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From May, banks will be forced to report
financials according to international standards
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RUSSIAN BANKING REFORM has finally started to move forward after eight years of dithering.
Starting this spring, every bank in the country will be carefully scrutinized and have to reapply for its licence. The lucky ones that pass muster will be admitted to a new deposit insurance scheme that will allow them to hold the savings of the man on the street.
The deposit insurance scheme is the cornerstone of the Central Bank of Russia's plans to reform the sector and it comes with a string of lesser improvements.
From May the banks will also be forced to report their financials according to international accounting standards and from April they will have to report to the CBR every day.
"The entire banking sector will effectively be relicensed. It will take time. Initially the CBR was talking about June, but now they are not mentioning any dates," says Michael Perhirin, the chairman of Raiffeisenbank. "But the important thing is that it is an ongoing process that has now started. We are entering into a crucial period for the banking sector."
The laws that underpin the deposit insurance scheme have been delayed in the Russian parliament (the Duma) while vested interests haggled over the role in the new scheme of Sberbank, the only bank in the country to enjoy an explicit 100% state guarantee on all its deposits.
Voters' money
Commercial banks were pushing for Sberbank to join the scheme on equal terms from the start, but as the Duma voted the law through only two days before December's parliamentary election, deputies didn't want to be seen putting voters' money at risk and amended the final version.
Sberbank will now join the scheme in 2007 or if its market share falls below half ? whichever comes first.
"[Economy minister] German [Gref] put through a similar scheme and we were given 15 years to make the change," says Andrei Kazmin, the chairman of Sberbank. "We are going to do it in two."
It will take time to check all of Russia's 1,300 banks and it is not clear how many will apply or whether the CBR has the will to turn anyone down. No-one in government has said how many banks they expect to see left standing at the end of the process.
Competition for household accounts is already fierce and Sberbank has seen its market share fall from a position of around 85% after the 1998 financial crisis to 64% this March.
Kazmin says that the $40 billion to $80 billion of funds that Russians have traditionally stored in their homes is starting to flood into the banks: real wages were up 9% in 2003 but Sberbank's deposits rose 40% and those of commercial banks at an even faster 60%.
That means that the relicensing scheme comes at a time when the stakes are rising.
If badly implemented, the new scheme could make things worse instead of better. Allowing dodgy banks to join would encourage them to take bigger risks as they battle to offer higher returns and so win a bigger market share. But it is important to remember that the scheme will work only if it comes with tough and effective supervision by the CBR.
With deposit insurance in hand, the Kremlin is now turning its attention to mortgages. Consumer lending has been expanding fast but the biggest thing people are buying with loans is a car.
The Kremlin is hoping to repeat the success that the US had with mortgages in the last century, where each $100 spent on housing added another $15 to the economy as people went out to buy carpets and furniture.
"Mortgages mean increased building and this means more jobs and more orders for industry," says Kazmin at Sberbank. "It will help sustain the growth of the economy and the middle class as well as stabilizing society. We hope the changes to the laws will be completed this year. It is top of the government's list."
And it could be a huge business. Some 50,000 mortgage loans have already been made, but because the legislation on collateral is weak ? a Russian family with a baby cannot be evicted from their home under any circumstances ? banks have offered them only to people who don't really need them.
Still, DeltaCredit, the pioneer of the Russian mortgage business, says that the competition is intense and that annual interest rates have already fallen from 15% to 10%.
The trick is finding the long-term funds needed to pay for all the houses. A key part of the mortgage bill package will be legislation to permit the issuance of mortgage bonds so the long-term debts can be sold off to institutional investors, such as the emerging pension funds and insurance companies.
DeltaCredit has already built up a portfolio of $80 million, some of which is used to secure loans from the International Finance Corporation, but the bank is hoping to securitize these debts.
Despite the lack of clear legislation, all the leading banks are plunging into what is clearly going be a big business.
DeltaCredit estimates that the volume of mortgages is about $1 billion now, but predicts that growth from next year will be exponential.
"If there are 10 million families that need housing and if we assume that they can buy an apartment for $20,000, then by 2010 the demand for mortgages should easily reach $200 billion, a huge figure," points out Kirill Dmitriev, deputy chairman of Delta Bank.