Nabiullina: the banking system not only remained robust amid COVID-19, but also extended support to the economy

Speaking at the credit institutions’ Annual Meeting with the Bank of Russia management organized by the Association of Banks of Russia, Governor of the Central Bank of the Russian Federation Elvira Nabiullina noted that the economy and society were at the stage when the system was already getting back to its normal functioning. This means that the banking sector is ready to switch from the anti-crisis mode to the solution of tasks suspended under the pressure of the pandemic. We bring to your attention the key points of her speech.

“I believe the banking system has adequately overcome the past year. And this is not only about the robustness retained by the banking system itself, but about the fact that it successfully discharged its mandate, providing significant support to the economy, restructuring current loans and issuing new ones,” the Governor said.

Thus, corporate lending grew by 10% last year, almost twice as much as compared to pre-pandemic 2019. Lending to small businesses increased by 20%. The peak season was in spring, when businesses were in a desperate need of financial resources, with their revenues dropped and loans becoming, to a great extent, a way to support payrolls, to pay rent, etc. Thus, the banking system was able to address this challenge in the spring. ...

Easy-term loan programmes supported by the government played indeed an important role. Mortgage lending grew significantly in the past year, by over 20%. This was due to the soft mortgage loan programmes and, of course, due to the lower rates in the economy in general.

The consumer lending that was a matter of concern before the pandemic, demonstrated moderate growth last year, at about 9%. And in this regard, banks were prudent and conservative when assessing the borrowers’ risks. Meanwhile, borrowers themselves did not seek to incur new liabilities in such a period of uncertainty.

Loan restructuring has become one of the main channels for the support of the economy by the financial system. These restructuring schemes and the safety cushion formed over previous periods help protect the banking system from a situation where last year’s crisis could become a problem for the financial system in the future.

The Governor believes the peak of loan restructuring has already passed. And since the start of the pandemic, banks have restructured about 10% of their loan portfolio, which is quite a lot. The banks themselves estimate that up to one third of such restructured loans may turn into nonperforming exposures, quoting figures within 20-30%. This will mean that bad loans may reach 2-3% of the entire loan portfolio, forcing the banks to form additional provisions for them. It will hardly entail any systemic risks, since the loan-loss recognition process will be gradual – judging by the last crisis period, it takes about two years, i.e. in any case, provisioning is not a one-shot process, while the revenues of most banks allow provisioning without the need to spend their capital.

Besides, a capital cushion in the sector is significant. It remains at the level of 6 trln roubles, which is three times the potential amount of additional provisions for restructured loans. In other words, no problems are seen in this respect for the banking system as a whole, though there is an unevenness in terms of both capital and income distribution, as well as the non-performing loans recognition in banks’ balance sheets. Therefore, the issue will require a special focus from certain banks.

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