Deposit insurance, the cornerstone of the government’s bank reform effort, is in place but has had a mixed reception from bankers. The Russian banking sector has just been through a complete relicensing process, in which any bank that wanted to keep the right to offer services to retail clients had to reapply for its general banking licence. By the end of the first quarter, 800 banks from a total of 1300 had been admitted to the scheme. Analysts hoped that the Central Bank of Russia (CBR) would take the opportunity to clean some of the deadwood out of the sector.
“Deposit insurance was a real disappointment because an opportunity to clean up the sector was missed,” says Irina Penkina, in charge of financial institutions at Standard & Poor’s Russian office.
Cautious outlook
The mini-bank crisis last summer has made the CBR super-cautious. It was caught off guard when bankers panicked after it pulled the licences of Sodbiznesbank last May and rumours spread like wildfire that the regulator had a blacklist of banks that it wanted to close. The long-awaited deposit insurance laws were rushed through that summer as part of the effort to restore confidence.
“The crisis triggered deposit insurance but the CBR didn’t intend to move so fast. It was introduced as a way of improving stability in the system. The irony is if the CBR had used deposit insurance to close down a lot of banks then it could have destabilised the banking system. Confidence remains very fragile,” says Natasha Page, head of Fitch’s Russian office.
Rather than risk another meltdown, the CBR is erring on the side of caution and has admitted most banks to the system, but it has taken the relicensing process as an opportunity to force banks to clean up their act. The widespread practice of banks artificially inflating their capital by lending money to themselves through shell companies – so call virtual capital – has been stamped out and banks are being forced to be more forthcoming about their ownership.
However, it will take several years for the real effects of deposit insurance to take effect – thereby luring Russians away from depositing their money in state-owned retail giant Sberbank to the commercial banks. A recent poll found that 34% of Russians had never heard of deposit insurance and only 25% said they trusted the banking sector.
Retail disappoints
Bankers are keener on deposit insurance than their customers because it is another plank in the development of the fast-growing retail banking sector. But despite high hopes, the anticipated gains from retail are not coming through fast.
Analysts say that banks have overestimated confidence in the banking sector and underestimated the costs of setting up retail operations. Deposits have risen fast but the sector is not proving as dynamic as they had expected and the business has yet to be tested.
“There are significant risks in the system, especially following the rapid development of retail, and the system has not yet been tested by a rapid downturn,” says Ms Page.
Russian banks have been more or less forced into retail since 2003, when the country’s best corporate clients gained access to the international capital markets and were able to borrow long-term money more cheaply abroad than from the domestic banks. As incomes are rising strongly and Russians are launching themselves into an orgy of borrowing, retail was the obvious place to go.
But setting up retail operations is a costly business making retail deposits among the most costly form of capital available to banks – in contrast to the rest of the world, where it is among the cheapest. The banks are pursuing retail deposits in the hope of selling customers other products to make back some of the money lost on investing in building branches.
“Banks are focusing on building up their depositor base, not because it is a source of cheap money – it isn’t – but because they can sell services to their customers,” says Nataliya Orlova, chief economist at Alfa Bank.
Search for clients
Small and medium-sized enterprises would be an obvious alternative because many ‘medium-sized’ companies now boast billions of dollars a year in sales and are big by international standards. But the appeal of taking on medium-sized clients is lost because they are so opaque that the due diligence to reduce the risks of dealing with these clients also makes it a costly business. Banks are cherry picking among the up and coming medium-sized companies but are not throwing themselves fully into broadening their client base.
“Russia’s medium-sized companies are not so small but to analyse the risk of each company is very time consuming and expensive,” says Ms Orlova. “The need to find these customers came at a time when margins were falling and banks were trying to cut costs and staff. The departure of the best corporate clients overseas in 2003 pushed the banks into the retail business.”
