Elvira Nabiullina: Speech at congress of Association of Banks of
Russia
Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at congress of Association of
Banks of Russia, 28 May 2021.
* * *
Good afternoon, dear congress attendees,
The pandemic is slowly but abating, there are signs that life is returning to normal, and in-person
conferences are gradually coming back. All the same, we are lacking in real-life communication,
so I am very glad to welcome you here today.
Of course, there are changes taking place not just in how we communicate. We can see that
the actions taken as part of our anti-crisis agenda are gradually being replaced by those
on a development trajectory, as before. With account for the fact that the pandemic
has had a serious impact on society, on the economy as a whole, and on the financial sector,
we must think about the future, and about how the financial sector will help the development
of the economy.
Last year, the banking sector made a positive contribution amid pandemic conditions.
It supported the economy, its clients, and, I am sure, will be able to further support
the development of the economy.
I would like to take this opportunity to thank the entire banking community for their wholly
responsible behaviour during the pandemic. It is thanks to you, really, that we managed to greatly
mitigate the negative effects of the pandemic.
We can see that banks did not restrict lending, as was the case, for example, during the crisis
of 2014-2015, but, on the contrary, significantly increased it and, moreover, restructured a large
volume of their clients' loans. That is to say, they supported borrowers in an acutely difficult
period when they needed financial resources. This made it possible to avoid more serious
consequences both for banks, whose credit losses were not as serious as many expected,
and for the economy as a whole. It seems to me that this shows that building such long-term
relationships with clients is very important, and banks had the opportunity to do so because
the financial stability they had established in previous years made it possible to carry out a policy
of not demanding that their clients immediately repay loans and continuing to issue loans.
Therefore, it seems to me that this is a positive result of an overall very difficult last year.
The corporate portfolio has shown serious growth, by almost 10%, and continues to grow.
In the first four months of this year, growth was 3.5%, taking January to the end of April into
account. That is, this trend continues to be seen this year as well.
At the same time, it is important that not only large companies are being granted loans,
but small- and medium-sized businesses too: the portfolio of small- and medium-sized
businesses grew by 20% last year, which is a record level since 2014. In this regard, of course,
this lending was also facilitated by special preferential programs issued by the government.
The government adopted large-scale programs to support small- and medium-sized businesses,
and we introduced our own mechanism: a special mechanism for preferential loans, which
was in high demand. And we can see that banks, within the framework of such special
instruments, issued about 18% of all loans to small- and medium-sized businesses.
But the remaining increase in loans to small- and medium-sized businesses was carried
out under normal market conditions, which is also a good factor. Moreover, in the first quarter
of this year, we can see that the portfolio of loans to small- and medium-sized businesses
has also continued to grow adding another 5%.
Mortgages grew at a high rate - as in the segment of small- and medium-sized businesses,
there was and still is incentive offered by preferential programs. The mortgage portfolio also grew
significantly, by more than 20%. Moreover, it already reached almost half of the total retail
portfolio, and in the first quarter, it also continued to grow, also by 5%. As you can see,
the figures are quite similar for both mortgages and small- and medium-sized businesses. That
is to say that there are positive trends in both.
However, when it comes to mortgages (we have talked about this repeatedly), we are worried
about the accompanying rise in housing prices in the primary market. In our opinion, this
indicates that there is a need for the gradual ending of the anti-crisis program
and the development of more targeted preferential programmes.
Consumer lending during the pandemic grew at a weaker rate than before that. However,
it has now accelerated again and is growing faster than the recovery of households' income.
Thus, we consider it important to monitor risks in order to prevent overheating and dangerous
levels of households' debt burden.
The situation with funding is generally calm. The total inflow of customer funds in 2020 was
higher than in 2019. But it is obvious that as far as retail and retail liabilities are concerned,
the situation is beneficial for the banks.
The growth of household deposits in the past year nearly halved compared to 2019. This
is the result of an outflow in the spring months, when people, due to the uncertainty
of the situation, withdrew and transferred money into cash. It was also due to a steady growth
in demand for alternative investments (such as real estate, stock assets) on the back
of decreasing deposit rates. In this regard, people can count, and they are right: the weighted
average interest rate on ruble deposits dropped at the beginning of last year from 5.5% to 4.2%
at the end of the year and remained at this level. We have only just seen a slight rise in rates.
The maximum interest rate on deposits at the 10 largest banks is now somewhere close to 5%
(4.93%).
On the whole, however, we can say, according to our estimates, banks are in good shape. There
is a recorded profit, that has continued into this year. One of the factors for it is the increased
lending, business growth, profitable business, and lower reserves. This is despite our easing,
and we carried our easing on reserves, and expected that in 2021 we would see an increase
in the demand for the creation of such reserves. But firstly, not all banks made use of the easing.
This brought about a sense of comfort that such easing could be used, but banks took a very
responsible approach to creating reserves last year. A lot of banks created reserves.
And secondly, we can see that the economy is recovering, and even the level of default that
banks expected is now lower. Let's hope that the economy will continue to develop. But profit
itself is a source of further capital growth, a further growth in lending. This is also a positive
factor.
I would like to touch on in a little more detail the steps we will take in terms of regulation in order,
on the one hand, to preserve the stability of the banking system, and, on the other hand,
to stimulate the flow of resources into the economy.
We now consider it important to pay special attention to the risks banks and their clients face
because a "recovering" economy after a pandemic may be more sensitive to these risks than
one in calm times.
I'll start with retail lending. It is important that we see balanced growth in retail lending. I said
at the beginning of my speech that it is important not to reach dangerous levels of household
debt burden. We are now being forced to pay attention to unsecured lending again. Here
are some figures: in March of this year, debt on unsecured lending increased by 1.9% in just
one month. According to preliminary data, it grew by another 1.6% in April. If such rates persist,
then the annual growth will be about 20%, which is much higher than the growth of household
incomes. We are already seeing an increase in debt burden. Now households are directing
almost 12% of disposable income (11.9%) to servicing loans. This is 1 percentage point more
than it was pre-pandemic, when we were already rather concerned about unsecured lending.
We do not want this trend to grow, so we have returned to the macroprudential policy
we pursued before the pandemic. This involves the following requirement: more capital on loans
granted to borrowers that already have loans. But we understand that such macroprudential
measures 'eat away' at banks' capital, which could be used to expand lending in other segments
and cover losses on restructured loans.
What's more, these measures affect different banks in different ways, that is to say, they almost
don't have a discouraging effect on banks with a large capital reserve, while they seriously
impact those banks that have a small capital reserve. Therefore, we are once again addressing
the Duma. We know that the Government has approved a draft law that allows the Central Bank
to set quantitative limits on unsecured consumer loans for borrowers with a high debt burden.
And it will not be an additional burden on capital. In our opinion, this will be positive and will affect
different banks with different capital reserves equally. The introduction of quantitative restrictions
themselves, if we are granted that right, is a crucial step, we understand, and we will discuss
it in detail with the banking community.
Another risk that we are paying attention to, and we think that you are also paying attention to,
is not only the increase in debt burden, but also the interest rate risk that individuals
can unwittingly take upon themselves. Thus, we came up with an initiative and published
a report. We are also discussing with you the proposal of not allowing uncontrolled lending
to individuals, and I emphasise here specifically to individuals, at floating rates. If you look
at the history of the issue, in recent years banks have been actively increasing their long-term
assets. This is probably a good thing, that is to say, the economy gained long-term resources,
which includes growth in the amount of mortgage lending. However, equities were increasingly
formed at the expense of short-term funds, including current accounts. To a certain extent, this
led to an increase in interest rate risk for banks. We understand that banks want to share this
risk with borrowers, and we can see that banks are actively increasing the share of loans
at floating rates to enterprises and corporations in their loan portfolio. It now stands at 38%
of the loan portfolio. Increased investments in floating rate bonds, which is 32% of the banking
sector's bond portfolio. This is a rather normal practice in corporate lending, where borrowers
have the necessary competencies to make a decision. Such borrowers find loans at floating
rates all the more interesting because the rate is usually lower when the loan is issued.
But in terms of retail lending, the situation is different: borrowers may be seduced by a lower rate
and cannot always reasonably assess the risks that an increase in rates may entail. There
is a possible subsequent increase in payments and increased debt burden, which is doubly
dangerous during periods of instability, when a person may lose their income.
In effect, this could become a second foreign exchange mortgage: when people have lost
the ability to service their debt, and eventually the borrowers' risks become the banks' risks.
For you, interest rate risk will simply turn into credit risk. Therefore, we are now discussing with
legislators, the Ministry of Finance, and the banking community what the parameters
for regulating floating rates should be. We hope to find an option where everyone can use this
tool with some degree of safety.
The next two topics are related to systemically important banks. They are not new topics: they
were postponed due to the pandemic and now we are returning to them. I'm talking about
systemically important banks transitioning to an advanced approach and regulation
of concentration risk. First, I'll touch on the transition to an advanced approach. This approach
is voluntary, two banks have transitioned to it, and one more bank is on its way. We believe that
over time, this approach, the advanced approach, should be mandatory for major banks. It must
be said that in the USA, Europe (the European Union), all systemically important banks have
already switched to advanced approaches. This approach allows banks to more accurately
assess capital and improve their own risk management system. And the greatest savings
in capital will then be enjoyed by banks with a high-quality loan portfolio. We have also prepared
an advisory report on this topic and will publish it shortly. We will then be ready to discuss
it in detail with the banking community.
Now let's look at the concentration risk for systemically important banks.
This is a sensitive topic for our banking sector if we look at the history of it. It is objectively
due to the fact that our largest corporate borrowers and enterprises are larger than our largest
banks. And in conditions where syndicated lending is not developed, an accumulation of risks
for individual large borrowers can create vulnerabilities and risks for banks' stability.
We are currently discussing introducing a new standard, which will differ from the current
concentration standards (N6, N21) in that a banking group's assets will be included
in the calculation of N30 without risk weighting and will be correlated with the core capital rather
than total capital. This, in our opinion, will make it possible to more accurately assess these risks
and take into account risk transfer channels and the spread of risks across the group that forms
banking groups.
We have prepared a draft regulation and plan to discuss it with the banking community.
In any case, the introduction of the standard will not take place earlier than 2022.
There are, indeed, many topics that need to be discussed, and we are ready to discuss them.
As you can see, I have already listed several of the consultation papers that we are publishing.
And we will adhere to the practice that was and is in place and think is useful. All innovations that
affect banks, will be discussed conceptually as advisory reports, then we will give everyone time
to discuss the draft regulations themselves, and then give everyone time to implement these
regulatory acts. At the request of the banking community, we have introduced the practice
of a release approach. As you know, we are trying to package all changes to regulation in such
a way that they come into force twice a year: on 1 April and 1 October. This is because
we understand that these implementations require that IT systems be developed because almost
everything is now tied to IT. We want banks to be able to do this at the same time. There
are exceptions when there are extraordinary situations or risks. Or when banks, due to the fact
that this is an easing measure, a preferential regime, ask us to introduce these new changes
faster. Sometimes we just let them choose: they can remain on the old system or migrate
to the new system. This is more difficult for us, but we understand that it is easier for banks
to work this way. In our opinion, this increases predictability of the implementation
of all our changes in regulation.
I would like to say that, together with you, we are trying to remove bottlenecks, to reduce costs
where possible, so that banks of varying sizes have the opportunity to work and benefit their
customers.
For example, for a long time there have been discussions, on all the platforms and during
meetings, of banks' access to funds from the budget, state-owned companies, and today Mr.
Aksakov spoke about this, about a draft law. We hope that it will indeed be adopted, and that this
topic will no longer require constant discussion. We understand how serious it is from the point
of view of ensuring an equal playing field regarding access to state and state companies' funds.
All the more so because they form a significant part of banks' equities.
However, we know the difficulties banks face and, most importantly, the difficulties their clients
face in dealing with anti-money laundering legislation. Therefore, we are preparing a special
'Know Your Customer' platform. We also need legislation here. We will not be able to do this
without legislation. In our opinion, it is this platform that will allow everyone to reduce the costs
of implementing anti-money laundering legislation. We hope it will get established.
Also, we are developing the Faster Payments System and its functionality in order to level
out the working conditions in the payment market. We can see that it is in demand both by banks'
customers and banks themselves. It levels the playing field in terms of competition.
I will not go on with the list. I mentioned this to illustrate our approach. We will not turn a blind
eye to problems and risks, but where we can, we will try to help banks reduce costs, which
we believe is important.
I will not have time to discuss questions now. We will have the opportunity to discuss things
further and more in detail at our traditional annual forum, the International Financial Congress.
It will take place in a month. I think we should return to the questions that Mr. Aksakov raised.
And when taking the reporting into account, I agree, we should take another look.
We are constantly reviewing these reports. We must, of course, take advantage of the fact that
everything is being digitalised in Russia and look for ways we can move to a qualitatively
new level here. You mentioned outdated regulations. Yes, there are outdated regulations.
But please let me remind you that we have a permanent working group that is working on these
issues. It is something like the Government's 'regulatory guillotine'. We have already revoked
some of the norms, and we are prepared to go further with greater intensity. We are waiting
for your proposals. Perhaps the association should intensify its work in this regard.
We are ready. Outdated norms are of no use to anyone.
Let's look at remote services. You mentioned this and many banks have raised the issue.
We understand that being able to open an account and use other services remotely
is an important area. In this regard, the development of the Unified Biometric System
is one of our key projects. We recently had a meeting with banks. And our approach, the Central
Bank's approach is that this system should be developed independently, equidistantly from
all players. Opportunities should be given to various players to participate in it and use it.
As for banks with a basic license, Mr. Aksakov also spoke about this. Banks with a basic license
will be the focus of our attention because there are questions banks with a basic license need
to answer. In my opinion, the decision to create them was made in a timely fashion. It allowed
banks to gradually (those without a business model yet) exit the market in a civilized manner.
However, some did find their business model. Indeed, we believe that over half of banks with
a basic license have viable business strategies. But nevertheless, we are ready to look further
and enter into a dialogue with you.
We are also going to discuss the topic of ecosystems in detail at the International Financial
Congress. So far, we have published one report that deals with general approaches
to ecosystems, but we are now preparing a second one, which will deal specifically with
proposals for changing banking regulation and will refer to those banks that are developing
ecosystems. Because in our opinion this requires that we take into account all the nuances
associated with the risks linked with customer relationships.
In conclusion, I would like to say that, in our opinion, bank financing remains and will remain
the primary way of raising debt in Russia for many years to come. We are interested
in the banking sector enjoying long-term sustainability and profitability. We want banks to be able
to meet the needs of the economy in any situation. In the crisis we underwent last year,
we saw that banks are able to do so. And in periods of growth as there is now. I wish you every
success.
Thank you for your attention!