2014/05/19 - The Gaidar Readings in Rostov-on-Don

Om May 19, 2014, the Gaidar readings – the Prospects of Development, Potential and Limitations of Support by Banks of the Southern Federal District of Economic Growth – were held in Rostov-on-Don.

The sponsors of the readings were the Y. Gaidar Institute for Economic Policy, the Russian Presidential Academy of National Economy and Public Administration (RANEPA), the Yegor Gaidar Fund and the South-Russian Institute, Branch of the RANEPA.

Among those who addressed the conference were Sergei Gorban, Vice Governor of the Rostov Region, Vladimir Gurba, Deputy to the Authorized Representative of the President of the Russian Federation in the Southern Federal District, Vladimir Mau, Rector of the RANEPA, Alexei Kopalin, Head of the Inter-Regional Department of the Ministry of Regional Development on the Southern Federal District, Andrei Nechaev, Minister of Economy of the Russian Federation in 1992–1993, Vassily Vysokov, Chairman of the Board of Directors of the ОАО Center-Invest Commercial Bank, Viktor Lyakhov, Executive Director of the Council of Municipal Entities of the Rostov Region Association and leading experts of the Gaidar Institute. The moderator of the conference was Sergei Prikhodko, Executive Director of the Gaidar Institute.

Sergei Gorban, Vice Governor of the Rostov Region stressed that in 2013 the Rostov Region made a breakthrough in launching of new projects in different areas: infrastructure, logistics, transport, agrarian sector and development of small and mid-sized business. In a search for stimulus of economic growth, the Government of the Russian Federation makes an emphasis on support of small and mid-sized business which is to be promoted to the medium level of development. However, without attraction of investments it will be difficult to implement those projects.

Vladimir Mau, Rector of the RANEPA touched upon the issue of a search for a new model of economic growth in Russia. In his view, before amending the budget rule and increasing state expenditures, it is necessary to determine the nature of the crisis Russia is passing through: either it is a structural crisis or a crisis which is coincidental to the business-cycle. If it is the latter, economic problems can be effectively solved by way of making higher state investments and reducing the interest rates. However, if it is a structural crisis, growth in state investments will make the economic situation even worse as it was once in the US.

V. Mau stressed that the existing situation in the Russian economy is rather controversial. The thing is that as regards macroeconomic indices Russia does not lag behind developed countries – an unprecedentedly low public debt, balanced budget and low rate of unemployment – but Russia still has a high rate of inflation and low economic growth rates which are below the worldwide level. Such a situation is abnormal and does not fit any econometric model. So, it is not an easy task to determine the nature of the existing economic crisis.  

Also, V. Mau noted that in selection of mechanisms of promotion of economic growth Russia should follow the experience of developed countries which solve that problem through reorganization of the social welfare state. The emphasis is made on investments in the human capital. In the developed world, investments in the human capital ensure dynamism of labor efficiency.

In his speech, Andrei Nechaev, Member of the Board of Trustees of the Yegor Gaidar Fund and Minister of Economy in 1992–1993 touched upon the issue of growth in regions’ debts. On one side, the debt of regions keeps growing, while on the other side regions’ position in terms of borrowing is rather limited as compared to the authorities of the federal level. If earlier, regional authorities sought to implement structural projects, at present due to growth in regions’ debts infrastructure, transport and logistics programs are being closed down. Regions are turning into cash offices that pay wages and salaries to public- sector employees.

In his report: The Prospects of Development of Regional Banks, Alexei Vedev, Head of the Financial Research Department of the Gaidar Institute spoke about the role of regional banks in the banking sector of Russia. In particular, he noted that a sizable share of the banking sector’s growth was ensured by regional banks which were basic elements of Russia’s banking sector. Despite the fact that small and mid-sized banks account for a small share in the aggregates assets of the banking sector, they are participants in the regional market of banking services and play an important role in regions’ social and economic life. Small banks are close to the regional sector of the economy and are able to solve effectively and promptly different issues on the local level.

As compared to Moscow-based banks, regional banks pay more attention to operations with the small business and households. Retail loans account for nearly one fifth of their assets which is 25% more than the relevant index of the leading Moscow-based banks. By virtue of a smaller share of foreign obligations in their liabilities, unlike Moscow-based banks regional banks are less exposed to sudden and destabilizing fluctuations of the situation on global financial markets.

At the same time, at present over 50% of assets of the banking sector is concentrated in the capital region. Uneven distribution of banking resources over the territory of Russia prevents further development of the economic potential of Russian regions and results in a situation where growing demand of enterprises and households in banking services cannot be met. In particular, about 60m of Russians (42% of Russia’s residents) do not have access to present-day financial services. Only a quarter of the country’s residents has a bank account and less than 10% of the population uses banking cards. Due to the above, the level of the cash-in hand flow in Russia is the highest one in the world. There is a great need in participation by small and mid-sized banks in servicing local government authorities, particularly, municipal and rural administrations, as well as local non-profit and social organizations.  

А. Vedev presented the outputs of surveys of managers of regional banks of the Southern Federal District and the Central Federal District regarding the situation in the banking sector. The overwhelming number of bank managers says that the banking sector is unstable due to a high debt ratio: the volume of the extended loans exceeds by Rb 3 trillion the volume of deposits. The “hole” of the banking sector is financed by means of resources of the Central Bank of Russia. However, about 75% of all the financial resources goes to banks with state participation and only few banks have an access to them. So, the situation is rather unfavorable for regional banks. “Regional banks with low capitalization and diversification are the prime candidates to rehabilitation, that is, withdrawal of their banking license”.

Despite consolidation of the trend of overflow of deposits fr om small and mid-sized banks to state-owned banks, 50% of bank managers believes that they can compete with state-owned banks on the regional level. «However, in my view, state-owned banks will become monopolists overnight and that will make things worse in the banking sector in general: interest rates will grow for borrowers and the quality of banking services gets worse”.

According to A. Vedev, promotion of the competitive edge of regional banks remains a controversial issue. “There is a proposal to limit the share of banks with state participation on the regional level and expand the access to the sources of refinancing”.

In his report: The Main Issues and Limitations of Development of the Banking Sector in the Russian Federation, Sergei Dobryshevsky, Scientific Director of the Gaidar Institute elaborated on the changes which took place in the Russian banking sector in the past few years:

"In 2013 the Russian banking sector underwent serious changes. On the basis of the 2013 results, the growth rates of the main indices of development of the banking sector slowed down as compared to 2011–2012. So, in 2013 the aggregate assets rose by 16.0% (18.9% in 2012), while loans to enterprises and households by 17.6% (21.0% in 2012). At the same time, the banking sector became more dependent on refinancing on the part of the monetary authorities. So, the banks’ total debt to the Central Bank of Russia and the Ministry of Finance of the Russian Federation amounted to 8% of the aggregate assets and exceeded Rb 4.5 trillion.

In 2013, the imbalances in the banking sector became more explicit due to uneven distribution of liquid funds and overflow of customers fr om small and mid-sized banks to large ones which situation is justified by efforts taken by the Central Bank of Russia to revitalize the banking sector by means of withdrawing licenses from a large number of banks.

The confidence in the banking sector, its stability and investment attractiveness of Russia in general are largely diminished due to the fact that in the Russian banking sector there is a large number of nontransparent banks, many of which are of a semi-criminal nature. So, to ensure a switch-over to the financial sector’s balanced growth, resolute efforts are to be taken to sort things out and consolidate the banking sector.

In addition to the above, in our view the policy of the Central Bank of the Russian Federation is to be supplemented with three other lines of actions which include: consolidation of the banking sector, tougher supervision over backbone banks and privatization of banks with state participation.

Consolidation of the banking sector should be carried out by way of setting of requirements to the minimum value of banks’ charter capital regardless of the fact when a bank was established. Within the frameworks of the Strategy—2020, from 2013 it is proposed to increase the minimum level of banks’ capital to Rb 1bn, while from 2015, to Rb 3bn.

According to our rough estimates, in case of setting of requirements to the size of banks’ own capital in the amount of Rb 1bn the number of banks (in case of absence of specialized or regional banking licenses) may decrease to 580 banks. With setting of the minimum size of Rb 3bn and Rb 5bn, the number of banks will fall to 363 banks and 282 banks, respectively. With such a small number of banks, the Central Bank of Russia will be able to carry out supervision more effectively than at present".
In his report: The Development of the Market of Banking Services in the Southern Federal District (the report was based on the outputs of surveys of banks of the Southern Federal District in 2013), Mikhail Khromov, Researcher of the Financial Research Department of the Gaidar Institute touched upon the specifics of the banking sector in the Southern Federal District:

"As the main portion of corporate customers of banks in the Southern Federal District is small and mid-sized business, it is a positive factor for development of the economy in the region. It is to be noted that the business which is affiliated with owners of banks is not a dominating line of banks’ activities which situation can be attributed as well to positive factors behind development of the banking sector.

In the Southern Federal District, the most promising line of the corporate business for regional banks is, primarily, extension of mid-term loans to customers. Also, another attractive line of business is provision of settlement and cash services.  

According to banks of the Southern Federal District, the main purposes of borrowing by corporate customers are replenishment of borrowers’ current assets and investments in modernization of production facilities.

The main limitations of lending to small and mid-sized business customers are requirements to the financial standing of the borrower and security of a loan.

For banks of the Southern Federal District, the most promising lines of retail lending is development of consumer lending.

It is to be noted that as in case of corporate customers the main limitations of growth in retail lending are requirements to the level of revenues and security of a loan.

According to the surveyed banks, the low extent of development of the infrastructure is regarded as the main limitation of growth in non-cash banking card settlements by households. It is probably for that reason banks do not regard the credit card segment as a promising one.  

According to the opinion of banks of the Southern Federal District, in order to ensure the stability of the depositary base it is necessary to increase the lim it of the maximum insured amount of a bank deposit.

At the same time, in relations with retail customers banks are confident that it is highly important to raise the level of households’ financial literacy to ensure protection of the rights of consumers of banking services".

In his report: The Specifics of Development of Regional Banking Sectors – Comparative Analysis, Yuri Kondrashin, Researcher of the Financial Research Department of the Gaidar Institute touched upon the mechanisms of raising the competitive edge of regional banks as compared to federal banks:

"The regional banking sector is a backbone of the economy of constituent entities of the Russian Federation; without it the economy can neither develop, nor function. However, it is highly debatable among professional bankers, experts, representatives of authorities and ordinary people whether regional banks are able to survive, develop and compete with large banks from the outside.

Due to the fact that there is an uneven economic development between Russian regions, imbalances arise between them as regards the extent of availability and provision of banking services: the higher the investment attractiveness of the region, the more developed its banking sector is. Due to a high differentiation of Russian commercial banks by the size, the impact of mid-sized and small banks on the real sector of the economy is decreasing.

It is to be noted that recently the strategy of large banks which consists in expansion of their business and takeover of new markets in regions has posed a threat to survival of regional banks which may lose their share of the regional market and prompted them to look for ways of promoting their competitive edge on the regional market of banking services.

While regional banks of the Southern Federal District are fighting for their survival and preservation of their position on the banking market, credit institutions of the Central Federal District expect expansion of all the lines of their business. However, banks of the Southern Federal District and the Central Federal District assess equally the further strategy of their development. Most banks expect tougher competition and a drop in profitability of their business; as in a situation wh ere an extensive development of business is impossible due to high costs, credit institution will have to look for alternative sources of growth.

In such conditions, it is necessary to create a new model of the Russian banking sector which meets the needs of regions in banking services".