Small Banks Beg State for Respite

The heads of hundreds of small banks flocked to Moscow on Friday to lobby against a new law that could force them to close by the end of the year, but Finance Minister Alexei Kudrin insisted that the government would not budge.

At an annual conference of the Association of Russian Banks, the small banks begged lawmakers and state officials to amend the law requiring them to increase their net worth to 90 million rubles ($2.6 million) by Jan. 1 and to 180 million rubles by 2012.

"Our colleagues have announced, and with good reason, that this law will lead to the closure of many successful small banks and bring harm to many honest small and medium enterprises," the association's president, Garegin Tosunyan, said in his opening remarks.

Small banks with less than 100 million rubles in capital make up 28 percent of the association's membership, which includes 760 of the country's 1,200 financial institutions.

"This strain is coming at a time of crisis ... and so our members propose that the time period for coming up with the minimal capital requirement is extended by two years," Tosunyan said.

The government has said Russia has far too many banks, and Pyotr Aven, head of the largest private bank, Alfa Bank, has predicted a wave of failures on bad assets several times in recent weeks.

At the conference, the chiefs of the biggest banks called for lower refinancing rates and more direct government support for banks. But the looming capital requirement was the main concern of most conference attendees.

The only speaker of the day who managed to draw midspeech applause from the banking crowd was former Economics Minister Andrei Nechayev, a sharp critic of the capitalization minimum.

"In the base-case scenario, it is stupid to require the banks to have 90 million rubles in capital by Jan. 1. In the worst-case, it is sabotage," Nechayev said. "Let the market dispose of these banks in market terms. ... Why should we do it artificially?"

Kudrin, who took the stage after Nechayev, said the law would weed out banks that contribute little to Russia's economic growth and criminally active banks that have increased their money-laundering operations during the crisis.

"We believe that is necessary to increase and consolidate banking capital to create developed institutes that are able to provide for economic growth," Kudrin said.

"What are 90 million rubles? Most of you in the crowd understand what this sum is worth. ... If a bank doesn't have 90 million rubles, it is a very small bank, rather, it is a minibank," Kudrin said.

Kudrin said that while there are still "honest" banks in this small-cap category, there are also many banks "engaged in money laundering," banks that exist not to lend but to "protect the owners' or someone else's money."

"This law will increase control over banks. There will be less banks but much more supervision," he said.

Kudrin predicted that about 150 banks would not have enough capital to meet the requirements by Jan. 1.

Kudrin's remarks did not sit well with bankers from turbulent Dagestan, where almost all of Russia's counterfeit currency operations are located.

"I want this law scrapped," said Magomed Abduchalikov, chairman of Inforbiznes Bank, which has a net worth of about 11 million rubles according to data on the Central Bank's web site.

"This law means in eight months, Dagestan's small businesses won't have any access to credit. There is no way a Moscow bank will lend to shops in our villages and hamlets. Our small banks trust the local people," said Abduchalikov, speaking on the sidelines of the conference.

Ali Aliyev, chairman of the bank Caspian and vice president of the Association of Dagestani Banks, said the republic of 2.5 million people has 32 regional banks, with core capital amounts ranging from 10 million to 40 million rubles ($300,000 to $1.2 million).

"I don't understand why our local banks are hurting anyone. If they break the law, have the Central Bank take away their license," Aliyev said.

Banking experts cautioned, however, that banks with such low charter capital are suspect.

"A bank that can't even show such a low threshold like 90 million rubles begs you to ask, 'Why does this financial organization exist?'" said Mark Rubenstein, senior banking analyst at IFC Metropol.

"With legal lending limits at 25 percent of capital, a bank with 10 million rubles can only lend 2.5 million rubles, that’s $75,000. Naturally, the economic feasibility of this bank is suspect," Rubenstein said by telephone.

Maxim Osadchy, banking analyst at MDM-Bank, one of the country's biggest private lenders, said banks with such low capital should "not exist in a competitive environment."

"You can't set up a bank by putting two people together. You need offices, technology, good risk managers and other key people," he said. "If you have 50 million rubles on your books, it seems that you are not a bank but involved actively in some other business."