We Can Grant Cheap Loans, But It Will Result in the Next Crisis

In a search for incentives of economic growth, Andrei Belousov, Minister of Economic Development of the Russian Federation has recently proposed to entrust monetary authorities with the right to set and control indicative rates on bank loans to companies.
The problem arose as early as September 2012 when economic growth rates started to decline. The main factor behind a drop in growth rates was a reduction of the domestic demand which situation resulted in a decline of economic activities.

The Ministry of Economic Development of the Russian Federation is looking for incentives of economic growth. The position of the above Ministry boils down to the fact that the cheap money helps enterprises increase output, so, it is important to promote lending as much as possible and carry out an incentive monetary policy.


First, there are great doubts that enterprises are in need of a large credit resource taking into account the fact that minimum 55% of enterprises' resources are placed in term deposits with banks and appear to be withdrawn from the business turnover.


Second, if enterprises take cheap loans in a situation of low economic activity there will be a risk of a bad debts crisis in future. They will take loans, but they have no idea what to do with them because there are no investment projects and investment activity is rather low. So, it appears that they will have problems with repayment of those loans. Such a measure will not solve the problem.


Third, there is no need to control interest rates on loans as they can be reduced only by way of reduction of interest rates on deposits. In Russia, saving activity is too low and there is much doubt that people would like to deposit their money with banks at the interest rate of 3%-4% per annum.


In addition to the above, speaking about economic growth difference is to be made between savings and money emission. A loan of the Central Bank is a money emission which results in a higher inflation rate in future. Cheap loans can be granted, but the effect will be short-lived and numerous negative consequences will follow. The credit pumping within the frameworks of that model of growth and institutional environment which has been formed will result in a short-lived revival of the economy with a build-up of structural problems and a crisis which cost will be higher than in 2008-2009.


It is savings which can be attracted by high interest rates only that are needed. There is a trap: without the risk of the inflation rate cheap loans can be extended provided that the rate of savings is high, while the latter is feasible only in case of higher interest rates on deposits.


The author is an opponent of the idea that the banking sector should be engine of growth. Such a situation will result in structural imbalances and subsequent crises. To ensure quality economic growth, economic freedom in the real sector and tough supervision in the financial sector are required. In any case, the financial sector is a secondary one as it cannot ensure economic growth.


А.L. Vedev, Director of the Structural Research Center