President of Russia Vladimir Putin: Ms Nabiullina, the Bank of Russia is taking aggressive steps to strengthen our financial and banking system. How would you assess the current state of affairs? And what do you think of our efforts to strengthen it?
Governor of the Central Bank Elvira Nabiullina: The situation in the banking sector certainly reflects the overall state of the economy. Even though things are not running entirely smoothly, the overall situation is stable. Lending is gradually recovering, and interest rates are dropping, but the dynamics are not consistent: one month the indicators grow and the next they drop slightly.
In August, without the exchange rate revaluation, loans to non-financial organisations – companies in the real sector – only grew by 0.2 percent. Consumer loans grew a little more, by 0.8 percent. However, considering the momentum from January through the first eight months of this year, corporate loans fell slightly, while retail loans increased.
Still, consumer deposits are growing, by almost 4 percent since January. One thing that is important is that the volume of US dollar deposits has decreased.
Vladimir Putin: What is the total amount of consumer deposits?
Elvira Nabiullina: US dollar deposits now account for 25.9 percent, down from about 30 percent in January, in other words there is a decline.
Vladimir Putin: And the total volume?
Elvira Nabiullina: Consumer deposits now amount to aboout 20 trillion, slightly over 20 trillion rubles, or more precisely, 23.374 trillion as of September 1. This is a lot, and in fact, it is a resource base for financing the economy. The financial condition of the banking sector is improving, which is necessary for it to perform its financing functions.
Profits in the banking system have increased substantially, to 537 billion rubles over eight months, or to 2014 levels. This is seven times more than last year, when losses were reported. This money should not be squandered but used as a source for increased investment in the economy.
Structurally, different types of loans have been increasing at a different rate. It is heartening that mortgage lending has been growing at a priority rate, with new loans up by nearly 40 percent. Overall, the annual portfolio has increased by 16 percent. However, there is also an issue of concern to us, which is lending to small and medium-sized businesses, which are vulnerable to the current conditions.
Lending to SMEs has decreased; therefore, special measures should be taken to improve the situation. We are working on these measures together with the Government and in cooperation with the Federal Corporation for the Development Small and Medium Business. We have a special line and a special tool, which we use, as a Central Bank, to issue loans at 6.5 percent interest. Our limit of 50 billion rubles has been increased to 75 billion this year. To date, 11 billion rubles remain, and we will continue working in this area because this assistance is extremely important in light of the high interest rates offered by other lenders.
In general, the situation can be described as stable. The banking system is strong enough to increase lending. But there are also problem banks, which is why we have been working for the past few years on the financial recovery of our banking system.
Vladimir Putin: The other side of the matter concerns depositor protection.
Elvira Nabiullina: Yes, to protect the interests of depositors and creditors, we have enhanced requirements for banks and have resorted to drastic measures such as licence revocation. We have revoked 279 licences over the past three years and 68 licences this year.
I’d like to say that the assets of the banks whose licences we have revoked include between 3 and 5 percent of total deposits, by different estimates.
Vladimir Putin: Do you pay money to people in accordance with the law?
Elvira Nabiullina: Yes, people’s rights are completely protected within the scope of the ensured sum. Within 14 days, we start paying sums of up to 1.4 million rubles and then the Deposit Insurance Agency works with the remaining property to return the money to the depositors and creditors whose bank accounts were above the ensured sum.
I would like to reiterate that despite the large number of banks whose licences we have revoked, their share of total assets, of deposits is not very large: 3–5 percent. In other words, in terms of the financial system as a whole, the consequences are not so far-reaching.
There are two reasons for the revocation of licences. If an organisation has lost its capital and is financially insolvent it cannot be allowed to remain on the market because if it continues to open deposit accounts for individuals and take money from businesses the scale of the problem only increases, that is to say, losses grow. This is why our focus now is on proactive supervision to identify such problems at an early stage. This is not always easy because there is misleading information and lack of full disclosure.
The second reason why we revoke licences is that a bank is actively involved in dubious operations, that is, services the shadow, or criminal economy. It needs to be said that the violation of laws to combat money laundering and ill-gotten gains accounted for 70 percent of revoked licences as one of the reasons or the only reason.
In our estimate, during these three years, the banking system has significantly scaled down the services provided to the criminal sphere. I have the data here: in 2013, operations bearing the hallmarks of the [illegal] transfer of funds out of the country were put at $1.7 trillion; in 2014, $800 billion; in 2015, $500 billion, and in the first half of 2016, about $110 billion. Of course, we would like the banking system to bring these funds down to zero.
The same goes for converting into cash. We also watch gross transit and the dynamics there are also positive. Most importantly, the number of banks conducting such operations is falling: when we began, there were about 150 such banks. Now there are about ten. Of course, some banks, which are not conducting [such operations] at present could resume them and this is why monitoring is so important to us.
We are doing this not only with regard to the banking system, but also, for example, with the payment terminals that process large amounts of cash, about 900 billion rubles a year. When we started this work, we came across violations of the law. The requirement is that the cash be credited to special accounts and accounted for, but only 6 percent of that amount ended up there. Now they credit 95 percent to special accounts. Therefore, it is important, of course, to cover all the loopholes in the structure to avoid that.
Vladimir Putin: Are law enforcement agencies any help?
Elvira Nabiullina: They are, and we are cooperating actively. This work is especially important because these are not just violations of the banking legislation. These are criminal acts. Often banks collapse for non-economic reasons, but actually because of –
Vladimir Putin: Rogue operations.
Elvira Nabiullina: Yes. Embezzlement. We came across unique cases, for example, when some banks took money from clients and never documented the operation, which means they stole the money the moment they took it from the people. We could not find it, because the transaction was not reflected in the documents. In those cases, only law enforcement agencies can put an end to this and guarantee the unavoidability of punishment.
The inevitability of punishment is certainly key to preventing similar acts by other bankers. Unfortunately, in many cases bankers flee the country after having transferred the money, which also needs to be brought back to Russia – not just to punish the culprits, but also to return the money. This is hard work.
Vladimir Putin: But to punish them, you also need to repatriate them.
Elvira Nabiullina: Yes.
Vladimir Putin: Or better not let them flee in the first place.
Elvira Nabiullina: Maybe we need to adjust the legislation, to consider this: there are laws that prevent debtors who do not pay for utilities or traffic fines from going abroad, so when bankers with such amounts of debts just leave… It is clear that you cannot obtain a court order in two days, but it is necessary to think about a system.
Vladimir Putin: We have to be very careful, of course, so as not to restrict the freedom of travel, but we still need to protect the government and society, and bank depositors, from all criminal acts, that much is clear.
I will issue appropriate instructions to the Government and law enforcement agencies, and let us think about it together.