Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Banks Banned From Changing Rates




The Constitutional Court has banned banks from lowering interest rates on deposits at their own initiative, a move analysts said would have little affect on Russia's troubled banks.


The ruling Tuesday was made to stop banks from unilaterally changing rates without the state's authorization - a practice many were engaged in during the heady days of the high-flying treasury-bill market.


A number of banks - including Sberbank, Inkombank and SBS-Agro - were engaged in this practice, and complaints filed by furious depositors brought the issue to the court's attention.


Blocking this practice is a step in the right direction, analysts said. However, they added, it is unlikely to have any impact on banks and under certain circumstances might even be reversed.


The banking sector is all but paralyzed following the T-bill market's collapse in August. Most banks are offering rates much lower than the expected inflation rate, making time deposits a money-losing proposition.


The court decision is not retroactive, so clients won't get back money that they lost due to lower interest rates.


Russian banks Wednesday greeted the court's decision coolly, with many saying that they no longer unilaterally change interest rates.


"Sberbank has deposits with fixed interest rates only," Sberbank spokesman Alexander Torkunov said.


In making time deposits, all clients must sign contracts approving a predetermined rate, he said. If the client fails to withdraw the savings when the time is up, then the bank has the option of redepositing the funds under a different rate.


Another industry insider blasted the ruling, saying that instead of finding more ways to protect depositors, the court should be helping the rattled banking system.


"Households should be prohibited from withdrawing deposits before time," said Alexander Zagryadsky, deputy head of the Association of Russian Banks, which defends industry interests.


Such a law would facilitate investments, Zagryadsky said. "If banks are not able to plan investment horizons, household funds cannot be allocated."


One Russian banking analyst said that while the ruling could protect depositors, it could also be easily reversed.


"There are three possibilities of that kind: The decision could be appealed, a new Constitutional Court could make another decision or a new constitution could be approved when another president is elected in the year 2000," said the analyst, speaking on condition of anonymity.


The retail deposit market remains in the doldrums after the crash and interest rates are far below the anticipated inflation rate. State-owned Sberbank offers 21 percent to 45 percent on three-month deposits and 16 percent to 19 percent on annual deposits.


Commercial banks offers differ little. On three-month deposits, Avtobank pays 37 percent to 41 percent and Alfa-Bank offers 50 percent.


"Banks have to offer low rates to be able to break even themselves. There is a lack of instruments in which banks can invest money," said Farid Shafikov, a senior official at Avtobank. "Naturally, buying dollars is a better alternative to ruble deposits."


Other bankers agreed that dollars could be a better place to invest rubles than bank accounts.


Troika Dialog economic adviser Sergei Prudnik put 1999 inflation at 60 percent to 100 percent and the December ruble rate at 35 rubles to 50 rubles to the U.S. dollar.


"My guess is that inflation of 60 percent and ruble at 35 is a more realistic scenario," he said.


Given that, parking money in private accounts will result in a 10 percent loss of purchasing power by year's end. In the worst-case scenario, bank depositors would lose 25 percent to 30 percent.


For example, if a person bought $1,000 in rubles today and placed it in a time-deposit account, the best he could hope for would be a year-end balance of 33,000 rubles at the 50 percent interest rate. That is slightly less than the 35,000 rubles the $1,000 would be worth if the ruble ends the year at 35 to the dollar.