Elvira Nabiullina’s speech at Association of Banks of Russia meeting
Good afternoon, dear colleagues,
I am pleased to welcome you all to our traditional meeting. This time we have agreed to change the format of the meeting slightly to have more room to share our views and answer your questions. This is why my speech will be a little longer than usual, but I will try to cover everything that the Bank of Russia believes is crucial for the development of banks. My deputies will join me during the Q&A session.
Let me briefly talk about last year’s results and our forecast before moving on to our plans. The banking sector has largely recovered from the 2022 crisis. Banks have substantially expanded their business, reached record lending rates, and posted high profits. Coincidentally, this makes it easier for banks as regulatory easing is rolled back.
We expect banks to continue to contribute to the economy and remain profitable this year. According to preliminary estimates, profits in the banking sector as a whole may reach ₽2.3—2.8 trillion in 2024. Lending will also continue to grow, but at a more moderate pace. This will be affected by higher interest rates, tighter macroprudential policies, and changes in the terms of mortgage programmes. I would like to stress that we do not expect credit contraction in any segment, although the dynamics will vary: according to our forecast, the corporate portfolio, mortgages, and consumer loans will grow in the range of
Last year, the corporate portfolio grew by a record 20%, compared to 14% in 2022 (even during the 2022 crisis, it did not decline). That growth was driven by strong demand from Russian companies for loans for investment, the replacement of foreign debt, and buyouts of foreign firms.
Retail lending was the fastest to recover. The unsecured consumer loan portfolio grew by almost 16% in 2023 versus a fairly modest 3% in 2022. At the same time, lending to highly indebted borrowers increased. In order to prevent runaway growth in household debt, the Bank of Russia tightened macroprudential limits twice last year, and also raised macroprudential add-ons, effective 1 September 2023. These measures and the key rate hike eventually cooled down the market: since September, the average monthly growth rate of unsecured consumer loans has decreased to less than 1% versus an average of 1.5% in January—August.
Let me focus on mortgages. The new housing market, in our opinion, is overheated, and mortgages grew by an average of 3.2% per month in the second half of 2023. That was mainly due to the fact that people were eager to secure subsidised loans before the terms of government programmes became tighter. High inflation expectations also contributed to such rapid growth. Over 2023, the portfolio grew by nearly 35%. Overheating is also evident from the high share of risky loans, especially in the primary market, where about 60% of loans were issued with a loan to value ratio of more than 80% at the end of 2023.
To cool down mortgages, we increased macroprudential add-ons three times last year. From 1 March 2024, as planned, we have also tightened risk-weight add-ons for loans with high payment-to-income ratio. From mid-2024, we expect to apply macroprudential limits to mortgages. In our opinion, such limits have proved effective in unsecured consumer lending. The relevant bill has passed its first reading at the State Duma, and I would like to thank Anatoly Aksakov and Nikolai Zhuravlev, its co-authors. This is a truly important initiative that will help limit risky loans and at the same time soften capital requirements for banks.
We are also concerned about the commissions that certain large banks have started to charge developers after the Government tightened the requirements for subsidised programmes and reduced the amount of compensation. The banks explain these commissions in part by increased add-ons on risky loans. Simply put, instead of refusing to originate risky mortgages, they try to offset the tightening of macroprudential requirements at the expense of the state. At the same time, developers are spreading the bank’s commission on all buyers, i.e. all, rather than only high-risk, customers pay the price. In our opinion, this is unacceptable and contradicts the very idea of state support for mortgages as a way to make housing more affordable.
Recently, a new scheme involving letters of credit has appeared. This scheme is similar to the commissions that banks receive from developers, and it will ultimately fall on buyers’ shoulders as well. We warned in a post on our website just a couple of hours ago that the Bank of Russia regards this scheme as unacceptable. First, the funds that buyers receive as a loan end up in uninsured accounts. Second, the scheme leads to a hidden increase in housing prices.
The scale of this scheme is small so far, but it is beginning to spread. I would like to emphasise that the banks that apply this scheme are in the focus of our attention.
The use of such letters of credit could potentially be taken into account in regulation as a risk of overvaluation of collateral. We are considering this option among others. We also want to propose amendments to the law on buyer-funded development in order to close any loopholes to bypass escrow accounts. Let me remind you that escrow accounts were originally introduced specifically to insure the funds of those individual buyers who invest in the purchase of housing. We believe that mortgage loans should only be issued if household funds are fully protected.
Those ongoing attempts to use various mortgage lending schemes have forced us to fast-track the Mortgage Lending Standard. As you know, the standard is ready, but first we need to set up an industry-wide committee on credit institution standards (the Committee).
We intend to send the draft regulation on the Committee to the Ministry of Finance for approval soon, as required by law. We expect that by the middle of the year or even sooner, the Committee will be up and running and will start reviewing the mortgage standard. In addition, we have already invited the Association of Banks of Russia to participate in the activities of the Committee. We will soon be ready to discuss in detail the format of participation and the number of representatives of the banking sector in the Committee.
The Committee will also have a supervisory function. As the relevant standards are adopted, in the first stage, as a disciplinary measure, we are considering the publication on the Committee’s website of a list of banks that violate the Mortgage Lending Standard or other credit institution standards.
Unfortunately, we do encounter new schemes all the time. Therefore, we are now exploring the option of misconduct risks being recognised in supervisory ratings (as we conventionally call banks’ economic position assessments). We assume that a supervisory rating will include two parts: a quantitative assessment, which takes into account financial performance, and an assessment of the quality of bank governance. The quality assessment is supposed to be influenced by misconduct, misselling, and engagement in suspicious operations. We will have to choose the right set of indicators and customise the rating tool to rank banks reliably in terms of risk.
What is the importance of supervisory ratings for a bank? They may determine the rate of deductions to the deposit insurance fund, and we are also discussing this issue now. We are considering the option of such rate differentiation. We aim to ensure that banks bear financial responsibility for higher risk for creditors and depositors, and do not benefit from aggressive behaviour in the market or violation of consumer rights and interests. For instance, involvement in dubious operations can threaten the interests of creditors and depositors, with the example of QIWI Bank being a case in point. If the differentiated approach were already in place, QIWI Bank would pay more, although this might not be enough, given that e-wallets are not yet subject to mandatory insurance. We will study how to provide insurance protection for household funds in e-wallets.
I would like to point out that the differentiation of contributions depending on supervisory ratings is a refinement of an already existing model. As you remember, banks used to pay into the insurance fund at an additional increased rate if they exceeded the basic level of returns on deposits and had a poor assessment of their financial position. The use of the basic level of returns on deposits was dropped given the rather difficult economic situation, but contributions at the increased additional rate for a poor financial position will return from July. Still, the current method does not rank banks well enough in terms of risk, and therefore we will continue to improve it.
Regarding the timeline for the implementation of supervisory ratings, we have just started a pilot project of a significantly redesigned and more risk-sensitive quantitative package. This is essentially the equivalent of a credit rating based on all the data on banks available at the Bank of Russia. At the same time, we are discussing approaches to assessing the quality of governance. In mid-2024, we intend to publish a consultation paper and discuss our concept with you, and from 2026 we intend to start implementing the new system. We need to work out many details so that the methodology is clear and transparent to everyone.
Let me now turn to other topics that we consider important for the sustainable development of the banking sector. Even after last year’s record highs, banks retain strong potential to boost lending. They have accumulated a healthy capital reserve of over ₽7 trillion. Certainly, in order to utilise this reserve and potential, banks still need to attract funding and maintain the required level of liquid assets. That is, there is enough capital, but liquidity has to be maintained. We can see that the aggressive growth of lending in the past few years (I have already given the figures) has caused the liquidity cushions of some banks to drop significantly. This is not yet a systemic problem, as banks can borrow liquidity from the Bank of Russia, but high dependence on refinancing by the regulator is not healthy. Banks should be able to rely more on themselves.
To improve the quality of short-term liquidity management at systemically important banks, the relaxation of the liquidity coverage ratio (LCR) will no longer apply from March. Banks that initially find it challenging to comply with the ratio may use an irrevocable credit line, but they will have to pay for it. This, in our view, will encourage banks to improve their liquidity position sooner. At the same time, we expect that the Ministry of Justice will soon register changes to the LCR calculation, after which banks will be able to include corporate bonds with national ratings in their highly liquid assets. This will make it easier for banks to restore their liquidity buffer.
In general, banks certainly need to lengthen their funding: attract long-term corporate deposits, issue bonds, and place irrevocable savings certificates for individuals. The cancellation of LCR relaxations and the need to finance long-term loans create prerequisites for the development of these instruments.
To enable banks to offer more attractive terms for long-term savings products, the respective insurance indemnity limit will be doubled. The President said this in his Address to the Federal Assembly on 29 February 2024. In addition, we would like to set lower rates of contributions to the insurance fund for long-term deposits than for short-term deposits, so that there is an incentive for banks. Thus, the contribution rates will be differentiated, but the total amount of contributions to the deposit insurance fund will remain unchanged. We intend to publish the details of our proposals in May.
By the way, longer-term liabilities will also make it easier to manage interest rate risk. Our analysis shows that banks take this risk into account in different ways, but in general they manage it actually through high margins. However, given that banks hold a growing amount of long-term assets, such as mortgages and project loans, while liabilities are still short-term, risks can accumulate and lead to losses. Therefore, in 2024 we plan to publish an interest rate risk management framework for discussion. Most likely, we will start by clarifying recommendations and finalising indicators for assessing the economic position of banks. Then, in the future, we think it is possible to introduce a separate requirement (limit) for interest rate risk or include it in the calculation of capital adequacy ratios.
If we talk about risk regulation in general, the risk of credit concentration becomes the first priority.
Even now, the concentration on certain major borrowers in some banks is very high. This poses a risk not only for a particular bank itself, but also for financial stability. We realise that this concentration did not just happen, it is partly the result of sanctions, when domestic companies lost the opportunity to raise foreign debt, and also many Russian banks were reluctant to lend to such companies due to the risk of sanctions. That is why we relaxed the N6 ratio so that those banks that were ready to take this risk or that were already under sanctions could lend to sanctioned companies. But there are also less objective concentration factors as some banks simply find it easier to work with familiar borrowers.
Meanwhile, we should bear in mind that major infrastructure projects are planned in the national economy and that refinancing of foreign debt will continue, i.e., objectively, concentration risks can only grow under the current scenario. Increasing concentration exposure may carry risks for certain banks.
Therefore, we are treating this issue very carefully and do not plan to prolong the relaxations of the N6 ratio. In our view, these relaxations are no longer necessary, as nearly all major banks are already under sanctions. We think that banks have sufficient lending potential so that borrowers can adapt to the removal of relaxations from the beginning of next year, as originally planned. We will deal individually with those banks that will have difficulties in complying with the ratio.
For systemically important banks, we plan to introduce a new N30 ratio on a consolidated basis. It will be more stringent than N6, without reduced weights, and in addition, it will relate only to core, rather than total, capital. We will introduce N30 gradually until 2030 to allow time for adaptation. After N30 is introduced, we plan to cancel N21 for systemically important credit institutions.
We will also include companies controlled by the same shareholder (‘sister’ companies in relation to the bank) in the list of related parties under the N25 ratio. We are considering the implementation of this ratio on a consolidated basis. At present it hardly works at all. We will provide more information about these changes in a report due by mid-2024, and we will also have an opportunity to discuss these changes with you.
A key way to reduce concentration risks, which are objective in nature, is syndicated lending. We see that it is stuck, and we have been talking about it for years. Our analysis shows that the obstacles are not regulatory but market-related. Primarily, major banks lack motivation, however, we believe that it will gradually grow, and not only due to tighter regulation, but also through positive incentives. For instance, we would like to include them in the new liquidity coverage ratio. If a syndicated loan is granted using standard documentation, this loan will be accounted for as a highly liquid asset as it can be assigned to another party more quickly and it is indeed more liquid. We are now discussing with VEB and banks what the standard could be for such syndicated documentation with minimum criteria for loan agreements.
We realise that it will be not easy for some banks to meet the updated concentration and LCR requirements, and there are historical reasons for that. Besides, not all ratios should be extremely rigid, and there may be an element of flexibility as well as an opportunity for banks to eliminate violations. That is why we are discussing the introduction of a special zone (the so-called orange zone) for some ratios. At present, a bank either complies or does not comply with the requirements. But once in the orange zone, the bank has to pay higher contributions to the deposit insurance fund. This is just a fee for a moderate increase in the level of risk. This fee encourages banks to remedy the problem faster. At the same time, the bank does not face more severe consequences, such as disconnection from government programmes and the national deposit insurance system. If the situation continues to deteriorate and the bank violates the threshold level of the ratio, the bank will be subject to more stringent measures up to the revocation of its licence, as is the case now.
In order to implement the idea of this orange zone, we need amendments to the Central Bank and deposit insurance laws, and we are currently working on them. I would like to emphasise, however, that no signalling zones are planned for other ratios, such as capital adequacy, and they will certainly have to be complied with.
In 2023 we had many discussions with you about the preparation and launch of incentive regulation for priority projects. We can see that the programme has started and is gaining momentum: projects worth about ₽300 billion have been added to the VEB.RF register, and the number of projects in this register has doubled in the last two months. In other words, this mechanism is being put in operation. Not only systemically important but also medium-sized banks have started using the incentives. As for the potential of this programme, which we estimate at about ₽10 trillion, it is much higher than its current amount. This means there is an opportunity to expand loans for the transformation of the Russian economy. We would like to see banks working more actively with borrowers who are implementing such important projects. All conditions are in place for this, especially given that corporate lending in general is set to keep growing. For our part, we plan to relax some criteria of risk-sensitive regulation and include banks with basic licences in this programme as well. We are also likely to extend incentive-based regulation to sustainable development projects and to instruments other than loans, such as bonds.
The next topic I want to address is the accuracy of risk assessment in the mortgage market. I have already started discussing mortgages.
It is essential that banks correctly assess developers’ projects and create adequate reserves. Currently, when granting loans to property developers, banks can use either a project-based or general approach. We had previously warned that the project approach for ‘construction’ would eventually become mandatory. This (permission to use the general approach) was temporary so that banks could adopt the project approach. We indeed want to switch to it and change the project approach so that banks have sufficient incentives to choose better quality projects. We have completed the first round of discussions with the banks, and we plan to amend the regulations this year so that they come into force in 2025.
We also intend to remove the unjustified gap between the risk weights for buyer-funded development agreements and mortgages on finished housing. In our opinion, as a result, the banks that use the standardised approach will have more opportunities to compete with the banks that use the advanced approach (an approach based on internal ratings). For the latter, the underlying risk weights for primary mortgages are now around 30%.
We also plan to further develop the calculation of the payment-to-income ratio. Since last year, large banks (and since April this year, medium-sized banks as well) have been able to send their assessment models to the Bank of Russia for validation when providing consumer loans of up to ₽1 million each. In 2023 we approved such assessment models for three banks. These models are more accurate than those based on simplified approaches and enable banks to assess borrowers’ income faster and without proof of income. We expect several more banks to pass validation this year. Given current experience, we intend to clarify the regulatory requirements for the assessment models.
Speaking of credit risk assessment, we are concerned about the quality of data that banks submit to credit bureaus. As you know, we have improved the quality of bank reporting, but we continue to see a significant number of violations in terms of the quality of data sent to credit bureaus, although banks in the first place should be interested in obtaining complete, detailed credit histories and in assessing credit risks correctly. Even more so, incorrect, incomplete or untimely data received by credit bureaus harm the interests of borrowers and the public at large. This is evident from the increase in complaints about inaccurate credit history information.
Effective October this year, a unified format is introduced for data exchange between banks and credit bureaus. This will simplify the entire process and reduce errors. However, in order to introduce the standard format, we need maximum engagement of banks in its preliminary testing.
Furthermore, there are many quality problems with the data banks submit to our FinCERT. This was discussed in detail at the Ural Cybersecurity in Finance Forum in
We will focus on data quality issues in general and apply supervisory measures if necessary. Data quality is one of the foundations of the data economy at large, and this is of great importance.
Let me briefly touch upon AML/CFT. Our data show that the amount of suspicious cash-out transactions and suspicious operations involving money withdrawal abroad decreased by 12% in 2023. This is the result of our supervisory activities, the efforts of banks, and the exchange of information on high-risk customers through the Know Your Customer (KYC) Platform.
Over 18 months in operation, the KYC Platform has performed very well. However, as soon as it started working, the number of fly-by-night companies immediately increased. These companies are created to bypass our platform, i.e. the ‘traffic light’. The amendments that were passed last year and went live in November largely solve this problem. Red/red bank customers, i.e. those who have been identified as high-risk customers by both the Bank of Russia and the bank, and have not been ‘rehabilitated‘ through the established procedure, will be excluded from the register of legal entities and entrepreneurs. They will also be unable to register new businesses for three years. In the near future, we will send the first list of such entities containing 70,000 fly-by-night companies to the tax service.
Let me also elaborate on consumer protection. There are plans to incorporate the factor of unfair behaviour into supervisory ratings, as I have said. This shows that we take the protection of financial consumers as seriously as the financial health of banks. Here are our current priorities.
This year has marked the arrival of the law that improves total cost of credit calculations and counters the imposition of additional services. This is a socially important law, and we will systematically monitor its implementation. As for advertising, which is also subject to new requirements, we are monitoring it together with the Federal Antimonopoly Service. On the positive side, we have eliminated the advertising that we were fighting against — loan rates at fantastically unrealistic 0%. We are now carefully ensuring that banks correctly disclose information about loans on their websites and mobile applications.
Instalment payments. A draft law has been prepared to regulate instalment payments. We need to eliminate arbitrage between consumer credit and instalment payments and protect the rights of all consumers equally. At the same time, we will preserve the room for non-bank instalment operators, with mandatory control of consumers’ risks. We still need to finalise the debate on the maximum amount of free instalment payments subject to simplified regulation. We will do this in the near future.
Comprehensive debt settlement. We are thankful to those banks that are actively applying our recommended standard. This enabled the banks to conduct about 8,500 settlement transactions. However, to achieve scale, all market participants should apply the standard, and for this purpose a law is needed. We are actively involved in its preparation and expect the State Duma to review it in the spring session. We also look to the law to lay out a role of the financial ombudsman as an independent intermediary.
Floating rates. As we can see, floating rates always become more popular when the market expects a key rate cut. There is really nothing wrong with floating rates if credit risks are properly assessed, and such loans account for almost half the corporate portfolio (47% at the beginning of 2024). However, it is more difficult to assess risks for individuals than for large corporates, and if rates change, individuals may face a sharp increase in their debt burden. The same applies to microbusinesses and individual entrepreneurs. Therefore, these types of borrowers should be protected from a sudden rise in interest rates. We hope that the draft law on such protection will also be adopted in the near future.
Misselling. Misselling complaints halved in 2023, not least thanks to behavioural oversight and our new powers to halt sales and require a buyback. We have indicated that we are ready to apply these new powers. We have carried out two waves of inspections so far. We are pleased that they have not uncovered repeated, systemic violations and that we have not yet had to use the new powers. We will continue these inspections on an ongoing basis. Misselling is a totally unacceptable behaviour, and it should be eliminated, not just reduced.
This is why we are also preparing proposals to increase fines for unacceptable behaviour towards consumers of financial services. The current penalty limits (up to 0.1% of the minimum charter capital) are absolutely insignificant for banks and do not offset the benefits of misconduct. For fines to be really effective, they should be many times higher: comparable to AML/CFT violations, i.e. up to 0.1% of the bank’s capital, and if the bank ignores our improvement notice, then up to 1% of capital.
We believe that diligent market participants will support this initiative. It is in their interests as it discourages practices that undermine consumer confidence in the overall financial market.
Another issue of our concern is the cases when banks (and other institutions) systematically ignore the requests of the financial ombudsman. This can prevent a person’s request from being considered or result in its mishandling. Eventually, the solution to a person’s problem is delayed and they have to go to court. That is why we are thinking that clear and well-defined enforcement measures should be applied to institutions that do not comply with the lawful requirements of the financial ombudsman.
Finally, I would like to mention the development of domestic payment infrastructure and digital technologies.
In 2023 non-cash payments in retail accounted for 83.4%, i.e. increased by 5.3 percentage points. This is one of the highest rates globally. It shows that we have chosen the right path, that all these services are in demand, and that the pace of development is high.
We will keep expanding all the payment instruments such as Mir cards and SBP. We will also continue to support the development of banks’ commercial payment services.
Instruments such as SBPay mobile application, customer loyalty programmes, and contactless payments contributed to the rapid growth of SBP payments. Over the year, the number of transactions was up 4.5 times, their amount grew 4 times, and the number of legal entities accepting SBP payments more than doubled. Every second person in our country uses SBP transfers, and every third customer pays for purchases via SBP.
The popularity of this system will continue to grow. In 2024 we plan to expand the loyalty programme not only for retail and service companies, but also for banks. We will pilot bioacquiring in SBP. We will launch payments between legal entities via SBP and expand payments for state, municipal, and other services to the budget.
At FINOPOLIS 2023, as you remember, a number of banks suggested introducing a universal QR code. We have studied this technology and recently met several large banks, whose vast majority spoke for the roll-out. We will continue to work on it and we think it is important: a single QR code will be in demand as people may find several QR codes confusing. A single QR code will be more convenient for people. Obviously, we would also need to create an infrastructure that is unbiased towards market participants and enables various participants to introduce innovative payment services. There should be fair competition in the market.
Digital ruble. The pilot project is going to plan, with 12 credit institutions, about 600 individuals, and 30 retail and service companies from 11 cities now participating. Our tests include opening e-wallets, depositing funds, transferring funds between individuals, paying for goods and services, and using smart contracts.
We plan to attract more users, connect the second wave of banks (another 19) and expand the functionality of the digital rouble platform. In particular, we will add dynamic QR code payments, including on the Internet, transfers between legal entities, and new smart contract functions.
The market for digital financial assets is also actively developing. Ten information system operators are in operation, the first DEX operator has been created, and there have been more than 350 digital asset issues worth ₽68 billion. Thanks to a law recently passed by the State Duma, businesses will be able to use all types of digital rights in cross-border settlements.
Open APIs. We have finished discussing the Open API concept and taken into account feedback from the market. We will follow a hybrid approach: Open APIs will be implemented according to the Open Finance model with some elements of the Open Data model (recommended). The implementation will be phased, and it will start with major banks, insurers, and brokers.
Commercial Consent Management Platform. It is also among our priorities, and the Bank of Russia will develop it together with the Ministry of Digital Development, Communication and Mass Media. Eventually, the implementation of Open APIs together with the Commercial Consent Management Platform will allow users to conveniently manage their data/consents and receive personalised services.
This concludes my speech. Thank you for your attention.