Finance News

Russian bad loans set to grow after new rule

The share of bad loans in Russian banks' portfolios will grow while lending growth rates will fall after a new rule forcing lenders to disclose their true interest rates came into force, a top central banker said on Tuesday.

The central bank introduced the rule this week following a number of lawsuits from borrowers who said they had been cheated by banks into paying more interest than they were originally told.

"The riskiest forms of consumer lending will now shrink," Alexei Simanovsky, head of the banking supervision department at the central bank, told reporters.

Russia's most aggressive lenders used to charge up to 50 percent interest on short-term consumer loans because Russians, who still have little experience of banking, have failed to see numerous hidden fees and commissions. Simanovsky estimated that the share of bad loans will grow to 3.5 percent by the end of the year from the current 3.0 percent but said banks have sufficient provisions and the rise posed no threat to the banking system. "I am convinced that today it does not threaten the banking system," Simanovsky said, adding that a higher share of bad loans is also a result of slower lending growth.

Simanovsky said the central bank had found no reason for concern after regular inspections. "But it does not mean we view the situation through rosy glasses," he said.

Economists warn the central bank's bad loan statistics can be inaccurate because Russian accounting rules make it easy for banks to strike bad loans off their balance sheets. Simanovsky said the spectacular rate of growth in Russia's consumer lending - 75 percent in 2006 - will fall this year to 60-75 percent. Billboards urging Russians to borrow to buy apartments, cars and home appliances are a common sight in big Russian cities. Banks have stands in many shopping malls where they issue cash to customers.

Last week, prosecutors asked the central bank and the anti-monopoly agency to investigate the Russian Standard bank, one of the leaders in consumer lending. Banks also borrowed extensively abroad taking advantage of low interest rates in developed countries and making hefty profits from issuing loans at home. Economists warn that banks could one day be saddled with millions of dollars in bad loans if a drop in oil prices hits the incomes of middle-class Russians.

Russian Standard, a household name for middle- and low-income Russians willing to borrow at high interest rates to buy a new TV or washing machine, owes about $3.5 billion in Eurobonds. The total external debt of Russian banks stood at $110 billion as of April 1 compared with $43 billion in sovereign debt.

Source: Reuters
Date: 04.07.2007 [ID: 50]

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