State Says It's in Control Of Bad Loan Situation

The number of bad loans in the country's banking system is "under control," First Deputy Prime Minister Igor Shuvalov said Friday in Astana, Kazakhstan, while an official said bad loans may account for up to 20 percent of the sector's credit portfolio.

"We have reserved substantial sums for recapitalizing the banking sector and are prepared for a difficult situation," said Shuvalov, who chairs the government's anti-crisis commission.

The percentage of bad loans in banks' credit portfolios rose sharply in the first quarter, reaching 4 percent as of May 1, said Alexei Simanovsky, head of the Central Bank's supervisory department, Interfax reported.

Simanovsky said last week that the share could reach as high as 10 percent to 12 percent by the end of the year, but the head of the Deposit Insurance Agency, the government body tasked with winding up banks and protecting depositors, predicted on Friday that the figure would likely increase to 20 percent.

"This definitely means that the banking sector has already eaten through its capital. ... Nevertheless, a more important factor is the level of losses to credit portfolios," Alexander Turbanov told Ekho Moskvy on Friday. "But the bank can work with borrowers, restructure loans, provide more favorable terms, and the loan will be repaid."

Some are predicting a direr situation. Standard & Poor's said last week that problem loans in Russian could reach 35 percent to 50 percent of total lending this year, with total losses amounting to half that figure.

Shuvalov also said the growth in bad loans would by no means trigger a crisis comparable to the liquidity squeeze that took hold of Russia in the fourth quarter of 2008.

"We do not see anything close to the extreme seen in the period of October and November last year. It will be a totally different situation," said Shuvalov.

The Central Bank has proposed an additional capital injection of at least 500 billion rubles ($16 billion) into the banking system this year to keep credit flowing and prevent more bankruptcies.

Turbanov said, however, that while 500 billion rubles was probably enough to save the banking sector, it wouldn't save every bank.

"If their balance sheets are weighed down with a lot of problem loans, then part of the funds will go into the reserves and part will be used to write off bad loans, and in the end it won't have the desired effect," he said.

Last month, the heads of Russia's largest private and state-owned lenders, including Sberbank CEO German Gref and Alfa Bank's CEO Pytor Aven, said the default rates would continue to skyrocket this year, making it impossible for banks to grow lending operations. They claim that banks will need more tier-one capital injections to prevent the system from experiencing a lending paralysis.