Report: Overdue Loans Threaten Banks

Russia could be facing a new banking crisis caused by bad credit, according to a report showing that the amount of overdue loans has ballooned for the second consecutive quarter.

Mikhail Matovnikov, head of bank research at the Interfax Ratings Agency and author of the report, "The First Signal of Crisis? -- Bad Credit Is on the Rise," said the situation with overdue loans is getting worse.

Over the whole of last year, overdue loans at the 100 largest banks in Russia grew by 26 percent. The figure for just the first half of this year was 54 percent. Of the 100 largest banks, those with more than 2 percent of their loans overdue has grown from 11 to 24 since the beginning of the year. In six of these banks, the share of overdue loans is more than 5 percent of their credit portfolio.

"For a long time after the crisis, a lot of banks were writing off their bad loans," said Matovnikov. "Now there is a new wave."

Experts say the trend is the result of a fall in banks' credit portfolio growth. The volume of credit issued grew by 61 percent in 2001, while in the first half of this year it grew by only 15 percent.

Companies are more likely to seek credit either in the West or by issuing bonds, leaving Russian banks with less dependable borrowers and consequently increasingly poor credit portfolios.

Bankers assume the tendency will continue. "I think the credit portfolio growth rate will continue to decline in most banks," said Alexander Silvestrov, head of major client relations at Alfa Bank. Banks will not be able to lend at the same rate working with mid-sized businesses as they have been able to with large corporations, he said.

Other factors have also contributed to the explosion in bad credit. The bankruptcy process of beleaguered petrochemical giant Sibur has had a negative impact on almost all major banks' portfolios. Alfa Bank's share of overdue loans increased from 1.6 percent at the end of last year to 2.6 percent. Without Sibur, the banks' bad credit would have fallen to 1.5 percent, Silvestrov said. Zenit Bank, whose share of bad credit has grown from 3.2 percent in 2001 to 6.2 percent, has the same excuse. Zenit's financial director, Sergei Rudik, said one-third of the bank's bad credit belongs to Sibur.

But not everything can be explained by the financial instability of Sibur, Matovnikov said. While only a few banks worked with the troubled firm, the bad credit ratings of 59 have gone up, he said.

Banks have started crediting new borrowers that were initially given small loans that were easy to return -- frequently using loans from other banks -- after which the loans grow bigger, he said. The fight for clients has forced banks to hang on to companies to and over-credit them. Because the number of good borrowers is limited, many banks are playing roulette. "This game is getting risky," said Matovnikov.

He predicts more bad credit will be uncovered during the next quarter and those banks will have limits imposed upon them on the interbank market, adding that some of them will start having problems, which could in turn precipitate a widespread banking crisis.

Banks in the Danger Zone
BankRanking by total assetsCredits to non-banks, mln rublesOverdue credits, mln rublesOverdue/ non-bank rubles credits, %
Petrovsky Narbank453,824.461328.3178.58
Kreditny Agroprombank661,821.67399.7525.48
Garanti Bank-Moskva128778.03200.08825.72
Yapy Kredi Moskva194883.38472.9638.26
Source: Interfax Ratings Agency