Elvira Nabiullina’s speech at 4th conference of Association of Banks of Russia

Good afternoon, dear colleagues.

I am happy to welcome all the participants in the conference! Our meetings with the Association are quite frequent. The previous one was in March. We were discussing the development of the banking system, pain points, and appropriate measures. I would like to start saying that the evolution of the banking system has been stable and resilient and it has been lending to both businesses and households. Last year, the increase in lending was record high. This year, we expect a slight slowdown to more balanced growth rates, yet they will still be positive. The banking system is contributing to the expansion and structural transformation of the country’s economy. The topics we are discussing are related exactly to the structural transformation.  I would like to focus on two important areas of our joint work.

These are the incentive regulation for technological sovereignty projects and incentives for long-term deposits. These are actually two sides of the same coin: to be able to expand lending to investment projects without risks to banks’ stability, we need to raise more long-term liabilities.

As we discussed with you, the first results of the use of the incentive regulation are still far from their potential. The portfolio of projects totals approximately ₽300 billion when we assess the available limit of ₽10 trillion that the incentive regulation is targeting. Of course, we should take into account that the programme was launched not so long ago and that monetary conditions have tightened. However, the main issue is a deficit of high-quality projects in the key areas listed in the Government’s taxonomy. As you know, the President stressed this issue as well and ordered the Government to develop new national technological sovereignty projects.

We were also discussing this topic with banks and concluded that this deficit was attributed mainly to relatively high investment risks. We can offer incentives to banks, but our regulation has no effect on project-related risks. In our opinion, it is only possible to mitigate these risks through financial support to borrowers.

Currently, it is possible to receive VEB.RF’s credit guarantees for projects included in the taxonomy. A number of potential projects might conform to the criteria of sectoral support programmes — such programmes also exist. However, they might not meet the eligibility criteria. Therefore, we believe it necessary to discuss how to expand the access to government support for projects within the taxonomy as the top-priory projects in order to ensure a combined effect of our regulation promoting banks’ demand and the Government’s measures for borrowers. This is how it was initially projected when we were discussing this issue with the Government and developing the taxonomy. We propose returning to this subject. There are representatives of the Ministry of Finance at this conference, and I think that we could discuss these issues together with the Ministry of Economic Development and the Ministry of Finance. These topics are very important, in our opinion, if we wish to concentrate banks’ financial resources to support such priority projects that are vital for the country.

We suggest setting an investment tax deduction for projects included in the taxonomy. The advantage of this mechanism is that, at the beginning, it does not need any budget expenditures, and a deduction is granted only after funds have been invested. In other words, the risks of inefficient support are minimal. From this year, an investment tax deduction for projects within the taxonomy is provided for by the Tax Code. However, we can see that regions need to carry out the appropriate work to ensure that this mechanism is actually used. I would like to urge banks operating in Russian regions to discuss these problems more actively.

Another important measure that is much needed is the provision of irrevocable and unconditional guarantees to banks financing key projects. They are used in Russia to a much lesser extent than abroad. We are perfectly aware that the budget system cannot accept excessive risks and, therefore, we suggest granting such guarantees only to the most critical projects after a careful selection, especially when the Government or state-owned companies are engaged in such projects, for instance, based on a concession model. In order to keep part of credit risk with banks and not to transfer it fully to the Government, a guarantee can cover only some part of the loan amount, let’s say no more than 70%. We believe that there should be a risk sharing mechanism for such projects. Yesterday, when discussing the Central Bank’s report in the parliament, Mr Aksakov proposed using irrevocable guarantees more extensively. It is rather hard to select the important projects for which such guarantees could be used.

The third area is the integration of the taxonomy into the support measures that provide for subsidised lending, tax privileges, and other preferences. Specifically, the compliance of a project with the criteria of the taxonomy can be one of the parameters for accessing such programmes or a factor for considering an application on a priority basis.

We will submit our proposals to the Government in the near future. We have described them in detail following our discussion with banks in order to identify this process of lending to technological sovereignty projects.

As I said earlier, we would like to expand the incentives currently used in bank lending to banks’ investment in bonds. In the future, bonds related to technological sovereignty and structural adaptation projects may be separated into a special segment of the debt market, similarly to sustainable finance instruments.

The second novelty is the expansion of the incentive programme to banks with a basic licence. Considering that these are relatively small banks, we have decided to double their risk limit under the incentive programme, compared to banks with a universal licence. Currently, the limit is the same — 10% of capital. In our opinion, the limit may be raised to 20% of capital for banks with a basic licence, but it should not exceed a bank’s average annual profit.

There will be another important restriction. The incentives will only be applicable to projects that banks with a basic licence are lending to jointly with other banks. A second set of eyes will improve the quality of risk assessment helping more evenly distribute risks across the banking system.

We are preparing the modifications to the regulation, and they will become effective next year. We expect that this will help broaden the use of the incentives for lending to projects of small and medium-sized enterprises that are also actively engaged in the economy’s structural transformation. Our meeting with small businesses proves that they want their projects to be considered alongside large projects.

Simultaneously, we are planning to ease a number of criteria for applying the incentives, including taking into account your proposals.

Firstly, we will include the projects launched before 30 September 2023 in the programme, provided that they were then at the initial stage of the investment phase.

Secondly, we will allow the use of the incentives for loans aimed at refinancing the earlier issued loans for projects within the taxonomy.

Thirdly, we will extend the period for applying the incentives within public—private partnership projects from seven to 10 years with the opportunity to extend it for another 10 years if a project is funded through bonds.

Fourthly, we will cancel the limit on the share of borrowed funds in the project financing structure for borrowers having two ‘BBB’ or higher credit ratings according to the national rating scale.

We expect that all these four modifications will be approved this year for them to become effective in 2025.

Furthermore, next year, we are going to expand the incentive regulation to sustainable development projects. As you know, there is a special detailed taxonomy for such projects encompassing education and healthcare projects, projects supporting employment and vulnerable groups of people, environmental and climate risk reduction projects. All this is essential to develop human resources and increase the competitiveness of the Russian economy.

As to sustainable development projects, we are going to allocate a special sublimit from the total incentive regulation limit, for example, in the amount of 30%. Considering that the total limit established is very high, so to say for future use, we consider that 30% will be sufficient to apply the incentives to loans amounting to several trillion rubles. Concurrently, the allocation of this sublimit will not affect lending to technological sovereignty projects that are apparently the most crucial ones.

As regards the second side of the coin, that is, incentives for long-term liabilities, it is essential that banks have stable sources of long-term financing.

We are going to publish our detailed proposals today. That is why, apparently, it is worth mentioning only a few key aspects now.

We suggest halving the insurance premium rates for long-term deposits with maturities of over three years and for irrevocable certificates. Combined with the upcoming tightening of the regulation of banks’ on-balance sheet risks (liquidity and interest rate risks), this might turn out to be effective. We expect banks to develop such products and offer advantageous terms on them to people.

Besides, the increase in the limits of insurance compensation for savings products with maturities of over three years will also be important to individuals: the President has already ordered to raise the limits for irrevocable certificates to ₽2.8 million. We propose raising the limit for deposits for over three years to ₽2 million.

Recently, Mr Aksakov said that long-term deposits should not be taxable, and the Ministry of Finance also proposed this. Generally, we support this idea. Similarly to the taxonomy, we need to take joint efforts in order to make long-term deposits popular.

Of course, we should avoid any imbalances in the incentive measures for long-term deposits as compared with the capital market. I think that we will discuss all these issues in detail.

We should be perfectly aware that, whatever the set of incentives offered to encourage people to make long-term savings, the key factor will still be individuals’ confidence in the ruble and the financial authorities’ capability to maintain steadily low inflation. In other words, if people deposit their funds with banks for long periods, they must be confident that this money will not depreciate because of inflation. Therefore, we believe that our efforts to return inflation to the target and lower inflation expectations as soon as possible are critical as well. In our opinion, this work will greatly contribute to the effectiveness of all the long-term savings and investment instruments that we have been implementing. As you remember, in addition to deposits that we are currently discussing with banks, these instruments also include the long-term savings programme, individual investment accounts of the third type, and unit-linked life insurance. I firmly believe that, by jointly discussing and promoting such areas, such instruments, we will be able to increase the role of the banking system in the country’s economic growth and the vital structural transformation that is currently underway.

My speech is concluded. Thank you for attention.