An Important Prerequisite for Stepping Up Economic Growth is More Loans to Enterprises

The scope of opportunities which emerged on the back of depreciation of the national currency and sanctions forms a substantial growth potential for Russian enterprises in different industries.

Realization of that potential is often complicated or impossible without credit support of modernization of production and/or current manufacturing activities. The specifics of the current period of development of the Russian economy consists in the fact that  economic drivers are intermediate demand or import substitution at all the levels and in all the types of economic activities, rather than consumer and investment demands. In such a situation, an important prerequisite for stepping up economic growth is more loans to enterprises.

However, expansion of lending to the nonfinancial sector of the economy in general can be accompanied by higher risks. The evidence of that is sustained growth in the debt burden on the nonfinancial sector in the past few years and its high current level. In 2014, enterprises’ annual average debt on loans amounted to 25.6% of their annual turnover (23.7% in the crisis year of 2009). In 2014, interests paid on loans amounted to about 50% of the disposable profit (36% during the most dramatic phase of the 2009 crisis). But in different industries of the nonfinancial sector of the economy the prospects and risks of lending greatly vary depending on the existing level of a debt burden and loan-servicing burden.

Lending to the nonfinancial sector of the economy promotes (or limits) the current and long-term economic growth by underpinning current production and investment activities of enterprises. There is no direct correlation of the dynamics of lending to the nonfinancial sector of the economy and economic growth, but sectorial strategies of utilization of credit resources permit us to judge to what extent an insufficient credit support could limit industries’ output growth or investments in capital assets in the past few years.   

In the 2009–2014 period, loans extended by the Russian banking sector amounted to about 75% of the borrowings of the nonfinancial sector of the economy. Limitation of access of Russian enterprises to global financial markets makes the role the Russian banking sector in credit support of enterprises more important. However, expansion of lending by Russian banks to the nonfinancial sector has a number of system limitations.

The base factors behind limitation of growth in lending by Russian banks to the nonfinancial sector of the economy are the following: instability of macroeconomic indicators, slowdown of economic growth rates, limitation of the resource base, high cost of credit resources, cautiousness which banks have to observe in granting loans and worsening of the dynamics of enterprises’ performance and financial indicators.  

Banks’ sluggish financing of enterprises’ investment projects is still a serious problem. In the 2005–2014 period, capital investments in the nonfinancial sector were financed by means of Russian banks’ loans only for the mere 6.7% – 9.0%, while self-financing by enterprises of capital investments grew at advanced rates: the share of own funds  in the pattern of sources of investment funding rose from 36.5% in 2009 to 42.5% in 2014. Banks increase the extent of funding investments very slowly and on a system basis without meeting enterprises’ actual demand in such resources.

Also, for a number of years there are imbalances between the quality of borrowers and credit institutions. With availability of funding on external markets, Russian banks lose out to foreign banks a competition for quality Russian borrowers. At the same time, the quality of borrowers for which the Russian banking sector is the main source of credit resources is at an inadequate level, so, more active growth in lending cannot be secured. The principle of prudence in provision of loans aggravates further those imbalances by limiting growth in corporate lending.

However, with access to financial resources on global markets for Russian enterprises becoming too complicated demand in the Russian banking sector’s loans on the part of large and reliable borrowers which earlier used to attract actively foreign loans is growing.   Growth potential of the above demand is estimated as threefold. For Russian banks, it is a priority one by virtue of its quality and for that reason this situation may result  both in a lower availability of corporate lending to industries which are less interesting borrowers for Russian banks and worsening of lending terms for them.  

The above imbalances are multiplied by a high debt burden and loan-servicing burden of a number of industries of the nonfinancial sector of the economy and growth in demand in credit resources for realization of the potential of the current scope of opportunities. It is to be noted that much needed expansion of lending by the Russian banking sector to a wide range of enterprises is in conflict with the principle of prudence in provision of bank loans.  

So, it is necessary to develop new approaches to distribution of risks to ensure reasonable credit support of the nonfinancial sector of the Russian economy and promote current and long-term economic growth.

Olga Berezinskaya, Researcher