On strategy of Russian banking sector's development

The Russian Central Bank and the Finance Ministry do not intend to cut the number of commercial banks in the country.

According to a source in the ministry, the strategy of the banking sector's development prepared by the two agencies do not envisages measures to reduce the number of commercial banks. "It is wrong to aim at reducing the number of banks. Maybe, they are too many, but their number should be cut only by the market," he said.

According to him, Russia at present has over 1,300 functioning banks.

The strategy, which on Thursday will be submitted for the government's consideration, aims at strengthening the banking system, increasing banks' capitalization and their role in the country's economy, at decreasing the costs incurred on banks and their clients, at protecting the domestic banking sector, the source said. To achieve these goals the strategy offers a number of institutional and technological measures, he added.

Thus, it proposes to ban foreign banks to open branches in Russia. They will be able to work on the Russian market only as separate legal entities, for example, subsidiaries.

The strategy also stipulates creation of the credit bureau system and bureaus to register mortgages of movables and real estate. Besides, banks are to lose functions that are alien to them, such as control over clients' cash discipline.

Also, banks are to be given the right to close non-functioning accounts that do not have any bank balance and have not had any flow for several years.

A number of restrictions are to be lifted, including the fee for opening a bank's branch.

The Central Bank and the Finance Ministry propose to set the required owned capital for banks to be open after January 1, 2007 at at least €5 million. Already functioning banks may preserve the existing owned capital but should not allow it to fall below the level accumulated by January 1, 2007.

The capital adequacy (the balance between capital and assets) is to be raised from 2 to 10 percent. The requirement will come into force in 2005 for banks with capitalization below €5 million and in 2007 for all banks.

The ministry is also preparing amendments to the civil code to stipulate a new form of bank deposits, the so-called irrevocable deposit. Bank clients who choose this deposit will receive a higher interest rate but will not be able to withdraw the money before the date specified in the contract. If the client withdraws money before that time, he will lose the interest. Specific mechanisms are to be further developed and spelled in a law.

Separately, the strategy envisages some measures to increase transparency of the banking system. Thus, a law is to be drafted to disclose real, not nominal, shareholders of banks. Besides, there will be a mechanism to disclose the chain of shareholders, including unscrupulous ones. Laws will also spell out a mechanism to influence unscrupulous shareholders. The source in the ministry believes that this can be either administrative responsibility or prohibition to acquire large stakes in credit organizations.

There is also a proposal to lift restrictions on banks issuing own bonds. "At present the market of corporate, bank bonds is quite developed and there is no point in restricting it artificially," the agency's interlocutor said.

Also, the strategy envisages measures to develop consumer loans. For example, there are plans to simplify the procedure of taking smaller loans i.e. of up to 300,000 rubles ($1 equals approx. to 29 rubles).

Fulfillment of the strategy will allow increasing banks' assets from the current 42 percent to 56-60 percent of the country's GDP by 2008.

Their aggregate capital, which at the beginning of this year equaled about 6 percent of GDP will reach 7-8 percent by 2008. Loans to the real sector of economy will amount to 26-28 percent of GDP, against the current 18 percent.