A Strong Hand in Banking Could Backfire

A visit to Sberbank headquarters by Prime Minister Vladimir Putin last week may have been more cordial than some of his recent corporate appearances, but the message was little changed.

After touring the facilities, meeting with senior executives and grilling Sberbank head German Gref on the methods used to size up a prospective borrower’s credit worthiness, Putin got down to business —that is, telling business how business should be done.

Sberbank should improve the quality of its loans but not “close its coffers,” Putin told bankers.

“It’s very easy to just shut the box, it is harder to work with clients and understand which of them are reliable,” Putin said.

New regulations, however, will cap the amount of interest Sberbank can charge at 14 percent, Putin said — down from the bank’s current rate of 15 percent to 16 percent.

“The level of 14 percent a year [interest on loans] is quite acceptable in current conditions,” Putin said. The new level represents a 3 percentage point premium over the Central Bank’s benchmark refinancing rate, now at 11 percent.

The directive is just the latest in a series of encroachments that have seen the government and the Central Bank take an increasingly active role in micromanaging the financial system. The state has tried to promote lending — all the while maintaining one of the highest refinancing rates among developed economies in a bid to stem capital outflows.

But such a policy could be shortsighted, as it hinders banks’ risk-management strategies and could ultimately destabilize the financial system if it results in too many bad loans being made.

Interest rates at some banks reach as high as 20 percent, drawing the ire of borrowers and now government officials. Banks, in turn, have justified charging high interest by citing the risk inherent in lending money during a major economic downturn.

After Putin gave his decree, Gref contradicted the prime minister, saying interest rates at 14 percent were not realistic.

Gref said the Central Bank offers funding to the sector through collateral-free loans at rates of 12 percent to 13 percent. “That is the real cost of money. Then you need to add the bank’s margin of at least 3 percent, and the result is that minimum [rates on commercial loans] are 15 to 16 percent,” he said.

In April, Putin gave an order requiring that all banks receiving government assistance lend out just as much as they receive and obliging them to keep lending rates no higher than 3 percentage points above the refinancing rate.

In a bid to spur lending and encourage banks to give out more affordable loans, the Central Bank has cut interest rates by 200 basis points since April, sending the benchmark refinancing rate to 11 percent. It has encouraged banks to lower its rates to reflect the discount.

Earlier this month, Central Bank First Deputy Chairman Gennady Melikyan said lenders had “reached an agreement” that no new deposits will be offered at interest rates above 18 percent beginning next month. Those who did not cooperate would face limited access to Central Bank cash and other funding instruments, Melikyan said.

Amid the ruble’s weakness earlier this year, the bank applied a similar policy on cash and loans secured by bonds or other collateral to limit bets on the currency’s devaluation.

Analysts were not surprised by the state’s move, although some said the long-term consequences would be hard to predict.

“The worldwide financial system has been going through a very unusual period. Governments have taken control of banks in many countries,” said Roland Nash, chief strategist at Renaissance Capital. “And keep in mind, Putin was saying this to Sberbank, in which the government holds a 51 percent stake.”

Interests rates should reflect the risk a bank has to assume, and 14 percent might not factor in every type of customer, Nash said.

“If you’re lending to Gazprom, then of course 14 percent is too high. But if you’re lending to an IT startup out of Barnaul, then 14 percent might not be high enough,” he said.

And while capping interest rates could cut into Sberbank’s profitability, it could also bring positive long-term consequences for the lender.

“If you can convince a monopoly like Sberbank to go out and lend, it could kick-start the economy, which would ultimately help Sberbank in the end,” Nash said.

Other market watchers said the state’s actions could have an effect that would be very different from the intended one.

The government is trying to manage the crisis in “manual mode,” said Natalya Orlova, chief economist at Alfa Bank. “But lower interest rates mean riskier loans, and if banks cannot reuse their money they could just reduce their exposure to the Central Bank.

“This could result in a contraction of the banking system,” she said.

Despite this, Sberbank’s stock is still one of the best bets in the sector, Orlova said.

“In terms of equity exposure, it makes sense to be on the safe side,” Orlova said. “If there is instability in the banking system, it will obviously be better supported than other banks.”

Investors were bullish on Sberbank’s stock last week, bidding it up 7.5 percent even though the company reported a 92 percent drop in year-on-year profit to 5.3 billion rubles ($170.6 million).

The 30-stock MICEX Index closed the week up nearly 4.2 percent at 1,026.95, while the dollar-denominated RTS finished up 4.15 percent at 1,012.