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. Last Updated: 07/27/2016

Pace Slowing in Process of Bank Reform

Despite Central Bank pledges earlier this year that Russia was heading for a sweeping clean-out of its banking system, signs are that the process is taking much longer than expected. In fact, the pace of closures of bad banks has slowed rather than quickened.

According to a spokeswoman of the Central Bank, 39 of Russia's some 2,500 commercial banks had their licenses withdrawn and the activities of another three were temporarily suspended in the first four months of 1996.

This appears to be a significant decrease compared to last year when 315 banks, or some 12 percent of all Russian banks, had their licenses retrieved.

The low toll of bank closures has raised concerns that the Central Bank is backsliding on vows to weed out smaller banks that are struggling to cope with the new lower inflation environment.

"It is disappointing that the Central Bank has taken away so few licenses," said Klaus Embs, a project manager for banking support at KPMG Frankfurt.

Embs said that, in spite of the reform-oriented leadership of its chairman, Sergei Dubinin, the Central Bank still has a large number of conservative managers that are dragging down the pace of reform in the banking sector.

In recent months signs have increasingly shown that the bank has softened its approach to banking reform. It announced a modest cut in the tight reserve requirements affecting commercial banks which should take effect this week. Commercial banks hailed the move as "a step in the right direction."

Analysts caution that this apparent policy softening may reflect short-term politics. In the run-up to the June poll "the last thing the government wants is a new banking crisis," said Roland Nash, an economist with the Russian-European Center for Economic Policy.

But they also believe the government's overall attitude to banking reform remains unchanged. "The government has clearly signalled that it is not bailing out banks," Nash said.

The decrease in the number of Central Bank sanctions may at least partially reflect a stronger performance of Russian commercial banks in the first months of this year.

By comparison, 1995 was anything but rosy for Russian banks: 800 banks posted net losses and the sector's total losses for 1995 were last month estimated at 10 trillion rubles ($2.1 billion) by the Association of Russian Banks.

"The high number of bankruptcies is a consequence of the government's tight monetary policies, excessive reserve requirements and a huge tax burden," said Alexander Zagryadsky, a spokesman for the ARB.

But 1996 has been different. Although the ruble corridor still limits the room for speculation against the ruble and corporate lending remains risky, most banks have returned to the market for high-yielding government bonds.

"This year things have been better for the banks," Nash said. "There is money to be made both on T-bills and more recently in the share market."

The cut in reserve requirements -- from 20 to 18 percent on ruble deposits of up to 30 days -- will also improve the banks' position when it kicks in.

But even though some crisis symptoms are easing, the Central Bank reportedly still has 400 of the country's banks on its problem list and is pursuing moderately tight policy.

Bankers themselves still complain the Central Bank is being too harsh, arguing that this month's easing of reserve requirements is insufficient to cushion banks from the shock financial stabilization. "We think 10 percent reserves would be normal given the decrease in inflation," said Zagryadsky of the ARB.

The Central Bank has also not shrunk from long-term measures to consolidate the banking sector. It announced it is increasing its liquidity and capital requirements in relation to Russian banks. By 1999 the minimum charter capital of a commercial bank will be 5 million ecu ($6 million) up from its current level of 1 million ecu.

So far less than 10 percent of Russian banks can meet this target, and some analysts warn that attempts by the Central Bank to pursue a hard line in relation to small banks may have undesired effects.

In Moscow the removal of a segment of the small and medium-sized banks will not affect the basic structure of the market, but in many regions it may virtually eliminate competition, said Mikhail Dmitriyev, head of economic research at the Moscow Carnegie Center.

A bank rating published by Izvestia earlier this week suggested that several of Russia's largest banks, including Oneximbank, Menatep and Rossisky Kredit are overburdened with loans to other banks.

However, the widespread phenomenon of larger banks lending to each other is not necessarily a worrying symptom, but could on the contrary suggest that the healing has begun, analysts say.

Following the August liquidity crunch the banks have become much more worried about their credit portfolios, Nash said.

"Little circles of 'good banks' that know each other have been formed," he said. These banks lend money to each other, often at preferential rates, and avoid "unsafe banks" of the type that triggered last August's domino effect on the financial market.

"That is a first sign of restructuring taking place," Nash said.