Central Bank plans to withdraw banking sector support measures

The regulator believes that the peak of pandemic-related loan restructuring has passed

The Bank of Russia considers that it’s time to curtail measures that have helped Russian banks to overcome a difficult period of mass loan restructuring. Although a small share of the loan portfolio may still be at risk, the banking system overall is healthy.

The Russian banking sector is ready to live without COVID-19 support from the regulator, says Reuters citing the Bank of Russia. The regulator softened some of its financial regulation rules last year to avoid a banking crisis, as the coronavirus pandemic saw many entities losing their revenue and hitting Russians’ incomes as a result. The support measures, which ranged from lower capital buffers and provisions to emergency liquidity lines, secured banks with 1 trillion rubles ($13,6 billion) in additional capital equal to 10 trillion rubles in new loans.

However, on 18 February, the bank’s head Elvira Nabiullina said that the peak of loan restructuring had passed, and the national banking sector can continue working without state support. “We see no negative side effects from scaling down anti-crisis measures,” she said adding that the regulator planned to withdraw softer regulation rules from 1 July.

According to Nabiullina, Russian banks will have to create extra provisions, because 2-3% of the loan portfolio still can transform into bad loans. Nonetheless, the Central Bank doesn’t see any debt-related problems in the Russian banking system. The regulator may even consider tightening consumer lending regulation, said Nabiullina.

Meanwhile, S&P Global Ratings warned last month that Russian banks could lose 1,4-1,6 trillion rubles in net interest income in 2021-2022 due to “narrower interest margins linked to low interest rates”. The agency estimated that the net interest margin could fall by 50-75 basis points this year to a historic low of 3,25-3,5%, and by another 25 basis points in 2022. Nabiullina confirmed that Russian banks lost 20 basis points in their margin last year and warned that the drop could deepen further amid low rates.

At the latest meeting on 12 February, the Bank of Russia kept its key interest rate at a historic low of 4,25 but announced that it did not plan to cut rates further. The rate is expected to be raised gradually as soon as inflation stabilises near its 4% target. The regulator plans to switch its monetary policy to a neutral rate in the next three years. It also may revise its estimate of the neutral rate, which is currently set at 5-6%.

By Anna Litvina