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. Last Updated: 07/27/2016

Banks More Active but Helping Fewer

Banks are lending more and they're lending more carefully, but it may be no easier for the little guy to get financing than before.

The total amount of lending by banks has increased, and banks are directing more of their assets to lending. Lending to corporate borrowers increased 56 percent in 2001, to 1.2 trillion rubles ($41 billion), according to the Central Bank. Corporate loans amounted to 38 percent of total bank assets as of Jan. 1, 2001, up from 32 percent the previous year.

But the number of borrowers has not kept pace with the increase in lending, analysts said, mainly because banks are behaving reasonably and paying more attention to credit risk.

"Banks are focusing more on the real risks of their borrowers," said Richard Hainsworth, CEO of the RusRating bank-rating agency. "Although banks are allocating more money to loans, it looks as if the banks are lending more money only to the borrowers they have for longer periods of time, rather than lending to a wider number of clients."

It is a catch-22 situation. The key to sustainable economic growth is to diversify the economy and to develop small and medium-sized businesses, and the key to doing that is financial intermediation, moving savings and uncommitted cash to those who need it, economists said.

But smaller, and often more opaque, businesses are more risky and tend to be less profitable. Meanwhile, inadequacies in corporate and personal bankruptcy laws mean most larger banks hesitate to lend to such businesses or offer prohibitive rates.

Banking loans accounted for only 8.3 percent of total domestic investment in 2001, according to the State Statistics Committee.

"It is not the banks' fault that a good financial intermediation system doesn't exist," Hainsworth said. "The risks of lending in the economy are very high and banks' operating costs are high."

Low equity capital levels have also held back credit expansion. Despite an almost 44 percent increase, total bank capital -- a determinant in how much a bank can lend -- was a meager 520 billion rubles ($16.7 billion) in 2001.

In such an environment, familiar borrowers get first dibs.

"Access to loans is a privilege rather than a right," wrote Mikhail Matovnikov, deputy general director of Interfax Rating Agency, in a report on lending last year.

The most privileged tend to be from cash-rich industries. As a result, the biggest borrowers accounted for 31 percent of total loans in 2001, up from 26 percent in 2000, according to the Central Bank.

A high concentration of loans also concentrates the risk of a loan going bad, Matovnikov said.

Poor performance may already be rearing its head. Past due loans, which had fallen since 1998, began to plateau in 2001, ending the year at 2.9 percent, according to Interfax Rating Agency. And as lending increases, the amount of past due loans may also increase, especially if the economy starts to slow.

This could make the circle more vicious, unless the government hurries up banking and judicial reforms, improving bankruptcy procedures and property rights laws, analysts said.

"For growth to be sustainable it has to come from small- and medium-sized businesses, and this won't happen unless a number of conditions are met, most important, banking reform and improved financial intermediation," said Alexei Moiseyev, economist at Renaissance Capital. "If we don't see banking reform now, Russia will start stagnating in two to three years' time."