Elvira Nabiullina’s speech at joint meeting of State Duma dedicated committees on Bank of Russia’s 2019 Annual Report
Good afternoon, dear colleagues
Today, we are holding our conventional joint meeting of the three committees to consider the Bank of Russia’s Annual Report, and this meeting is taking place in a really unconventional format. The coronavirus has not only frozen our normal life. We all are aware that the consequences of the pandemic will not just melt away after the restrictions are cancelled. The coronavirus has actually shifted the paths of the normal development of our economy and financial system. Of course, we are now a little more optimistic about our future prospects: Russian regions are easing their restrictions; industrial enterprises, trade businesses, and somewhere even the service sector are resuming their operation. However, we estimate that there are still several quarters of recovery ahead.
In my speech, I would like to focus not only on the results of the last year’s development of the financial system and the Bank of Russia’s 2019 performance, but also on the condition of the financial system before the outbreak of the pandemic, its future consequences, and the findings we should derive from this abnormal situation, as well as on what is being done and what else could be done by the financial system in order to support households and the economy.
Last year was rather comfortable for Russia’s economy. The Government launched the national projects aiming to address pain points in the economy. I remember that throughout the entire 2019 we were discussing what else was needed and could be done to accelerate economic growth. Those discussions consistently revealed a contrast between stability and development. We were questioning whether it was reasonable to cherish low inflation, small sovereign debt and a budget surplus, if all that was not transforming into growth. I believe that this year’s pandemic and oil price downfall have solved that false dilemma. In my opinion, that dilemma was definitely false.
These are price stability, our conservative fiscal policy, and the accumulated safety cushion in the financial system that have enabled us to implement prompt measures mitigating the adverse economic consequences of the pandemic in order to help households and businesses weather this objectively challenging period and return to normal life, and to revive economic growth.
Inflation was 3% as of the end of 2019, and slightly decreased even more in the first months of this year. Three-year inflation averaged 3.7% beginning from 2017, which conforms to our medium-term inflation target of about 4%. We can also see that recent years’ opinion polls evidence that the price growth problem has become less acute for consumers. This is undoubtedly the result of keeping inflation at a low level for several years, close to the Bank of Russia’s target.
The low initial point of inflation at the beginning of the year enables us to continue to reduce the key rate, and moreover to do this faster, despite the pro-inflationary pressure put by external factors, such as the slump in oil prices. Inflation expectations changed only moderately in response to the inflation rise in late 2018 — early 2019, which made it possible for us to ease monetary policy last year, switch to neutral policy in autumn, and pursue loose monetary policy beginning from April 2020.
Today, we can see that after the two-month surge in prices, in May inflationary pressure, which is measured as seasonally adjusted annualised price growth, returned close to the 4% level. Further on, subdued demand is expected to put extra disinflationary pressure. Therefore, we have room for further reduction in the key rate in order to maintain inflation close to the target. Loose monetary policy will promote the revival of domestic demand and help the economy regain its potential faster.
As you know, Russia has been facing serious shocks in recent years, and we have been increasingly focusing on financial stability issues. That is true — it is impossible to prevent external negative events, but we may mitigate the risks for the Russian economy resulting from such adverse events.
Not only low inflation, but also the accumulated reserves and safety cushions both at the federal level and within financial institutions expand our capabilities to address problems in challenging periods. We can see this now in reality.
Today, Russia’s foreign currency and gold reserves total USD 566 billion. This amount includes the resources of the National Wealth Fund that are currently being used by the Government to support the economy within the fiscal rule.
The banking sector’s capital cushion exceeded 5 trillion rubles.
Last year, the Bank of Russia introduced the debt service-to-income ratio (DSTI) for borrowers. Thank you for this legislative initiative. This measure counteracts an uncontrolled rise in households’ debt burden, protects individuals against debt bondage, and, actually, prevents the creation of a credit pyramid that would threaten people’s well-being and the sustainability of the banking system.
The PIR is effective since 1 October 2019, which has stabilised the retail lending segment that used to demonstrate excessively high growth rates.
As a result, by the moment when the Bank of Russia jointly with your committees permitted loan repayment holidays this year so as to support households experiencing a decline in their incomes due to the anti-coronavirus restrictions, the retail loan portfolio was of relatively good quality, and banks have accumulated a buffer for unsecured loans amounting to 539 billion rubles that they may use to absorb losses if the situation worsens.
Therefore, we may expect that the absolute majority of borrowers will be able to resume normal servicing of their debt, and loan repayment holidays will not cause any challenging consequences for the banking system itself. Overall, the banking sector has become stronger by the moment when this crisis period started, and this is related not only to consumer lending. Banks have not demanded governmental support in the current situation, as they used to over the periods of all past crises and shocks. Moreover, banks are now capable of supporting their borrowers.
Households and companies experiencing a decline in their incomes may request loan repayment holidays. As of 3 June, banks approved 1 million and 200 thousand restructuring applications received from individuals, with the amount of restructured loans totalling 510 billion rubles. Requests from small enterprises numbered 129 thousand, with restructured loans amounting to nearly 600 billion rubles. By the moment, the growth in the number of restructuring applications has slightly slowed down, but borrowers may still request loan repayment holidays until 30 September.
In order to support all these processes, the Bank of Russia has introduced temporary regulatory relaxations permitting banks not to create additional provisions for restructured loans. These relaxations are applicable not only to loans covered by the law on loan repayment holidays, but also to a broader range of assets, specifically 85% of the loan portfolio.
The Bank of Russia has also promptly launched its preferential refinancing instrument to support lending to small and medium-sized enterprises with a total limit of 500 billion rubles, including 150 billion reserved for 0% wage loans, and an additional limit of 50 billion rubles allocated later on for large companies’ payroll programmes. Today, the interest rate on this preferential instrument is 3.5%.
Of course, the current situation in the banking sector, just as in other industries, largely depends on the spread of the pandemic. Since the beginning of the year, the corporate loan portfolio has expanded by 3.3%, which is quite a high growth rate. Furthermore, an unprecedented rise in corporate lending was recorded in March and April amid the restrictions in place, which is understandable because companies need more borrowings when their incomes decline. Conversely, retail lending recorded a significant slowdown, increasing only slightly in May (0.2%). Since the beginning of the year, retail loans expanded by as little as 3.1%, which is a lower rate compared to corporate lending. I would like to remind you that last year consumer lending was demonstrating a considerably higher growth rate than corporate loans. This is explained by both the cautiousness of individuals opting to avoid decisions and borrowings due to uncertainty about their incomes, and the prudence of banks comprehending that borrowers’ financial standing may deteriorate.
The pandemic also affected deposits, especially at the beginning of the outbreak. The situation has stabilised by now, but in March households’ funds were demonstrating increased volatility since consumers were actively buying in products and stocking up with cash because of the restrictions. Banks have overcome this situation quite smoothly owing to the material liquidity cushions they had and still maintain. Moreover, we have also expanded the opportunities for banks to receive liquidity from the Bank of Russia if needed.
By the end of the five months, banks’ net profit totalled 561 billion rubles. The largest part of this amount was certainly earned over the first three months of the year, when the impact of the pandemic was still limited. However, profit started to decline later on, reaching its record low in May (0.5 billion rubles).
These figures are neither amazing, nor alarming. The banking system is coping with this load, and lending is starting to bounce back as the restrictions in the economy are lifted.
Overall, the banking sector’s indicators will deteriorate by the end of 2020, compared to last year. A part of borrowers will still be incapable of recovering their creditworthiness, due to which credit risk will increase for banks, and they will have to create additional provisions, which will affect their profit, as well as to use their buffers. Nonetheless, we do not anticipate a scenario that would endanger the sustainability of the financial sector.
Now, regarding the financial market in general. The year 2019 may be rightly considered to be the year of retail investors. As of the end of 2020 Q1, over 2 million people opened individual investment accounts. It is worth mentioning the period of volatility in the market that occurred last year, when private investors became an important factor of support to the national stock market. We expect this segment to maintain the upward trend since interest rates in the economy will go down following the key rate path, and deposit rates are already sufficiently low. Of course, deposits continue to be and will remain a reliable method of saving, and deposit rates currently exceed inflation. However, a part of individuals will be opting for more profitable instruments, and increasingly often in the stock market. In this context, the law protecting non-qualified investors is especially important for us. We have carried out extensive discussions of this draft law with the market community, and I think that the debate will never be over in this regard: as long as everything goes smoothly, individuals prefer to have access to all instruments, but as soon as they incur losses because of a high-risk instrument, they become disappointed, and moreover, prefer to forget that they were acting at their own risk, hoping to receive compensation for their losses. By the way, this is related not only to newcomers. Recently, we have also observed this by the example of professional market participants in the course of the trading of crude oil futures contracts when oil prices plummeted into negative territory.
This draft law was passed in the first reading long ago, and we believe that its approval will only enhance the development of private investment in the financial market and will in no way impede this growth.
Insurance market
Last year, we completed an important stage of preparations for the customisation of premiums in compulsory motor third-party liability insurance (OSAGO). In contrast to concerns, OSAGO prices did not rise over the past year, but decreased by nearly 5%. The affordability of OSAGO was also growing. When insurance tariffs depend on a driver’s potential accident rate, this is a fair approach, and it is thus more beneficial for law-abiding drivers, incentivising road users to drive cautiously. We are grateful to deputies for the support in this issue.
The past year was also important for the orderly — I would like to stress this — orderly development of the microfinance market. Deputies have been consistently raising the issue of microfinance companies’ activity. You are surely concerned about the protection of individuals borrowing funds from microfinance organisations. We have really identified inadequately high interest rates and exorbitant penalties for delays that may drag a person into a debt pit just in a few days. However, short-term small loans disbursed by microfinance companies are a socially important market segment, and we should not ban legal creditors that may grant these loans to individuals because the latter may otherwise get into the clutches of illegal creditors that unfortunately still exist in the market. This is exactly why two essential decisions became effective last year, and we are very grateful to you for them. Specifically, these decisions limit the cost of borrowing from microfinance organisations and the maximum amount of the penalty for delays. I would like to emphasise that we have been gradually approaching the current levels for several years. As a result, interest rates decreased more than twice by 2019, compared to early 2018.
Financial technologies
Anatoly Aksakov has said that this is one of our key priorities, and we have always been putting a special focus on this issue. The pandemic has revealed how important it is that Russian banks are capable of rendering multiple services online and that individuals are extensively using this option.
Last year, we launched a key project — the Faster Payments System. It promptly became very popular, and the majority of banks were keen to join the FPS. This system enables instantaneous and cheap money transfers based on a mobile telephone number, which is a brand-new quality of services for individuals. For major banks, the launch of the FPS also implied that they will no longer be able to retain a client within one bank, one ecosystem just through the inertia and prohibitive tariffs.
One of the reasons why this system has so quickly embraced such a large number of consumers is the legislative decision providing additional powers to the Bank of Russia. Owing to this decision, we were able to oblige all systemically important banks to join the FPS within a reasonable period of time. We are grateful to you for the support in this issue. By the moment, all systemically important banks have joined the FPS, and the total number of banks connected to the system is nearly 60.
After the outbreak of the pandemic, we offered the zero fee to individuals in the FPS for money transfers of up to 100,000 rubles in order to provide as much comfort to people as possible in the situation when cash payments and money transfers via ATMs and bank offices were hindered. We were able to limit the fee owing to the powers granted by the State Duma to the Bank of Russia.
The pandemic has also shown that although the current level of penetration of financial technologies is definitely high, we still have a large number of processes requiring an individual’s personal presence, such as account opening and mortgage loan transactions. For the period of the anti-coronavirus restrictions, we temporarily permitted banks to carry out these operations remotely, but this is a temporary solution only. It cannot address this issue comprehensively.
At a system level, this problem may be solved owing to biometric technologies that we already have, but the opportunities enabled by biometric authentication are limited to financial services, and today banks are not highly motivated to employ this system. Currently, the State Duma is considering amendments to the laws that would expand the opportunities for using biometrics and biometric authentication for receiving not only financial services, but also state services and other types. The agenda also comprises the issue of whether biometric data may be collected not only by banks, but also by multi-purpose centres rendering state and municipal services, provided that all data security requirements are fulfilled. I believe that biometrics will be gaining ground after the end of the pandemic, when a lot of people start to revise their practices and appreciate the convenience of remote services for their everyday needs.
We are now very close to the complete digitisation of mortgage lending, and the pandemic has also accelerated our work in this regard. We will ask deputies to support appropriate amendments to the regulation.
I should definitely say a few words about the law on digital financial assets. Although our regulation is generally sufficiently advanced, we still lack definitions and basic rules for the turnover of digital financial assets. The draft law has been under consideration for a long period of time; there are multiple discussions about it; a number of contradictions have been identified and eliminated. Anatoly Aksakov has already said that he considers it important to approve this draft law in the near future. We totally support this opinion, especially as regards the issues causing no arguments. This would enable us to make a step forward, while continuing to discuss disputable points. Financial technologies and digital finance will be developing further, and we will thus have multiple disputable issues to settle, but I believe that if we have reached an understanding on certain aspects, we should move forward and not impede the progress.
The advancement of financial technologies is the basis for financial inclusion. Deputies are bringing up the issue of financial inclusion at every meeting on our report. Of course, remote channels are improving the situation for people living in hard-to-reach and sparsely populated localities, but they have the Internet there. Hence, we are certainly expanding financial inclusion not only by enhancing digital finance, but also through other means.
The project enabling the provision of banking services at post offices is currently under way. This project currently encompasses over 26,000 localities. Furthermore, their number has increased by over one-third since the beginning of last year. In addition, the project for cash disbursements at rural stores’ cash desks is currently implemented at over 4,000 points of sale. At the beginning of 2019, they numbered about 100.
We believe that financial inclusion for disabled people should be a special focus of attention. We have a task group with public associations’ representatives working for three years by now. This group has devised recommendations for banks regarding how to make the environment more accessible to disabled people. These recommendations are now followed by 60% of banks, compared to 38% in 2018. It is essential to improve the accessibility not only of the physical environment, but also the information environment. In this context, there has been developed the national standard of the barrier-free digital environment that should ensure financial inclusion for people with various types of health issues.
Our AML/CTF policy has materially reduced the amounts of dubious transactions and helps prevent ‘dirty’ money from getting into the Russian financial system, which was also confirmed by the Financial Action Task Force. In 2019, we continued to decrease these amounts of cash-out transactions, although they were relatively low already in 2018. Concurrently, we are well aware that counteracting dubious transactions requires higher expenses, which is challenging for banks, especially for small ones. In this case, banks find it simpler to deny services, first of all to small and medium-sized enterprises, so as not to carry out labour-intensive operations to identify and analyse clients. We have revealed such cases. SMEs have been actively raising this issue. In response to the complaints from businesses, we have established the system for the rehabilitation of companies put on the so-called black list. However, this is surely not enough. Therefore, we are now working over the KYC platform project. This platform will enable banks to address a single system and find out the assessment of a client’s reliability, instead of carrying out a comprehensive analysis themselves. We are going to actively develop this system so as to launch it in practice in late 2021 — early 2022 since it is really much-needed.
Finally, I would like to thank deputies for the prompt and efficient work accomplished lately. Recently, we needed fast amendments to the regulation that would enable us to approve support measures for households and businesses. I hope that all this in complex and the stable operation of the financial system will promote a fast revival of economic growth in Russia. I would like to emphasise that the financial system is capable of supporting growth and providing necessary resources to the real sector.