Statement by Bank of Russia Governor Elvira Nabiullina at the State Duma of the Russian Federation on 21 October 2015

Dear State Duma deputies, dear Mr Chairman, good afternoon.

Let me begin with the general assessment of the current situation, whereafter I will proceed to give you a more detailed insight into the status of the Central Bank-implemented financial sector support program for this year.

Current situation. The Russian economy is unfortunately still in the negative zone. There are individual signs of stabilisation, and we expect growth to resume in 2016. Inflation is slowing down, forecasted to reach 12–13% for the year end, which is driven by our moderately tight monetary policy and the gradual exhaustion of the effect from a weakened ruble following its fluctuations late last year and this summer.

In the course of the year, we have been consistently reducing the key rate, but the recent Board has decided to retain it at 11% p.a. in recognition, primarily, of this August’s oil market volatilities, which triggered ruble fluctuations, impacting, in their turn, on inflation expectations. Our current monetary policies aim to reach the 4% inflation target without detriment to economic development. According to our forecast, inflation downfall is set to continue at a fairly quick pace, totalling 5.5–6.5% by the end of the year 2016; so we are on track to reach our 4% target by late 2017.

Current situation in the banking sector. We expect the banking sector profits to total between100 billion and 200 billion rubles (3.5 times less than 2014). In the current conditions, this admittedly muted yet positive result gives evidence to the fact that banks have adjusted to the more challenging business environment and stand prepared to expand lending.

Banks have shown a gradual recovery in their lending activities within the year, from a drop early this year to the subsequent moderate turnaround. Lending to businesses looks a little more steady compared to retail, yet the latter is showing some stabilisation, too.

Loans to the real economy grew at 7.5% for the last 9 months (excl. foreign currency revaluation – 1.5%). Lending to small and medium enterprises (SME) remains a concern: it is becoming less accessible, and SME credit portfolio fell by 4.2 % for the last 8 months. This is our concern because SME is the type of a borrower to which major banks are not too willing to lend.

Let me give you more details on our current steps to support SME. These include our next year plans to reduce the risk ratio in individual loans to SME from 100% to 75%. This step, along with some other arrangements, will help improve the terms of credit. However, the current conditions call for a systemic SME support program to be adopted by the Government, in addition to our support of lending in this sector.

Lending to individuals has fallen by 5.0% from 11.3 trillion to 10.8 trillion rubles since the start of the year. Decline in the unsecured consumer lending sector, recently overheated, was particularly strong; yet mortgage lending is showing a moderate growth (with a 4.9% growth, year to date, in the mortgage portfolio of banks), which is a positive signal. The Government-implemented support through a special program is especially relevant for this sector. In an effort to shore up mortgage lending, we seek to reduce the risk ratio for best performing mortgage loans to 35%.

Overall financial stability indicators are in the so-called green zone; the Russian economy is indeed accommodating itself to the new environment; yet, undoubtedly, it is in need of measures to put it on a sustainable growth path.

At this point, let me give you some details of our steps related to the turnaround programme. This programme mainly contains four aspects: capitalisation support to the banking sector, special-purpose refinancing facilities, advancement of regular refinancing facilities and regulatory changes in banking.

Capitalisation support to the banking sector. As Mr Shuvalov has pointed out, for this capitalisation support to materialise, changes to legislation and banking regulation are necessary, as initiated by the Bank of Russia, which among other things include incorporation into the composition of capital of subordinated loans and preferred stock paid by the federal government bonds.

The current lending data gives evidence that the capitalisation support programme is beginning to make some positive impact. We have conducted an express study of lending developments across the ten banks which received funds for their capital before August 2015. In this group, the average pace of lending growth between July and August was over 1%, with over 1.5% for lending to priority sector enterprises. It would be premature at this point to review the outcomes, given that this type of capital was only recently made available to the banks.

Lending is unfortunately on the decline in construction and air transport – the industries with the highest debt burden and credit exposure. Also, these two show a high share of overdue debt, 19% and 24% respectively. These are very large numbers. This means that lending recovery is going to be hardest in the industries with the maximum debt built up in prior years. We therefore need to specifically address the issues of bad debts and financial rehabilitation in the real sector, including bankruptcy procedures where appropriate.

Special-purpose refinancing facilities. You may remember that there are four major special-purpose facilities, i.e. those used to support SME lending, non-commodity exports, project financing and military mortgage program.

These tools are selective in application; yet, thanks to their more lengthy credit periods compared to regular ones, and their reduced rates, they help support priority sectors.

The Central Bank loans for small and medium business are available for a term of up to three years, at a 6.5% incentive rate. In the total lending limit of 50 billion rubles, as much as 30 billion are consumed. Additionally, we have somewhat streamlined our regular credit arrangements, and accept in pledge receivables for not only first grade loan, but also those of second grade. Our plan is to extend such terms to self-employed businessmen.

Further on, on the non-commodity exports. We offer loans at the reduced rate of 9%. Of the limit of 50 billion, the amount of 16.5 billion rubles is now drawn.

As regards the third facility, investment project refinancing, we have increased the limit from 50 to 100 billion rubles, with 35.4 billion rubles having been consumed to date. In this connection, the Central Bank loan application procedure has been streamlined: the Bank would now transfer money in two days following receipt of application; the rate is 9%.

In the fourth facility, military mortgage program, the initial limit stood at 10 billion rubles. Once used up by the banks, it was expanded to 30 billion rubles, of which amount almost 20 billion rubles have been drawn.

Although the special-purpose facilities are overall in demand, a final judgement on their impact could only be made once the projects they target are complete.

Furthermore, we have introduced a dedicated forex refinancing facility to smooth out peak payments of external debt and sustain the optimal foreign currency liquidity level. These remain to be fully drawn, with the limit of 50 billion dollars. Demand here has dropped on the back of improved forex liquidity: the debt, once peaked at US$36 billion, is currently down to US$26 billion.

The overall banking liquidity situation is continuing to improve. The disposable collateral the Bank of Russia could use, if necessary, to provide more liquidity to the banking sector, is up from 3 trillion to 9 trillion rubles.

Advancement of regular refinancing facilities. We have extended the Lombard List and the Bank of Russia List of Guarantor Entities. Decisions have been made with regard to increased adjustment ratios / reduced haircuts as applied to adjust the prices of assets eligible for collateral for refinancing operations.

And now with regard to our regulatory action for the banking sector. Late last year, we adopted a package of temporary regulatory measures to help banks adjust to the new environment. This easing is however temporary because, if applied for too long, they could make a negative impact, triggering in banks an inclination to conceal their current problems. Hence the recent partial termination of such measures, and more to be discontinued from 1 January 2016. These arrangements are being consistently terminated based on our monitoring of the banking situations, which is to ensure that transition periods are balanced enough.

We are making ongoing efforts to enhance our banking regulation, implementing international standards. In this respect, to avoid excessive load related to the rollout of Basel principles, we have reduced the regulatory total capital adequacy ratio from 10% to 8%, and tier 1 capital ratio from 5% to 4.5%. These are compliant with international standards. From the capital perspective, such regulatory changes are overall going to be neutral, enabling banks to build up lending.

And, finally, I would like to note that we attempt to exercise flexibility as we adjust our tools, as seen within this year, focusing our additional support measures on the most needed areas. We seek to be responsive to developments in the external climate, which is unfortunately uncertain and prone to recurrent change.

At the same time, we seek to remain focused on our monetary policy targets, steering away from excessive easing in banking regulation – such as could be instrumental in concealing problems. Our objective is to keep from disguising problems but to provide time to the banking sector and real economy as they learn to operate in the new environment.

We expect the situation in the banking sector to remain stable next year, and our banks to continue lending expansion, thereby supporting economic growth.   

Thank you very much for your time.

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