Today’s banking crisis looks a bit strange comparing it to Aug.1998 or summer 2004. Newspapers say it exists, while the bankers say it doesn’t. Banks don’t get closed, and there are no lines. Meanwhile, the present situation (let it be called so) in the banking sector is capable of causing what usually happens during crises: redivision of the market.

The crisis does exist in the West, in the USA first of all. Its reasons were mortgage credits given to the population along with poor checking of solvency. A person, who had not a penny to bless oneself with, was able to borrow money easily from a bank for buying a private house. Then the borrower went to another bank and refinanced the credit. As a result, the number of credit defaults exceeded the critical point. A number of leading banks found themselves on the verge of bankruptcy as well as some investors, who bought the securities backed with unsecured mortgage credits.  

Global liquidity crisis - i.e. the situation where banks either quitted lending money to one another (especially for short term) or raised the interest rates significantly – is the main trouble that Americans have given to the world now. So, “cheap” money has disappeared. 

Considering dependency of our banks on the oversea’s markets, the current crisis is likely to affect our economy. First assistant of the chair of the Central Bank Gennady Melikyan reported at the banking forum that our credit organizations have begun to borrow actively in the foreign financial markets. Last year the volume of credits taken was twice as big as in the year 2005. 2.65 trillion rubles within the structure of Russian bank’s liabilities were taken from abroad.   

Naturally, the banks who borrowed much from foreign institutions are feeling discomfort now that the crisis came. Most our credit institutions work using the same scheme: they take a credit form a foreign bank with the low interest and give it to private clients and firms with the higher interest. The difference of interest is the banks’ profit. 

Foreign companies of the credit institutions have nothing to be afraid of as foreigners will always find money for their own structures.  Stable position is also characteristic of the banks that have charged high commissions last years besides the interests for consumer credits, as they have their own means secured with cash inflow from the population.  

Others can get damaged theoretically and even get to be about to close in case, for example, a foreign investor requires urgent return of the money. The debtor wouldn’t be able to refinance the credit quickly and would find oneself in a state of technical default. 

This is what is called liquidity crisis. In itself this problem is solvable on a condition that the market doesn’t get shaken unnaturally, as it is very sensitive at this period to every nuance. For example, reinforcement of the ruble is advantageous for banks as their debts are nominated in US dollars while taking from the population is in the Russian currency. With the ruble stabilized, the banks wouldn’t be able to speculate in differences and the deficit of liquidity would be much higher. The Central Bank, who defines the currency exchange rate de facto in Russia, is not likely to allow that. 

But now Rospotrebnadzor and the General Prosecutor’s Office have been trying to reorganize the market of the consumer crediting. Attention to this segment of the market by the state bodies is grounded, and this is banks who can thank themselves for that. Above mentioned Melikyan said in August in the banking forum that “we (Central Bank) attempted to come to an agreement with the bankers. We waited till the public indignation arose and we had to apply the worst method of the problem solving, i.e. to enter the necessity of putting real interest rate in the regulations. But the bill, which obliged the banks to disclose all the information about consumer credits, was killed at the Federation Council.”  

”I do hope new amendments would be approved, allowing balancing the legislation on consumer crediting. Otherwise, we either have citizens deprived of their rights with the banks dictating the rules of game, or banks have no rights while the borrowers dictate the rule” said Melikyan.

Rospotrebnadzor, who has decided to struggle for abolition of commissions and fines, became hyperactive in December last year, when the law proceedings were started against Home Credit in the City of Ekaterinburg. This was the only case won by Rospotrebnadzor, and the number of cases started had increased greatly by February. That time the banking crisis had been going on in the West, but the “head sanitary inspector” rushed ardently to defend citizens who really needed protection, but made with a higher qualification. And with the way it was done, all the proceedings came out in favor of the banks.   

Then the Head of Rospotrebnadzor Onishenko, who remembered the principle of separation of powers, applied to the Prosecutor General. At a close meeting where present were representatives of the Central Bank and FAS, the “fighters against banks” proved to be luckier. After that, mass inspections of the banks, engaged in the consumer crediting, began, and especially of the Russian Standard as the leader in the market.  

As a result, the Russian Standard announced abolition of commissions and began recalculations for its clients along with toughening requirements the borrowers must meet. The Bank’s representatives are careful in making comment and they are not ready to talk about how the Bank will go through the crisis.   

The Prosecutor General’s Office has been checking a number of banks engaged in the consumer crediting. Though, the process is not published in the press, and the banks prefer keeping silence. Though, speaking to journalist without dictating machines, they complaint about the actions by the law enforcement bodies. Permanent checking is harmful for any business, even if it is not published widely, and the inspecting bodies do not put forward any official charges.

All that seems odd that, with the world banking crisis going on, our officials are rocking the boat. Use of force in the market, even prompted by the wish to help people, didn’t lead to more stability. “Actions by Onishenko and thrashing the banks by the Prosecutor Generals’ Office were perceived by some clients as appeal not to pay commissions and even not to return the credits. Some banks even had to increase their staff of collectors, who now explain to people it is better to pay, that the commissions have not been abolished and that non-payments for credits are illegal,” said anonymously a representative of a big retailing bank.   

So one may note an artificial aggravation of the crisis, made it intentionally or not. The bankers take their own measures protecting themselves from bad credits through toughening requirements to the borrowers. For example, in a number of banks a person used to need only a Russian citizen’s passport to get the credit card. Now it is necessary to have one additional ID. If it is international passport, there must be a mark about travel taken during last six months. 

The market of the mortgage crediting has undergone significant change either. Some banks, who were leaders last year in the market of mortgage crediting, are out of the game now. Some of them got back to the practice of initial installments as a condition for allowance of credit. Some banks who lowered the interest rate several months ago, now refuse giving comment about if it would be increased, but say with sure it won’t be reduced any more. Along with the global crisis, the growth of regular delay in mortgage payments has been the main reason for toughening requirements to the borrowers.   

”Today the main difficulty is that it is necessary to submit more documents than it was before. The process of getting the credit approved has become equally long practically in all banks. Now the real estate market is rather stable, but if such a situation had been last year, when prices went up sharply, many deals would have been failed. Besides, a number of the leading banks have begun collecting fees for consideration of the client’s applications” said a specialist in the field of mortgage crediting at the realtor Company Best-Estate Evgeny Kotov.   

In relation to the world banking crisis and actions by state bodies many banks had to find large amounts of money urgently. Securitization turned out to be the only solution possible. It refers not to issuing securities backed with credits, but direct selling of credit portfolios to those who have wish and opportunities to buy them.   

This is daughters of foreign banks, first of all, who have fewer problems with financing. And this is state crediting institutions.  The other day, the chair of VTB Andrei Kostin said his bank is willing to buy credit portfolios of the private banks that have liquidity problems. This could be a good opportunity to increase the share in the mortgage crediting market from 8% to 10% which was pointed as the target before.

It is possible, that other stable banks, that do not have problems of liquidity deficit, follow this way. And it’s not only mortgage credits, but also consumer credits that may become the object for purchase. The latter cause more hassle, as the amounts are smaller and the number of clients bigger, but the profitability is higher than with mortgage credits. 

However, the process may not be limited only to reselling credit portfolios. One may remember the summer 2004 when the largest at that moment retailing bank was sold out as a result of liquidity deficit and awkward actions by financial authorities. It is possible that this time some retail business change the owner again.  

Development of the situation will depend greatly on further steps by authorities, and the steps are implicated with the coming election. The mentioned Onishenko doesn’t seem to drop back; on the contrary, he has put more complaints against Home Credit.

The main thing is that the clients are not to expect great change in the short term perspective. All in all, it doesn’t matter much to which bank you turn out to owe in the end. As for normalization of relationship between banks and borrowers, it is still early to count on it at the moment. The new laws must be approved for that, and the deputies are busy now with other concerns.     

Opinion by players in the market

Oleg Skvortsov, Deputy Chair of the Board of Absolut Bank:

Generally, there is no acute problem of defaults in the Russian market at the moment. So we can’t speak about problem situation in the market of mortgage credits or consumer credits.

The crisis in the world financial markets may influence the rates of growth of mortgage and consumer crediting in our country. We shouldn’t expect reduction of mortgage crediting in the nearest future. On the contrary, some banks might increase their interest rates or leave the market at all. 

It is possible that some banks give more attention to the quality of their portfolios. It is possible toughening requirements to the borrowers in the Program of Mortgage without Initial Installment, or refusal that program as a risky product. Clients with non-transparent income and unclear structure of the current property, with lack of clear places of work in their record of service, may meet reduced range of possibility to get credit funds.

I consider it that the capacity of the Russian market of mortgage and consumer crediting is far from being exhausted. That’s why I don’t think we should expect crisis in those markets in the next 3-5 years.

Nikolai Korchagin, General Manager of mortgage broker Creditmart:

We should differentiate the situation with consumer credits from the mortgage and liquidity crisis.

The situation with consumer credits has been maturing for years in our young market of the retail crediting. The banks, searching after super-profits, increased the volume of their portfolios sacrificing control of risks in favor of business growth. That had to led to high level of arrears and to displeasure by people. One must welcome the effort by authorities and regulating bodies intending making the market more transparent and providing respect for consumers’ rights.   

Mortgage market is more conservative and stable. It feels a bit nervous now due to the situation in the western mortgage markets. A number of banks quitted giving mortgage credits because the necessity has become clear for revision of credit policy in the context of the risks and due to a simple reason: the world crisis of liquidity led to rise in price of financing by a number of players in this sector. Nevertheless, I don’t see the further dramatic development for this sector. 

Our banking system stands the crisis rather easily and its relatively low development is advantageous for us. One of the factors aggravating the situation in the USA was the high level of development of the mechanism of securitization. For each dollar of mortgage credits serving as backing, it was issued 30 and even more dollars of mortgage securities! Of course, the liquidity crisis has caused some difficulties with financing with a number of banks, but its role for us is rather positive, helping avoiding turning our head out of success and helping more proper considerations of the risks.         

Comment

Anatoly Aksakov, deputy chair of the State Duma’s Credit Institutions and financial markets Committee:

I don’t see grounds for large scaled banking crisis in Russia. Potential by the Central Bank is enough to solve any problems with liquidity within rather short period of time.

First, the Bank of Russia has increased recently assignments to the obligatory reserves. Decreasing them we can solve liquidity problem at any moment like it was done in summer 2004.

Second, the Central Bank has significant currency and gold reserves (more than $400 billions), which allows refinancing crediting organizations on smoother conditions than now without consequences in a form of inflation.

Moreover, the Bank of Development has been created that will be engaged with refinancing of crediting institutions for various projects: crediting small and middle-sized business, and infrastructure projects.

It’s important to understand that Russia is not involved so much in the world flows and schemes in the way that global crisis lead to similar consequences in our country. If we talk of mortgage market, its share in the USA in its proportion to gross domestic product is 65% while in Russia it’s only 2%. So the mortgage is not capable of great influence on our banking market.

We have 0.5% defaults for mortgage credits and less than 3% for consumer credits, which is within the normal. Nothing forbids crisis in Russia. On the contrary, we have surplus of liquidity. If the growth of prices for oil and other fuels continues, it will compensate losses related to reduction of borrowing from abroad.   

Along with that, one should remember that there is one regulator, Central Bank. It is good when it is also engaged in supervision. And when Rospotrebnadzor interferes with the banks’ activities, that gives a rise to questions. I’ve written a letter to the name of the Prosecutor General Yuri Chaika asking him to approach carefully to the inspection of this or that crediting organization.

Under text

The government seems to take seriously the problem of liquidity deficit in the market. Meeting with the President, vice- premier Kudrin reported that finance ministry is ready to put $10 billions intended for forming the capital of the state corporations, within the home banking system in case the necessity presents itself. They could be deposited in the largest state banks. Besides, first assistant of the chair of the Central Bank Alexei Ulyukaev reported of possibility for refinancing the banking system in the amount of 1.5 trillion rubles. So the banks will be supplied with money.  

It’s curious that Kudrin, who is always careful and always oriented to struggle against inflation, has suggested a project, implementation of which would make absolutely impossible achieving the government’s target for inflation. Here is a point here. The chance for achieving that plan is diminutive. But now, with the next failure occurred, it will be easy to plead to the struggle against the banking crisis.