Artificial stimulation of lending can do nothing but harm the economy

The Bank of Russia has published the performance figures of credit institutions as of the beginning of March 2015, showing that risks have been ballooning in the banking system.

Most alarming are the ongoing steady growth of overdue debts owed by both nonfinancial corporations and individuals. During the two months in 2015, overdue debts as a percent of the total loans increased 0.5 p.p., to 4.3% from 3.8%.

Indeed, the current level of overdue debts is lower than that in the crisis-hit 2009, when year-end overdue debts reached the maximum 5.1%. Therefore, comparing to 2009, both the accumulated overdue debts and the increase in such debts during the first few months of 2015 seem not to be so critical.

However, the trends which have recently been developing in the banking system give no chances for optimism and require rapid response by the central bank and the Russian government. A special emphasis should be placed on some of the aspects of principle which drastically alter the view of both the bad debt issue and the sustainability of the Russian banking system.

First, it should be taken into consideration that the Russian economy has been sliding into a full-blown and protracted crisis. 2015 will face challenges, while the main problems including those for banks will come later, and hence overdue debts will grow.

Second, a package of social measures was implemented in the crisis-hit 2009, providing support and even boosting real household disposable incomes to 3% (2.8% in 2008), whereas they declined by 0.8% year-over-year in 2014. Further decline can hardly be prevented in 2015 as well, given the forthcoming "optimization" of budget expenditure and amplified inflationary pressure. Under the circumstances, the debt burden is likely to increase considerably: individuals will do their best to retain the previously achieved consumption level, while an increase in final consumption expenditure will inevitably promote growth in overdue debts on loans.

Third, the rapid economic contraction in Russia and the protracted investment downturn which had commenced long before the aggravation of the geopolitical situation in 2014, worsened the financial situation and financial performance of enterprises. Under the circumstances, the mounting challenges – most of which relating to timely repayment of previously obtained loans – will rather worsen the situation in the banking sector. Resident nonfinancial organizations account for more than a half of bank loans.

Fourth, the situation in the banking system in 2015 will be complicated by the anticipated acceleration of inflation. Consumer inflation in 2009 slowed down by 4.5 p.p. to 8.8%. In 2015, according to the Bank of Russia's estimates, consumer prices will increase at least 12% (after 11.4% in 2014, December to December). The amplification of inflationary pressure in 2015 will not only worsen borrowers' creditworthiness, but it will also lead to a respective increase in credit risks and deterioration of the financial position of banks. Furthermore, the bank margin is likely to be cut because of the credit downturn and deteriorated creditworthiness of potential borrowers.

Finally, the Russian ruble in 2015 is very likely to see further nominal and real depreciation against world currencies. While loans denominated in foreign currencies account for a bit more than 32% of the total financial resources invested by banks, a weaker ruble's exchange rate will complicate the repayment of debts denominated in foreign currencies.

Close attention is required to the hike in bad debts, including the actively discussed administrative methods of enhancing the availability of loans, above all, subsidization of interest rates. The recently developed level of interest rates on bank loans reflects not only already developed but also developing risks in the economy. Higher interest rates on loans is embedded cushion allowing the banking sector's sustainability to be maintained. This first of all concerns interest rates on mortgage-based loans, the demand for which reflects largely economic development prospects. The crisis of 2008–2009 originated from the U.S. mortgage-backed lending sector, while too optimistic assessments of economic development prospects had an adverse, to a greater or lesser extent, effect on all of the countries integrated into the global economy.

It is our opinion that artificial stimulation of lending can do nothing but harm the economy sliding into a protracted crisis. This measure will only pass to the state a part of credit and market risks from banks acting as creditors and economic agents acting as borrowers. Under the circumstances, the assumption of long-term commitments (such as mortgage loans) by individuals and businesses and the state is exposed to more risks. It is unlikely that someone could provide accurate evaluation of these risks: considerations about likely duration and depth of the crisis are still very contradictory.

Anna Kiyutsevskaya, a researcher at the Gaidar Institute.

More details on the subject matter are available in Anna Kiyutsevskaya's article for RBC: The threats of the 2015 crisis for Russian banks: the five principal risks