Elvira Nabiullina’s speech at Federation Council’s Financial Market Development Board
Good afternoon, Ms Matviyenko
Good afternoon, dear colleagues
I am very grateful to you for the invitation to make a speech today.
We can really observe that the coronavirus pandemic is waning, Russian regions are progressively lifting their restrictions, and individuals and businesses are resuming their normal life.
Nonetheless, we should be aware that the recovery cannot be instantaneous — it will take time, and it is essential to do everything possible so that this development has a sustainable basis.
The Government’s measures, first of all the budget-funded measures supporting households and businesses, are limiting the scale of this year’s economic decline. The Bank of Russia’s anti-crisis measures also help address this task, mitigating the shock for people and companies through the financial system, first and foremost through large-scale loan restructuring.
However, the economy needs a broad complex of measures that would enable businesses not only to weather the hardships, but also to develop faster. The Bank of Russia is engaged in the implementation of those components of the country-wide plan that are directly related to the financial system. These are long-term money creation, above all for investment, the support of the digital transformation of the economy, project financing in construction, the evolution of the mortgage industry, higher affordability of borrowing for the real sector, first and foremost for small enterprises, and the enhancement of the protection of financial service consumers’ rights. Furthermore, the Bank of Russia is aiding economic recovery through monetary policy and the regulation in the financial sector.
Currently, we have opportunities for reducing the key rate. This has become possible owing to low inflation achieved over the course of the previous years. I would like to remind you that we first reached our 4% target in 2017 and since then have been keeping inflation at a low level. We have switched to accommodative monetary policy which stimulates growth by lowering the cost of borrowing. As you know, we cut the key rate in June to its record low of 4.5%. Judging by the information we have received since our latest decision on the key rate (first of all, data on inflation in June and early July), we still have room for a further reduction in the key rate.
In this regard, I would like to emphasise that a key rate decrease influences to a greater extent short-term deposit rates, while long-term rates change to a lesser degree, thus increasing the attractiveness of long-term deposits for households and of long-term lending for banks. Therefore, our policy not only helps the economy regain its potential, but is also aimed at expanding the supply of long-term money needed to implement investment projects and speed up growth in the future.
The banking sector has not only managed to support borrowers through large-scale loan restructuring programmes vital for both individuals and businesses, but has also maintained its potential for a further increase in lending.
The Bank of Russia granted regulatory relaxations to banks enabling them to restructure loans not only through law-based loan repayment holidays, but also under their in-house programmes without extra provisioning. This regulatory easing encompasses 85% of the loan portfolio. By the moment, the amount of restructured loans totals nearly 4.3 trillion rubles.
Corporate lending expanded by 0.5% in June, which is comparable with last year’s reading of 0.4%. Moreover, the growth rate since the beginning of the year equals 3.8%, which is also higher than 2.3% the year before. I should stress that lending to small businesses is increasing faster: the growth rate over the five months reached 6.4%. Of course, we are aware that this rise in lending has been partially forced since enterprises tend to borrower more when their revenues are declining. Nevertheless, we have also been developing special instruments in order to support banks in such lending. We have a dedicated preferential programme for small businesses with a limit of 500 billion rubles. We launched it almost immediately after the crisis outbreak. Within this programme, banks may receive loans at the 2.5% interest rate, and they have already drawn down over 300 billion rubles of this limit. More than 90,000 small businesses were able to restructure their borrowings to a total amount of almost 690 billion rubles, which is 13.5% of the portfolio.
Retail lending also gained 1% in June, after a very slight rise of 0.2% in May, while April recorded a 0.7% reduction in retail lending. Overall, household lending expanded by 4.1% over the first half of 2020. This is materially lower year-over-year: in the first half of last year, retail lending rose by 9.7%. However, that period was characterised by increased growth rates in consumer lending. We were then taking targeted measures in order to cool down this segment and prevent the emergence of a bubble in this market.
As all other segments of the credit market, mortgage lending slowed down during the period of the pandemic, but it is now bouncing back, driven by the overall decrease in interest rates and the regulatory easing, including special measures aiding mortgage lending, on the one hand, and certainly by the governmental preferential mortgage lending programme under which borrowers received over 100 billion rubles in June, on the other hand (we estimate that this preferential programme is currently accounting for nearly one-half of all new mortgage loans, which means that this is material support of the mortgage segment).
The average mortgage rate dropped to 7.4% in May. This is a considerable decrease compared to 10.6% in April 2019.
Ms Matviyenko has already mentioned a number of interesting ideas based on the experience of Bashkortostan and the Krasnodar Territory using the mechanism of housing savings. It implies that individuals are saving funds for the down payment in a special-purpose account, and when their savings reach a certain amount, they may receive a mortgage loan on the conditions that were stipulated initially. Firstly, this provides stable funding to banks in the form of savings; secondly, mortgage rates in this case may be even beneath standard interest rates.
The regions employing this mechanism currently record mortgage rates of about
Exactly one year ago, we launched the mechanism of escrow accounts for financing housing construction. We really had a lot of disputes and concerns in this regard. Today, nearly one-fourth of residential property, which is 23 million square metres, is built using this mechanism.
Banks have been increasing construction financing amounts despite the hardships induced by the pandemic. Lending to developers based on the new scheme expanded by 41% from March through May and by 70% since the beginning of the year.
As of 1 June, contracts signed by banks and developers according to the new scheme amounted to 1.4 trillion rubles. In this regard, I would like to draw your attention to interest rates on such loans. We carry out analysis in this area, surveying developers, which shows that interest rates on these loans are below 5% for 55% of developers, including below 1% for one-fourth of them when the largest part of funds has already been accumulated in escrow accounts, and range from 5% to 12% for the remaining 44% of developers.
Now, regarding technological projects in finance.
Technological projects are enhancing the speed, affordability and accessibility of financial services. Fintech is not just a popular trend. First and foremost, this is a mechanism reducing costs for businesses and individuals using financial instruments.
The first issue is the marketplace. Ms Matviyenko has also spoken about this. Last week, the State Duma adopted the relevant law in the third reading. We hope a lot that the Federation Council will support it. This will make it possible to finally accomplish the establishment of the legal framework necessary for the functioning of this type of platforms. They really make financial services offered by a wide range of suppliers accessible to people in any region and in any locality. This marketplace will enable people to select more advantageous and higher-quality offers and increase the competition in the financial system.
As regards the law on digital financial assets, the State Duma approved it only in the first reading, and despite several cycles of discussions, there is still no progress on it. There are really a lot of issues associated with this law. However, in order to develop the digital economy, it is critical to comprehend that it will create new assets and new instruments, which will require an adequate legal framework. We do have disputable issues, and if we have not resolved them, we may continue to discuss them further, while the fundamentals should be approved, in our opinion, so as not to hinder the development of digital financial assets.
Moreover, technologies also create new opportunities for existing instruments, which is vital for small businesses since in reality they often get access to a reduced range of financial products and services, compared to large corporates.
Last year, the legislative authorities approved the law on crowd-investing, that is, raising investment through special platforms. This is a possibility to transparently and responsibly engage a broad range of persons willing to support efficient small businesses and aid the manufacture of promising products. The principle for financing small enterprises through crowd-investing is as follows: a company requesting funding on an investment platform shall disclose information about it and its business project it is going to finance this way. Investors, whether individuals or legal entities, transfer funds into the nominee account of the investment platform. Currently, we are cooperating with the Government and development institutes within the nation-wide plan so as to evolve this instrument in practice. Specifically, we believe it essential to work out a mechanism enabling compensation to companies for a part of their expenses for fundraising through investment platforms, as well as a mechanism for development institutes’ surety in order to increase potential investors’ confidence in such investment.
Furthermore, investment platforms can make factoring accessible to small and medium-sized enterprises. This issue is also being widely discussed. This is a very promising area, especially for small businesses lacking working capital. Today, factoring is underutilised both because the regulation is incomplete and because SMEs choose not to initiate legal proceedings against large corporate clients. We consider that this platform will make it possible to raise investors’ funds secured by receivables from large buyers.
To this end, together with RSMB Corporation, we are elaborating the mechanism for the issue and management of digital rights in factoring on investment platforms and are working on the system for recording and storing obligations to buyers on payments for SMEs’ products.
To finish off, I would like to say a few words about the protection of financial service consumers. This issue has always been a matter of great concern for the Federation Council. For the Bank of Russia, this is undoubtedly a top priority in the development of the financial market.
I would like to dwell on two elements that should be implemented.
Firstly, this is the law protecting non-qualified investors that has been under discussion for a really long time. The approval of this law is a long-pending issue, and we may not procrastinate on it any longer. Ms Matviyenko has also said that there are already a great number of retail investors, households, with nearly 2.5 million people holding individual investment accounts, in the stock market, the potential of which has not been fully unleashed yet. These people still lack sufficient experience in the stock market and necessary knowledge. Therefore, it is critical to protect them from investment decisions that would entail financial losses for them.
This is why we believe that it is absolutely essential to approve the law on non-qualified investors. The State Duma is planning to consider it in the second reading this week. I hope that this will really happen. This law has been discussed a lot with the professional community. I also agree that it is already well-balanced. We would like to ask you to support this draft law so as to accelerate its approval as much as possible.
In addition, it is crucial to maintain the attractiveness of individual investment accounts in order to promote private investment. We can see that the largest part of investment accounts being opened are of the so-called A type, since it is harder to utilise funds in B type accounts, although the latter provide for a larger amount of tax preferences. We propose to introduce amendments to the law allowing investors to partially use or withdraw funds from these accounts, if funds have been in such an account for over three years, as well as when a person raises a mortgage loan or is facing hardships, so that a person could utilise a part of these funds without closing the account and losing the right to a tax deduction. Moreover, we have been discussing this a lot with the market community and support the idea of increasing the minimum annual contribution into investment accounts from 1 to 3 million rubles and cancelling the contribution limit when funds are transferred from A type individual accounts to B type accounts.
Another important draft law that you have mentioned is directly related to combating fraud, primarily on the Internet. This draft law was introduced personally by Ms Matviyenko and a number of senators, and we consider it extremely important. We also ask for your support in this regard. Its first reading took place at the beginning of 2019, but there has been little progress since then. If approved, this law will make it possible to promptly block fraudulent websites before enormous funds are stolen from individuals who sometimes fail to comprehend who are swindlers and who are not. This will help prevent people’s losses and protect their money and personal data against illegal access.
The overall enhancement of online security for financial service consumers is a key priority in our work. Thus, several years ago, jointly with Yandex, we started to assign a verification mark to banks’ and microfinance organisations’ official websites so that pseudo-creditors and phishing websites could not easily lure customers. Later on, we expanded this experience to assign such a verification mark in other main search systems.
We believe that if all financial organisations are put on the Bank of Russia’s register (currently, this is not so), this will enable consumers to verify who they are dealing with, which will make it hard for fraudsters to pose as legal financial market participants. Just a few days ago, amendments introduced into the relevant law established the requirement for pawnshops to be on the register. In our opinion, a similar requirement shall be equally applicable to credit cooperatives that are also utilised by individuals.
In conclusion, I would like to speak about another initiative aimed at enhancing the protection of financial consumers’ rights. This initiative we proposed has provoked a lot of disputes and discussions in the market. It is related to insurance when a mortgage loan is raised. Today, banks keep the bulk of the insurance premium, that is, insurance conceals an increase in the mortgage loan cost. Borrowers do not even know which part of the money they pay is received by insurers. However, already now these are banks that actually receive insurance indemnity under such insurance contracts in the absolute majority of cases. We believe it appropriate to grant a mortgage loan provided it is insured, and such an insurance contract should be concluded by a bank, rather than by a borrower. If anything occurs with the collateral, this burden should not be shifted to the borrower, and in the case of the latter’s disease or death, it should not be shifted to family members. People should not lose their housing — it should be covered by insurance. We do know that neither banks nor insurers are happy with the changes proposed, since, honestly speaking, they used to pay much less to individuals than they received from them. The current policy does not benefit customers and shall be altered, in our opinion. We will continue the discussion of this issue as we may not leave the situation as it is now when a person has to deal with such a problem alone.
Wrapping up, I would like to emphasise that the Russian financial market continues to develop, despite all the hardships the world in general and our country in particular have to face due to the pandemic. The financial sector is efficiently addressing the challenges and becoming more flexible meeting the needs of the economy in various situations, including in crisis periods. Of course, this would have been impossible without the development of Russian laws. I would like to thank the Federation Council and senators for your active position in the enhancement of the financial regulation, for the cooperation, and the assistance you provide to the Bank of Russia in its key initiatives. We have a lot to do ahead so as to ensure that the financial industry really helps the economy and individuals to both weather the consequences of the pandemic and achieve more sustainable development. Thank you very much.
