Central Bank Worried About Lending Boom

The Central Bank is worried a lending boom could turn sour for undercapitalized banks if robust economic growth hits the skids.

Alexei Simanovsky, the head of Central Bank's regulation and supervision department, said in a recent interview that banks have been given six months to comply with a rule restricting the amount of credit they can extend to a single borrower.

"We are monitoring fast growth in the banks' credit portfolio with caution," he said.

Simanovsky said he was concerned that some politicians were calling on banks to lend more.

"And we get no less cautious about statements from some high-ranking officials that banks are issuing too little credit and that the banking system does not want to understand the needs of the economy," he said.

The banking system has recovered since the 1998 financial meltdown that dealt it a heavy blow, but is still widely seen as one of the economy's main structural weaknesses.

The country's banks are fragmented and heavily dominated by state-owned institutions, notably state savings bank Sberbank.

Banks are often blamed for giving out too few credits and putting a brake on ambitions to close a yawning gap with Western economies.

But Simanovsky said there was a danger that some banks could become overextended if the oil-dependent economy falters.

"Those who are in a position to pressure for more credits milk the banks, possibly with good intentions. They want to develop productive industry. But the point is they ignore the risks to the banks," Simanovsky said.

"And in case of the slightest serious dysfunction in the economy caused by domestic or external factors, like a drop in the price of exports, systemic risks would inevitably surface," Simanovsky said.

Simanovsky said banks were extending loans at almost twice the rate the economy was growing.

"Fast growth of credit volumes and emergence of new clients means that credit decisions made by the banks do not always meet necessary standards of caution," Simanovsky said.

After rocketing 53 percent in 2001, the loan portfolio of banks rose by 17 percent in the first half of the year to 1.715 trillion rubles ($54 billion) as of the end of June.

Official statistics show banks' bad loan portfolios accounted for some 3 percent of outstanding credits, but Simanovsky said the real figure was higher.

"I suppose that the volume of bad loans is twice as high. That is my conservative estimate," he said.

"Our attention is increasingly focused on risk-management issues and internal controls," he said.

Simanovsky said the Central Bank will insist all banks meet its prudential rule requiring that loans granted to a single borrower do not exceed 25 percent of the bank's capital.

He said banks were being given six months to fall into line after the Central Bank issued an instruction to them over the summer to comply with its lending rules.