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. Last Updated: 07/27/2016

Official Says Foreign Borrowing Too High

NIZHNY NOVGOROD -- The level of domestic banks' foreign borrowing, now at 15 percent of combined banking sector assets, is too high, the country's top banking supervisor said Thursday.

"Fifteen percent is, of course, too high," Gennady Melikyan, first deputy chairman of the Central Bank, told reporters at a banking conference.

Melikyan said some banks had taken on too much debt but added that these were not dominant banks in the sector. Banks had 2.65 trillion rubles ($103 billion) in foreign liabilities as of July 1, 2007, Melikyan said.

"Banks stuffed their vaults to the maximum with loans in foreign currencies," Melikyan said.

Massive external borrowing and equity fundraising by firms has driven record net private capital inflows, which replaced oil revenues as the country's main source of foreign currency and fueled a liquidity bonanza earlier this year. Banks borrow abroad at lower interest rates and lend money at home at sky-high rates as Russians discover the advantages of consumer lending.

A large share of foreign debt liabilities makes local lenders less vulnerable to bank runs at home but more vulnerable to the kind of interest rate and currency risks that have been triggered by the U.S. subprime mortgage crisis.

The Central Bank has pumped liquidity into the banking system via repo auctions over the past week as money market rates jumped. It sold as much as $4 billion to curb a sell-off in the ruble Tuesday as foreigners dumped Russian assets.

"Currency risks in this situation rise," Melikyan said, calling for the government's help in forcing banks to raise more funds at home and less abroad. "We should think how to replace foreign borrowing with domestic. Maybe with the government's or development institutions' help."

The government allocated about $10 billion to the capital of the Development Bank, created to support infrastructure projects and industry revival. The bank is expected to emerge as a major borrower this year.

Melikyan said the Central Bank had begun inspections in a number of banks, including some leading players, to look at their consumer lending practices. Melikyan declined to identify the banks.

"We are inspecting a number of banks and are looking into issues related to consumer lending," Melikyan said. "In some regions, effective interest rates on consumer loans reached 120 percent. This is robbery!"

Prosecutors last week asked the Central Bank to monitor consumer lender Russky Standart's compliance with the law on banking and the protection of consumer rights, scaring holders of the bank's junk-rated eurobonds.

Russky Standart, which specializes in point-of-sale loans and credit cards, has faced a wave of complaints over the double-digit percentage rates that it charges on unsecured loans.

Following the prosecutors' statement, Russky Standart announced that it was scrapping all commissions on consumer loans. Melikyan said the prosecutors' involvement in consumer lending issues was only temporary.