Russian banks have come under increased scrutiny over their bad loans as top executives may be forced to beg for state bailouts. Elvira Nabiullina, head of the central bank, faces pressure from executives to lower rates amid challenges for corporate clients and households. She cut the benchmark rate in June from a record 21% to 20%, and again last month to 18%. The central bank also indicated it would continue to cut interest rates throughout the year to reach its target of a 4% inflation rate by 2026.
Despite this, current rates still make it harder for people to secure, repay, and refinance their debt. Expert RA, Russia’s largest credit rating agency, reported a 65% drop in net profit last year and called for external support. Nabiullina appears to be downplaying the extent of the banking issues, saying there was “no need for the recapitalisation of large banks due to some overhang or potential overhang of bad debts.”
She added: “The true situation with problem loans is better than people sometimes make out.” However, the banking chief did admit that capital was “really distributed unevenly across the banking sector”.
A former Russian central bank official told the FT that a high key interest rate increased the number of non-performing loans as non-subsidised borrowers cannot “afford expensive bank loans”.
Top executives at some of the country’s biggest banks have already discussed asking for state bailouts because of bad loans. Officials told Bloomberg News that the quality of loans is far worse than official data shows.
Herman Gref, CEO of state-owned Sberbank, Russia’s largest lender, warned that the quality of loans is decreasing and companies increasingly need to restructure their debts.
He said: “It is already clear that it will not be easy. I hope, as always, we will be able to find joint plans to get through these difficult times.”
Sberbank reported that its cost to risk had rised to 1.71% in the second quarter of this year from 0.97% in the same period last year. Its provisions against bad loans have also shot up, as they have for state-owned VTB Bank.
Pressure continues to mount on the central bank to cut rates as businesses and the genreal public alike struggle to cope with financial hardship.
Vasily Astrov, an economist at The Vienna Institute for International Economic Studies, said people are refinancing their debt on “very unfavourable terms” because of high interest rates.
He warned: “Very few companies can take in credit at such very high interest rates. And the same goes for households.
“Now that the general interest rate level is so high, basically these old debts have to be refinanced on very unfavourable terms. And that creates stress.”