Elvira Nabiullina’s speech at State Duma’s plenary session on Bank of Russia’s 2019 Annual Report
Good afternoon, Mr Volodin. Good afternoon, dear colleagues.
Presenting today the Bank of Russia’s 2019 Annual Report, I would like to focus first of all on those aspects of our activity that ensure the capabilities of our financial system to overcome the consequences of the coronavirus.
Over a few months, our life has really altered, and the economy is facing a shock which is unprecedented both in its nature and consequences. Actually, our standing as of the moment when these new challenges arose is the result of our work over recent years. This epidemic has quite clearly revealed our strengths and the areas where we are efficiently coping with the challenges. These are our macroeconomic stability, the sustainability of financial institutions, and the well-established base of financial technologies.
However, the current situation has also brought to the fore unresolved issues, and we need legislators’ support to address many of them, including the protection of financial service consumers’ rights and their notification (this is related to such issues as the protection of non-qualified investors, the financial services sales standards, and the problem of banks’ ultimatums regarding fees and transfer limits). On the other hand, we should also further develop remote financial services and digital finance in general.
Before I dwell on the Bank of Russia’s performance and current standing, I would like to thank the State Duma for the continuous cooperation with the Bank of Russia. Both the dedicated committee and the working groups on individual areas have been significantly contributing to the enhancement of the financial sector regulation. The aspects of the Bank of Russia’s activity are considered in great detail not only at the State Duma, but also, for instance, within the operation of the National Financial Board comprising representatives of three parliamentary parties. I would like to emphasise how promptly the State Duma was approving the decisions required to implement support measures for households and businesses during the period of the pandemic. One and a half months ago, we had a very efficient meeting with the State Duma management regarding urgent measures.
Today, the main focus of both the Government’s economic and fiscal policy and the Bank of Russia’s monetary policy is to resume economic growth and restore affected businesses and, which is crucial, households’ incomes as soon as possible. Unfortunately, Russia’s GDP will inevitably decline this year, just as in other countries worldwide. Nonetheless, our losses will most likely be lower than in many other economies and less significant than over the previous global crisis of 2007 — 2009.
At the moment, we forecast that Russia’s GDP will decrease by
Today, we have all necessary resources for recovery. The Government is preparing the country-wide economic revival plan. From the very beginning of the pandemic outbreak, the Government has been implementing measures to support the most affected industries and households. In turn, the Bank of Russia has switched to accommodative monetary policy. Last Friday, we cut the key rate to 4.5% per annum. I would like to emphasise that we have been decreasing the key rate since last June when it equalled 7.75%. Taking into account all the key rate reductions, credit resources should become cheaper for both businesses and households. Our previous years’ results and the confidence of individuals and companies in price stability provide us the opportunity to approve such decisions without the risk of an inflationary spiral. In other words, accommodative monetary policy will not result in the depreciation of Russians’ wages and savings, but will help maintain inflation close to our 4% target.
Furthermore, the banking system currently has much more capabilities to support the economy. The sector has accumulated a capital buffer in the amount of 5.4 trillion rubles (or approximately 10% of banks’ loan portfolio), enabling banks to absorb losses caused by insolvent clients and loan restructuring without any threat to financial stability and, accordingly, to depositors — banks’ creditors, as well as to issue new loans, which is essential for economic recovery. In the case of a capital deficiency, banks would have had to decrease the amounts of new loans, covering their gaps.
By the moment, banks have restructured loans exceeding 3 trillion rubles. This is a large amount for the economy in general. With regard to small enterprises of the most affected industries, banks have restructured over one-third of the total portfolio.
In order to support large-scale restructuring for borrowers, the Bank of Russia made the decision on regulatory easing. At first, we implemented regulatory relaxations for loans granted to households and companies of the most affected industries. Later on, we expanded this regulatory easing to other sectors. Currently, our regulatory relaxations actually embrace 85% of the loan portfolio.
However, banks’ capabilities to absorb losses of the economy are not unlimited, and therefore, we should not attempt to resolve all the problems at banks’ expense. It is critical to remember that if a bank faces serious problems, they ultimately entail very large costs for the state in the case of the bank’s financial resolution, or even much higher losses for businesses and individuals depositing their funds with such a bank.
In recent years, we have been consistently pursuing policy aimed at mitigating bank lending risks. Specifically, this policy limits the amount of loans that may be granted to finance owners’ business. Moreover, it stipulates a borrower’s debt service-to-income ratio in consumer lending which was introduced to discourage lending to individuals whose credit exposure is already hazardous. As a result of this policy, the growth rate of consumer lending slowed down at the end of 2019. These measures significantly improved the quality of banks’ loan portfolio.
I would like to stress that if the quality of the loan portfolio was not that good and if the banking sector had not accumulated a safety cushion over the past years, the implementation of the loan restructuring measures that are crucial for households and enterprises would have become impossible and could have entailed risks to financial stability.
Credit risk is now becoming the predominant one for banks, which is why it is totally normal and adequate for banks to switch to prudent credit policy. Borrowers who will be unable to recover their creditworthiness after the pandemic (and this is inevitable and cannot be avoided) may be facing difficulties repaying their loans, while an increase in bad debts creates risks for banks, their depositors and creditors. Therefore, the governmental programmes supporting borrowers are critical. We can see that they are in high demand, especially the most recent 2% lending programme.
Lending growth rates will definitely go down as a result of banks’ prudent credit policy, coupled with borrowers’ cautiousness. Hence, we need targeted measures, first of all to maintain lending to small and medium-sized enterprises and support mortgage lending.
As regards the Bank of Russia’s measures in this area, in the first place, we launched a special preferential refinancing instrument for banks with a large limit of 500 billion rubles. Currently, the interest rate thereon equals 2.5%, and by the moment 345 billion rubles have been drawn down.
The governmental programmes, namely the 6.5% Programme, play an important role in supporting mortgage lending. On our part, in addition to the release of the buffers which has enabled banks to use nearly 126 billion rubles, we are also planning to reduce risk ratios for mortgage loans. This will provide banks approximately 300 billion rubles to expand lending.
Speaking of banks, I would like to get back to last year’s key events. A very important decision became effective at the beginning of 2019 protecting the rights of financial service consumers, specifically the deposit insurance system was expanded to small businesses. Today, insurance fully covers 89.5% of small enterprises’ accounts and protects the absolute majority of minor businesses having little amounts of available funds and lacking safety cushions, due to which they could become bankrupt if they lose their funds in bank accounts.
This year, the State Duma approved — and we are very grateful for this decision — the amendments to the laws expanding the insurance of funds in accounts to social and charity organisations and increasing compensations to individuals in certain cases to 10 million rubles. This covers the cases when an individual has not yet used funds received, whether these are inherited assets, insurance and social payments, or court-ordered payments, and in a number of other similar situations.
Recently, an increase in the number of retail investors has become a clear trend. Currently, they are numbering nearly 5.5 million people. More than 2.2 million people are using individual investment accounts. Just three years ago, this number was as little as 236,000. This is a quantum leap in the development of the financial market. It is essential to ensure that individuals entering the financial market do not get frustrated and are not deceived. On the contrary, they should be able to employ the benefits of the financial market.
As interest rates in the economy go down, returns that exceed inflation only slightly will become insufficient for a range of individuals. The latter will be entering the stock market and will be offered complex financial instruments that can be comprehensively assessed only be experts. Thus, they may incur losses and get discouraged. Who would be the addressee of their claims in this case, which would be justified? I think that the answer to this question is quite obvious. Therefore, it is crucial to adopt the law protecting non-qualified investors as soon as possible.
This law was approved in the first reading already one year ago. We may be discoursing about it for a long time, and there is always room for improvement. However, I would like to ask you to adopt this law in order to protect individuals’ basic rights. Further on, this law may be adjusted as the experience in this area accumulates.
As regards the insurance market, I will only dwell on such socially important segment as compulsory motor third-party liability insurance (OSAGO). I would also like to thank the State Duma for your support in the issue of insurance premium customisation. As you remember, this generated much controversy, but already the first stage of the reform that was accomplished last year demonstrated that this more flexible approach turned out to be very efficient. Contrary to widespread concerns that the reform might cause a rise in premiums, the average cost of an OSAGO policy decreased by 4.8% last year. This average amount continues to go down this year in the majority of Russian regions, although the insurance premium has slightly increased due to the expected rise in prices for components, but this growth is less than 1%, which is considerably below inflation.
Now, regarding non-governmental pension funds, returns for future pensioners amounted to 8.2%, which is 2.5 times higher than last year’s inflation. Moreover, since last year, pension funds are subject to fiduciary responsibility, which means that they are fully liable for the efficiency of investment of future pensioners’ assets.
In previous years, individuals’ migration from one pension fund into another was a rather topical issue since this is a non-transparent mechanism that often involved misinformation and even frauds in some cases.
Deputies were bringing up the issue of counteracting this practice so that individuals do not lose the already accumulated investment income. As a result of the restrictions we implemented in 2019, the number of individuals’ unscheduled transfers between pension funds decreased to 260,000, which is 6 times less than in 2018 and over 18 times less than in 2017. Furthermore, the amount of lost investment income lowered fivefold over the year, to 3 billion rubles. However, these losses still occur, and we believe it necessary to implement additional measures in this regard. By the moment, the Ministry of Labour has devised a draft law restricting agents’ activity, and the Bank of Russia is going to support it.
Here, at the State Duma, we have been repeatedly discussing the microfinance market and the possibilities of its orderly development. Almost the entire country was discussing the cases of totally inadequate requirements set by microfinance companies for their borrowers. There was a natural question of whether microfinance organisations should be totally prohibited. We have always believed and continue to hold that the micro-loan segment cannot do without legal creditors. When individuals are rejected by banks due to their poor creditworthiness, what should people do in such circumstances? However, we need appropriate regulation in order to prevent malpractice in this area. We can see now that over the last two-plus years of the progressive implementation of the restrictions, interest rates have lowered 2.3 times since the beginning of 2019. Today, the maximum outstanding debt may not exceed the principal more than 1.5 times.
Concurrently, the State Duma approved the amendments to the laws on prosecuting illegal creditors, which is crucial. As a result, last year, the number of pseudo-financial companies decreased by nearly 20%. Furthermore, microfinance organisations may not issue loans secured by real estate, which also enhances the protection of individuals. As you remember, we were discussing this issue at last year’s annual report meeting. It is very important that this measure was approved. Today, we believe it essential to introduce the amendments to the laws we also have been discussing already that would strengthen the liability for illegal creditors even more.
The next topic is financial and payment technologies.
As you remember, quite recently, just a few years ago, they tended to speak of Russia as a country of cash payments, and very few believed then that this could change. Nevertheless, we have managed to increase the percentage of cashless payments from 30% to 70% just in 5 years. This has become possible owing to innovative technologies that have made cashless payments comfortable and accessible to everyone.
We now have MIR cards that are successfully developing and widely used by individuals. These cards currently account for over 20% of all domestic card transactions. Moreover, all age groups, and not only people who tend to easily embrace new technologies owing to their age, are currently using bank cards, including MIR cards, in their everyday lives.
The Faster Payments System is one of our most important projects. Individuals can now make money transfers between any banks at lower fees; and currently people are also allowed to transfer up to 100,000 rubles a month through the FPS without any fees charged.
By the moment, 70 banks have been connected to the FPS, including all systemically important banks owing to the laws. Of course, a number of banks need to readjust their services in order to make them more convenient for consumers and thus demonstrate their client focus in practice.
There are two other draft laws that I should definitely mention and that should be adopted faster, in our opinion. Specifically, this is the expansion of the application of biometric authentication and the law protecting non-qualified investors I have been talking about already, as well as the law on digital financial assets. The situation is quite similar in this area: life is moving forward, while our regulation is continuously behind. Therefore, we propose to separate the issue of cryptocurrencies provoking so much debate and adopt the draft law on digital financial assets that cause almost no arguments, thus giving a new impulse to the development of technologies.
Technologies certainly improve financial inclusion.
I do remember how deputies generally pose this issue when I come to the State Duma. Our policy in this regard combines two areas of focus, specifically the expansion of physical access to the most basic transactions in sparsely populated and hard-to-reach localities and the simultaneous development of remote online services. As to the physical access, the number of rural localities where post offices render basic financial services has increased by 35% over the year, to total 26,000 at the moment. In addition, the project for cash disbursements at rural stores’ cash desks currently embraces 4,200 points of sale (they numbered as little as 100 at the beginning of 2019). We are going to expand this project so that it also covers other transactions, including card replenishment, money transfers, and payments. Financial inclusion issues will always be in the focus of our attention.
In wrapping up, I would like to thank once again the State Duma for the support of the Bank of Russia’s key initiatives, the extensive discussions on complicated issues, and the search of solutions to the benefit of individuals and businesses.
We have ahead a really challenging journey of recovery after the pandemic. Nevertheless, we have all grounds to believe, including based on our experience of very prompt and flexible measures we have been implementing jointly with you in recent months, that we will not only be able to weather this situation, but will help the economy resume sustainable growth.
Thank you so much for your attention.
Of course, I am ready to answer your questions.