The Quality of Competition in the Banking Sector is Seriously Deteriorating

A license-withdrawing process and procedures for rehabilitation of large Russian banks, such as FK Otkrytie, the Binbank and the Promsvyazbank resulted in worsening of the competition in the banking sector in 2017.

As a result of these processes, two banks which became the beneficiaries of the rehabilitation of the banking sector have gained exclusive advantages and the quality of competition in the banking sector has changed much for the worse.

In the past year, the number of the existing credit institutions decreased by 62 institutions fr om 623 to 561 institutions or by 10%. In 2017, the total volume of assets of banks whose licenses were withdrawn amounted to Rb 0.8 trillion.

In 2017, the situation in the banking sector was quite strange: both big losses and high profits were simultaneously observed. So, in 2017 the banking sector’s total consolidated profit amounted to about Rb 790bn. It is to be noted that profits worth Rb 1.6 trillion and losses worth Rb 772bn were demonstrated by 420 credit institutions and 140 credit institutions, respectively.

A larger portion of growth in reserves and, consequently, bank losses took place in the last few months of 2017. In the first eight months of 2017, the banking sector’s profits exceeded the relevant index of 2016, having amounted to Rb 997bn, while the volume of deductions to reserves was equal to the mere Rb 235bn. In the remaining 4 months of 2017, reserves increased by over Rb 1 trillion and, subsequently, led to losses of Rb 207bn.

On one side, there is a structural surplus of liquidity: a gap between loans and deposits amounts to about Rb 6 trillion. On the other side, there is quite the opposite situation wh ere one can see simultaneous growth in the RF Central Bank’s loans to the banking sector to finance failed banks. It appears that on the back of the internal banking crisis the structural surplus of liquidity is actually diminishing.

Also, one should be prepared for a bad debt crisis in the next 1.5 – 2 years. Actually, the situation is quite disastrous: a portfolio worth Rb 11 trillion is placed at the interest rate of 16% per annum with the volume of payments amounting to Rb 2 trillion a year. It is to be noted that the low-income strata of the population account for the main portion of the debt. Efforts to use households’ loans, including mortgage lending as a driver of economic growth are highly questionable. For many households, the interest rate of 10% makes mortgage unaffordable because households’ real incomes keep falling. According to the preliminary data, in 2017 households’ real disposable cash incomes decreased by 1.7% as compared to 2016.

Alexei Vedev, Leading Researcher, Gaidar Institute