both bank associations' platforms and the Bank of
Russia's platform, and we are ready to fine-tune our regulation to create the best environment for
SME operations.
Moving on to mortgage lending. This is the most socially important type of lending. Last year,
mortgage lending expanded at a high pace with interest rates falling throughout most of the year.
Currently, banks are resuming rate cuts after a short period of their upward revision - we
registered growth to 10.4% after an all-time low of 9.4%. Mortgages are long-term loans, and
interest rates depend on inflation and inflation expectations. Our monetary policy is therefore
aimed at keeping inflation sustainably low in the long run. This is the key factor for a reduction in
interest rates on housing mortgage loans. We believe it is entirely plausible to reduce mortgage
interest rates to 8% within the period stipulated in the Presidential decree.
Bank lending is certainly an important, but not the only source of financial resources for
businesses. Both debt (loans) and equity (capital participation) instruments are important so that
companies can raise funds to deliver on the national objective of raising fixed capital investment
to 25%. We have already expanded the range of such instruments. We revise regulations to
simplify and accelerate the process of security issue for issuers. They already can register bond
programmes, which considerably reduce procedural costs. In the near future, they will be able to
register issues electronically. Currently, bonds account for 18% of total corporate borrowing,
which is more than 7 trillion rubles. Therefore, the accessibility of borrowings for our companies
should mean not only bank lending, but also expansion of corporate bonds.
However, companies need to expand their capital stock along with the use of debt financing. An
improved approach to corporate governance is of paramount importance in raising equity
financing. Investors will only invest in enterprises whose operations they can understand, where
their rights are protected, and there is a clear picture of how they can earn money. Public
companies have, therefore, enhanced the controlling and strategic functions of their board of
directors, and will continue further enhancement. A board member is not a figurehead, as they
may seem, but someone responsible for the company's development. Companies establish
functions of risk management and internal controls, and protect dividend rights of their
shareholders in the best possible way.
And the last point I would like to make on the banking sector is the outcomes of major banks'
resolution under a new mechanism. Last year, we almost completed the resolution of three
major banking groups and Asian-Pacific Bank. We created a bank of non-core and toxic assets,
and all banks that underwent resolution already operate in the market in compliance with all
ratios. It would be fair to say that the most difficult stage of banking sector resolution is behind us.
Certainly, it was not painless and came at a cost. Last year, the Bank of Russia registered
losses associated with the resolution and establishment of a non-core asset bank. However, the
losses on the Bank of Russia's balance sheet mean that depositors keep their money and
entrepreneurs whose funds were placed in accounts with these banks remain solvent. We
avoided larger losses in the economy and knock-on effects in the financial market. Our current
objective is to return as much funds as possible through the sale of these banks and operations
with non-core assets.
Insurance market
Last year, we launched an OSAGO reform. Its first stage, which included the expansion of the
rate corridor, improved applications of the bonus-malus coefficient, and an update of driving
licence categories, has already reduced the cost of OSAGO in nearly all regions, with a
countryaverage decrease in the policy cost totalling 4%. The next stage involves rate personalisation for
drivers; it should ultimately solve problems faced by OSAGO policy holders. Firstly, it should put
an end to the injustice when careful and responsible drivers have to pay for those who drive in a
risky manner and often have accidents.
Microfinance organisations
The microfinance market faces the same fair criticism now as in recent years because of
usurious interest rates, and incredible fines and penalties. We came up with a serious tightening
of the regulation of microfinance organisations. Currently, there are half as many such
organisations in the market as there used to be five years ago. From now on, the law caps
interest rates at 1% per day, while the full cost of borrowing with all fines and penalties included
is limited to 1.5 times the loan amount. These conditions will allow borrowers to use
microfinancing to settle their temporary financial problems without running the risk of ending up in
an even worse situation.
Moving forward, we believe that one of our priorities is to prevent losses from illegal operations in
the economy and damages from fraud suffered by households.
The value of dubious transactions in the financial system continued to decline last year, and this
is a stable trend of recent years. The slides show data over several years. Cashing-out
transactions halved, while illegal overseas withdrawals shrank by 20%. These are last year
figures.
The development of digital technologies increases potential cyber-risks. We are controlling cyber
resilience of financial organisations. The Bank of Russia continuously monitors cyber-attacks
and operates a system of information exchange and support for market participants.
As regards the protection of households against fraud, our objective is to minimise the period of
time between the moments when a Ponzi scheme or an organisation that illegally provides
financial services is revealed and liquidated. This requires large-scale monitoring. Last year, we
established two special-purpose centres in our Krasnodar and Khabarovsk branches, which
helped us detect fraudulent entities more promptly. Last year, we revealed 168 Ponzi schemes,
which is 25% more than the year before.
We are working together with law enforcement agencies, including regional authorities. It is law
enforcement agencies that bear responsibility for putting an end to the activity of such illegal
entities.
Illegal lenders pose the greatest threat to the public. Under the guise of microfinance
organisations (that is why microfinance organisations often face criticism), they offer loans which
are sometimes secured against housing, and afterwards demand that borrowers repay
enormous amounts of money. Illegal lenders usually operate via the Internet and we must stop
their activity. Therefore, we ask you to authorise the Central Bank to promptly block websites
advertising illegal financial operations, among other things.
We have already forwarded the respective bill to the State Duma and look forward to your
support.
In order to reduce the chances of the public getting trapped by illegal lenders, since last year, we
have been working together with Yandex on a joint project aimed at labelling websites of legal
trustworthy microfinance organisations registered with the Central Bank with special symbols.
We are discussing similar projects with other search engines.
Development of the Mir card
Currently, as many as 59 million cards have been issued; the share of the Mir card has been
growing both in issue volumes and cashless operations. Countrywide, people use cards on a
daily basis; in more than half of Russian regions, transport cards, and in some regions, also
social cards are attached to the Mir card. We hope this trend will continue.
Mir cards are accepted in member states of the Eurasian Economic Union and Turkey (last year
we told you we were conducting negotiations). In the near future, we are planning to ensure that
these cards are accepted in non-CIS countries popular with Russian tourists, and to expand their
acceptance in CIS countries.
The development of cashless payments is not restricted to the use of Mir cards.
Last year, we completed the development of the Bank of Russia's special project, Faster
Payments System (FPS), which we launched early this year.
As many as 14 banks have already joined the system, and 114 more have applied. Our
estimates suggest that early next year, 250 banks will have joined the system. At the later
stages, only small banks with a basic licence, which need more time to introduce changes, will
join.
According to our estimates, the introduction of the Faster Payments System will reduce fees for
retail remittances more than 2-3-fold.
We are currently working to further develop the system and ensure payments for goods and
services via the Faster Payments System. Firstly, this will support the trend toward the rise in
cashless payments, given that FPS fares for trade and service companies will be lower than
those for merchant acquiring services. You may remember that this topic is currently very acute.
Last year, we also introduced remote biometric identification for financial services provision.
Biometrics is currently collected in branches of 146 banks; by the end of the year, these will be
collected in all banks with a universal licence in accordance with regulatory documents. In the
near future, biometrics will also be collected in multifunctional centres and used to provide not
only financial services, but also other public services in digital format. Given these factors, we
expect that the use of biometrics will expand considerably next year.
Last year, we launched Masterchain, a blockchain-based project elaborated in association with
FinTech Association and market participants; this is an advanced transaction record system.
Together with Rosreestr, we have already implemented a masterchain-enabled electronic
mortgage project.
Consumer protection
I will now talk about consumer protection. A rare, but one of the most painful situations for
consumers in the financial market is when depositors lose an uninsured portion of their deposits
with banks from which we revoke licences. I would like to draw your attention to this issue,
because it was repeatedly raised at our discussions of changes to the deposit insurance
system. If we consider the number of depositors' accounts, 99.5% of them are completely
covered with the 1.4 million ruble insurance under the deposit insurance system. However, these
are only 57.4% of deposits in terms of value. This suggests that, on the one hand, the current
insurance payments provide complete coverage of most depositors' funds (99.5%); on the other
hand, however, the public is well informed and keeps their deposited amounts under 1.4 million
rubles. Should we increase the insurance coverage in these circumstances? Certainly, this
move should not be made in favour of very rich people who, in my opinion, can manage their
risks. However, we believe it is reasonable to take a closer look at the situation when a depositor
has a large amount of money deposited with one bank by coincidence, because the customer
did not have a chance or enough time to manage their funds and the bank's licence was revoked.
In such cases, we believe it would be reasonable to increase the insurance coverage. Deputies
have proposed this move and we support it.
Which circumstances should this apply to? Inheritance, insurance or social payments, payments
awarded by a court decision, proceeds from the sale of real estate, etc. are cases where we
deem it possible to raise the insurance coverage to 10 million rubles.
Another aspect of consumer protection is conduct supervision. This is a system that controls
whether financial organisations conduct sales, conclude agreements and deliver on their
obligations in a reliable manner. Do sellers disclose information about potential risks when they
sell their products? Do they provide fair information about returns? Do they impose unnecessary
services to customers? Last year, we had to pay attention to the practice of life insurance policy
sales. We received a lot of complaints that customers had been lured by high returns, but as a
result earned less than they could have earned if they had deposited their money with a bank.
Investment life insurance grew at an outpacing rate and the collected insurance premiums
reached large amounts. Currently, the market is on a downward trend, shrinking by 27% in the
period from 2018 Q1 until 2019 Q1. It is an expected development. This is the result of both the
public's disappointment in the product and the regulator's tighter requirements. We want the
financial market to demonstrate healthy growth rather than to be driven by deception. Moderate
growth rates are acceptable if the market develops in a healthy manner.
Last year, we established the institute of financial ombudsman. A special law we had discussed
for many years was adopted. Currently, it is coming into effect and should raise consumer
protection. For the public, this will mean a simpler short procedure of dispute settlement with
financial organisations. We realise that customers are often weak in disputes with financial
organisations, but we are offering them protection.
We continue to develop financial literacy programmes, which has also raised many questions.
The regulator will not be able to effectively protect customers without providing information and
education to the public. We are working together with the Ministry of Education. The financial
literacy module has been included in the school curriculum (29,000 schools or roughly 70% of all
secondary schools already have this module in their curriculum). We conduct online and offline
workshops and lectures for the public, and we also offer special programmes for orphans and
elderly people. We post advertising materials, including on public transport. Our regional
branches are making a large contribution, which we find extremely important.
I would like to conclude by saying a few words about financial inclusion. Many deputies are
concerned about this issue and raise it at almost every parliamentary group meeting, because
voters are concerned about it.
The overall level of financial inclusion in the country is adequate and new technologies are
developing faster in Russia than in many other countries. Certainly, they offer new opportunities
to households and businesses. This is, certainly, an average indicator typical of big cities. In
some regions, where there are many remote and thinly populated towns and rural areas,
financial inclusion is low. This remains a pressing issue. Therefore, we adopted a special
threeyear programme last year to raise financial inclusion and have launched its implementation in
every region, taking its specifics into account.
Our key measures include working with major banks with a country-wide branch network to
persuade them to stay in such areas before alternative channels emerge, including mobile
offices and multifunction automated stations, and new formats, like simple transactions delivered
by a post office, and cash withdrawal at points of sales. These options are now available. We are
developing remote services in cooperation with Rostelecom. We signed an agreement to have
the Internet installed in these areas on a priority basis. Last year, we launched a pilot project to
raise financial inclusion in the Far Eastern Federal District and are currently launching it in the
Southern Federal District. Financial inclusion challenges in these regions are of higher
importance in these regions than in other areas.
We believe that new technologies will open new possibilities for consumers. Currently, 45% of
financial consumers use remote financial services, with the indicator doubling over the past three
years. This is a good indicator, because there were doubts whether consumers were willing to
use remote services. However, we can see that their willingness is increasing. Therefore, we are
placing great efforts to develop financial technologies. I have already mentioned biometric
identification, the Faster Payments System, and financial services marketplaces. We are grateful
to the State Duma for its contribution to these projects. These are complex projects, but we
believe that they are essential to technology development, and among other things, to raising
financial inclusion, so that we could bridge that gap between advanced cities and regions and
ones where services are unavailable. To conclude, I would like to say that we are continuing
consistent efforts in all areas of the Central Bank's responsibility - monetary policy, financial
market resolution and strengthening, encouraging competition, the development of the national
financial infrastructure, and raising quality and reducing costs of financial services for
households and businesses.
I would like to repeatedly thank the State Duma for its cooperation with the Bank of Russia and
massive efforts to improve financial market-related laws. This is a tangible contribution to
strengthening our financial system, and its capability to foster economic growth and raise public
well-being.
Thank you for your time.