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. Last Updated: 07/27/2016

Kasyanov Urges Yet Delays Bank Reform

The government's commitment to bank reform was called into question Wednesday after the Cabinet failed to approve a much-anticipated five-year development blueprint for the struggling sector.

Prime Minister Mikhail Kasyanov sent the blueprint back to the Central Bank and the Finance Ministry for several minor revisions, while at the same time warning that failure to speed development of the industry would stunt overall economic growth.

Kasyanov told ministers that the banking sector must grow three times faster than the rest of the economy as a whole if the country is to maintain its five-year expansion.

"Without a fast-growing banking sector, we will not be able to support high rates of economic growth," news agencies quoted Kasyanov as saying. There is "no room for optimism," he said.

Some analysts questioned the sincerity of Kasyanov's remarks.

"It's interesting that statements like that are made and on the very same day the bank sector reforms do not get approved," said Andrew Keeley, bank analyst at Renaissance Capital. The reasons for the postponement "seem to be very technical. I think ... this is a bit of a smoke screen, really."

However, Mikhail Delyagin, Kasyanov's former economic adviser, said sending the plan back for minor revisions "has become a standard procedure lately" and does not necessarily imply that it has been derailed.

The strategy calls for submitting to parliament several bills this year to protect banks from defaulting borrowers and allow lenders to penalize depositors for early withdrawals from term accounts. Another bill would create an electronic bookkeeping system to lower the costs of reporting for banks.

The strategy also sets several bold targets, such as increasing the ratio of lending to the nonfinancial, or real, sector of the economy to 28 percent from 18 percent, and the ratio of bank assets to gross domestic product to 60 percent from 42 percent by 2009. In most Western countries, total assets held by banks exceeds annual GDP.

Commercial lending by Russian banks has tripled over the last three years, while retail lending has doubled in the past year alone, according to the Central Bank. As of Jan. 1, banks had outstanding loans to the real sector of 2.4 trillion rubles ($81 billion), or 45 percent of total assets.

But this growth in assets and lending "is not enough, because the development of the banking sector lags behind the development of the economy," said Kasyanov. "That's why there is no room for optimism in this case."

The underdeveloped and fragmented banking system -- the country has more than 1,300 banks -- is widely seen as the chief obstacle to an efficient flow of funds to the private sector and to diversification of the economy.

Several points of the document came under intense criticism in the run-up to Wednesday's meeting.

The strategy stipulates, for instance, that from 2010 all banks must have minimum capital of 5 million euros. This requirement is meant to speed up consolidation, but it could wipe out most regional banks whose capital rarely reaches even half that sum, said Anatoly Milyukov, managing vice president of the Association of Russian Banks.

Milyukov said that 800 banks in the last four years have surpassed the limit on their own and that government interference is unjustified.

The strategy also fails to address the unusually high reserve requirements Russian banks face. They have to place between 7 percent and 10 percent of their deposits in illiquid Central Bank accounts, as opposed to between 2 percent and 3 percent in most other countries. "It definitely is a drain on banks' resources," Keeley said, because "these fairly large chunks of their deposits are frozen in illiquid accounts at the Central Bank."

Meanwhile, it emerged that the government is backtracking on its December promise, made to reluctant State Duma deputies before the third and final vote on national deposit insurance, to fully insure all deposits in Sberbank.

State-controlled Sberbank is the only bank in the country with government guarantees on deposits and is exempt from the new law on deposit insurance that banks must fund themselves.

First Deputy Finance Minister Alexei Ulyukayev said the government guarantee Sberbank currently enjoys will only cover deposits made before the deposit insurance law comes into effect later this year.