Elvira Nabiullina’s speech at XXI International Banking Forum

Good afternoon, dear colleagues.

I am happy to welcome all participants in the forum. Of course, I will speak on technological sovereignty issues as well since they are among critical ones, but now I would like to address two topics. The first one is our overall view of the current situation in the banking industry. I would like to highlight the pain points that we consider necessary to discuss with you today.

The banking sector contributes to the economic development, specifically the investment process that has been evolving rapidly in Russia. The banking sector itself also feels confident owing to a large capital cushion and profits. Banks pay dividends, with a third of them paid to the budget. Part of profit stays in banks’ capital, which enables them to expand lending.

The key rate increase has been gradually influencing credit activity, but will not halt lending. According to the statistics for July—August 2024 and the recent data for September 2024, the overall growth of credit remains significant, although the impact of the key rate is uneven across the credit market segments. Compared to 2024 Q2, the expansion of retail lending has obviously slowed down, whereas corporate lending has continued to grow rapidly.

In August 2024, corporate lending expanded by 21.4% year-on-year, which is a high growth rate. This year, up to a half of the increase in corporate lending has been accounted for by those segments that actually are weakly sensitive to key rate changes. This is a significant portion of housing construction projects, lending to the earlier launched investment projects, and a large number of projects in machine building. Nevertheless, we do see a notable slowdown in other segments — this is how it should be when monetary policy is tight.

The expansion in mortgage lending has decelerated notably as well. Indeed, the amount of mortgages issued in July—August 2024 nearly halved vs 2024 H1, namely to ₽350 billion per month. However, this should not be seen as a dramatic decline since this is actually the growth rate recorded in 2022. Essentially, we are observing the return to a balanced growth pace that will not entail overheating of demand or soaring housing prices.

If the pace of lending recorded in July—August 2024 remains the same until the end of 2024, the mortgage portfolio will expand by about 12% as of the end of the year. It is the upper bound of the range of lending growth rates that we estimate as balanced. Therefore, these growth rates are absolutely normal. We have always been saying that mortgage lending should increase at a balanced pace.

Consumer lending is supported by a rise in people’s incomes and sufficiently positive consumer sentiment. Nevertheless, this segment also recorded a slowdown in July—August 2024, which was the result of both the key rate increase and the toughening of our macroprudential measures. However, we also expect a rather high growth rate of 17% in this segment as of the end of the year. Of course, this will be mainly due to the dynamics in 2024 H1, but this pace is still rather quick.

I would like to emphasise that, in terms of monetary policy and the effect on inflation, these are not growth rates in individual segments that matter to us but rather the expansion of the total loan portfolio. The overall growth of credit in the economy should be moderate so as to ensure that the output of goods and services increases sufficiently fast to meet soaring demand. There is no other way to achieve a low inflation rate.

Hence, we raised the key rate to 19.0% per annum in September 2024 and do not rule out the possibility of its further increase in October 2024. Indeed, as you can see it in the banking sector, a number of lending segments are less responsive to the key rate increase than market lending. Nevertheless, even in these conditions, it is possible to find the path of the key rate that will ensure the return of inflation to the target. Our aim is to decelerate inflation to 4% by the end of next year. Therefore, I firmly believe that, making their business plans, both bankers and entrepreneurs should still take into account that inflation will be declining to the target and should not think that the Bank of Russia will put up with elevated inflation in the country.

The positive dynamics of the banking sector that I have mentioned enable us to implement our earlier plans with regard to modification of the banking regulation. Some of these measures were postponed due to external conditions, but we are returning to these plans and adjusting them. In addition, there are some new initiatives. We intend to do everything gradually and prudently so that the banking sector has enough time to adjust to the changes. As you know, we discuss all the measures. These measures were also discussed yesterday and today. Why are we proposing these measures? The reason is that we all need to think of how to enhance further the resilience of the banking system. We have weathered the recent crises very well exactly owing to the resilience of the banking system. However, we have used multiple buffers and we certainly need to maintain a sufficiently high level of resilience.

Speaking of specific plans, we are focusing on concentration risk. Unfortunately, many banks are either exposed to the maximum level of concentration risk or enjoying certain easing measures. We believe that such easing in relation to the effective regulatory ratios proved to be reasonable at the time, but is not needed any longer. As we can see, there are some banks that have started abusing these measures. It is crucial to regulate concentration so as to ensure that risk is distributed evenly across the banking system and the sources of financing for large projects are diversified. Banks frequently refer to large borrowers and large companies. However, large companies may equally raise syndicated loans from a group of lenders.

Therefore, we will be discussing with you how to standardise and align the rules for participating in syndicated lending. We have already brought up this topic several times and started to discuss it. I believe that we need to find some practical solutions in this regard. We are also considering credit default swaps as a mechanism of credit risk transfer to provide insurance-like protection for certain strategic projects, primarily those promoting the country’s technological sovereignty, which Mr Aksakov was speaking of today. Of course, we do see potential in using government guarantees and sureties from development institutions — they will also help reduce concentration risks to banks and expand lending to the largest borrowers.

As we can see, both the Government and businesses are now developing concession projects rather actively, which is also critical for the structural transformation of the national economy. We have been discussing risk weight decreases for projects under concessions with market participants. In my opinion, this would be reasonable, given that these projects are directly supported by the Government.

Furthermore, we have a number of new initiatives. As far as I know, you have already started to discuss them on the sidelines of the forum, and I would like to talk about them as well. As regards the introduction of a foreign currency liquidity ratio. We will introduce a new national liquidity coverage ratio for systemically important banks from 2026. However, this is in relation to the balance sheet in general. We are actually seriously considering the introduction of a foreign currency liquidity ratio as well.

The depth of the Russian foreign exchange market has decreased. If there is an outflow of short-term foreign currency deposits — and we did observe such cases — a bank’s transactions in the foreign exchange market may really cause volatility of the exchange rate. I have already heard comments from some bankers that we do not need to tighten the regulation in this area as banks are capable of managing their foreign currency liquidity themselves. If this is really so, you will be able to comply with this ratio. Overall, it is essential that the problems which banks might suddenly face due to an outflow of foreign currency liquidity do not spill over to the foreign exchange market as a whole. Hence, we will again seriously consider the issue of introducing this ratio.

Another initiative is subordinated instruments of a new type. We are aware that banks need additional capital even though they have a capital cushion. Capital is needed to expand lending, restore the buffers — and we do have the schedule for restoring the buffers — as well as to gradually recognise the losses associated with the blocked assets. By the way, some banks are doing this rather quickly ahead of schedule or have already done this. However, others need time and capital. Moreover, there are cases where shareholders cannot provide required funds to their banks while banks lack profits, due to which they are considering the option of subordinated debt.

By the way, this can be seen in practice not only in Russia: when subordinated debt is taken into account in capital and is raised for capital, subordinated instruments unfortunately cannot always perform this function in stress conditions, the function of covering losses as this is done by capital, which is actually the function of capital. Banks are doing everything possible not to write off subordinated debt. Why? This is because they usually sell it as debt to their major clients, high-profile clients and do not want to then lose the relationships with these clients. Actually, this debt is not written off, is not used as capital. Moreover, the trigger for writing-off is set at a very low level. Therefore, by the moment when a bank is obliged to write off the capital, the bank has already lost a large portion of it.

On the other hand, this instrument has an unfair aspect as well. This is because the investors in subordinated debt might lose everything if it is written off, while the bank restores its solvency and its shareholders incur almost no losses. This disrupts the priority principle, the responsibility principle that should be there. These are the bank’s shareholders who must be responsible in the first place.

Therefore, we are planning to perfect the rules for issuing subordinated instruments, set a rather high trigger for the conversion of subordinated debt directly into capital, and divide subordinated instruments into two types.

The first one will be available to banks’ large shareholders with a stake of, let’s say, more than 5%. If this rather high trigger is exceeded, a bank will be obliged to take into account this debt in its capital, and this will be an integrated instrument for the bank’s financial resolution.

The second type of subordinated debt may be available to a wide range of investors but may be written off only in the amount needed to restore capital. When capital is restored and a bank earns profit, this subordinated debt should also be restored. In other words, the debt and coupons should actually be restored for an investor afterwards. Until that moment, the bank will pay no dividends to its shareholders or bonuses to its management. In my opinion, this will help return to the fair principle of priority, principle of responsibility for the bank’s financial health.

We are going to publish this concept so as to discuss it with you in detail. However, I would like to ask you to think over these options as there are many aspects to be considered.

Another topic that also has an aspect of concern in our view and that I would like to address is mortgage lending. This topic is related to both banks’ financial resilience and consumer protection. Both issues are critical for us. We have always been talking of the imbalances caused by large-scale subsidised mortgage lending. However, there has been three months already since the termination of that programme, but unfortunately, we can observe how various other very creative schemes start to emerge. There are multiple schemes, including the so-called subsidised rates, options with a change in interest rates, tranche mortgages, loans without a down payment, instalment schemes with further transformation into mortgages, etc. They seem to be very attractive, but when analysed, all of them are just about overpricing in the housing market. This can essentially involve troubles for people choosing these schemes: they might find themselves in a challenging situation if the money from the sold apartment turns out to be insufficient to repay the outstanding loan.

Of course, we need to address this problem. What is good is that the mortgage lending standard was approved just a few days ago, after lengthy discussions. I am grateful to bankers for this — we finally managed to reach an agreement. I hope that this standard will be complied with. We also need to develop and discuss a supervision standard with you.

Furthermore, alongside this mortgage lending standard, we will be also increasing the requirements for loss provisioning in relation to loans that provide for a sharp rise in repayments, especially after a long grace period. This is needed since there are multiple schemes today that people choose because of initially small payments that then surge after a specific period or under certain conditions. As you remember, we restricted mortgage lending schemes offered by developers by toughening the requirements for provisions, but now, as the key rate has been raised, the role of that measure has decreased. We will adjust it so as to make it efficient in the new conditions.

I would like to emphasise once again — I have been speaking about this many times and, hopefully, one day it will be the last one — if such schemes multiply, we will urge the legislators to approve the mortgage lending standard that banks will be obliged to adhere to. In other words, banks will be allowed to issue mortgages only on the terms directly stipulated by law. This will certainly reduce banks’ opportunities but will protect consumers if we, as the banking community, fail to do so ourselves.

Another segment equally requiring standardisation is car lending. This segment has been growing. However, we can observe an increase in complaints as well, which is associated with coercive tied selling. Sometimes, cars either are sold only on credit or, when not on credit, are priced higher. Moreover, a loan can only be raised together with extra services that cannot be refunded afterwards.

I would like to give an example as it depicts how cunning these sellers are: a car buyer is forced to purchase maintenance worth ₽170,000 combined with a book on a flash drive. It is only possible to refund ₽9,000 for maintenance services. The amount of ₽161,000 is not refundable because a book may not be returned according to law. They have found this in law and are thus tying the services that a consumer may not refund.

Banks say to us that car dealers are actually twisting their arms acting this way. We do not supervise car dealers, and it seems that these are not banks who shall be blamed. Nevertheless, it appears that this situation is a conscientious choice. There are banks yet — and we are happy that there are indeed such banks — who break off any relationships with such car dealers. However, there are also banks that are actually promoting such schemes.

Banks are definitely capable of controlling their counterparties.

We will be combating these schemes jointly with the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor). I would like to urge those who are still using these practices to eradicate them before we intervene together with Rospotrebnadzor. This is why we need a standard in car lending as well. I hope that the banking community will manage to agree upon these standards faster than in the case of mortgage lending.

There are similar problems in online lending — I have warned you at the very beginning that I was going to highlight the pain points today. These are practices where putting a tick in one box is enough for a person to sign the consent to personal data processing and to a credit card as a bundle. People are coerced into buying services in online lending.

The most egregious example is that everything is digitalised and done instantaneously when a bank wishes to sell something. However, if people decide to get a refund according to law, they need to come to an office personally because banks have not digitalised that for some reason. In other words, their services are digitalised when they need to sell a product to a consumer; whereas when people protect their rights, banks’ digitalisation somehow vanishes. Of course, this is intolerable.

As for now, we will issue recommendations regarding the functioning of online channels. However, there is nothing that would prevent banks from correcting their mistakes already now. Digitalisation may not give rise to manipulations. We will discuss this issue at our conference on client centricity in November. It was first held last year and was attended by many participants. A very large number of bankers declared then their commitment to becoming client-centric. We hope to see this in practice.

We are going to release the ranking of banks as of the end of the year classifying them by the ratio of justified claims, as we have already been doing in relation to insurers. Consumers will thus see what banks receive the largest number of justified complaints about consumer right violations.

Furthermore, we are going to collaborate with the lawmakers so as to raise the fines for coercive tied selling and misselling. Indeed, the number of such breaches has notably decreased, but they are still committed because the fines for them are negligible. In our opinion, they shall be comparable with gains from the violations.

I would like to stress that most banks act in good faith towards their clients. However, some banks’ unfair practices discredit the entire banking sector as well as those banks who act in good faith. Therefore, we are determined to vigorously combat such practices.

Finally, I would like to speak on a positive topic — innovations. The Russian banking sector is indeed among the leaders in terms of innovations. An essential one that the Bank of Russia is working on together with many banks already engaged is the digital ruble.

This is a milestone for us. Our aim is to start extensive introduction of the digital ruble from July 2025. We are progressing according to the schedule. The first stage of the pilot testing was successful. In September 2024, we expanded the parameters of the pilot testing for those banks who had been participating in it from the very beginning. Another 20 banks are preparing to join the pilot testing. We hope that everything will be done as needed. Furthermore, we would like to oblige banks to process digital ruble transactions stage by stage: at first, these should be systemically important banks who are more prepared, then banks with a universal licence, followed by banks with a basic licence. The same should be done in relation to trade and service companies: they should start accepting digital ruble payments gradually, similarly to how that was done with non-cash transactions.

It is important — and I know that small banks brought up this issue — to ensure the opportunity to connect to digital ruble services, and there are banks interested in this option, although this will certainly involve expenses. Small banks can perceive them as significant.

We are providing a software module to banks for them to integrate their mobile applications with the digital ruble platform. In addition, together with the IT industry, we will explore the issue of model solutions that could reduce banks’ expenses for upgrading their systems. It is critical to ensure that small banks are prepared to this stage of the deployment.

Businesses and banks should not face any difficulties with launching the option of digital ruble payments. It will be possible to pay via a QR code similar to the one used in the Faster Payments System (SBP). This code will become universal to process transactions with digital rubles as well as payments made via the SBP and commercial payment solutions. The National Payment Card System has successfully completed the pilot testing of this technology with 22 banks. We expect a universal QR code to become a national standard, similarly to the standards on the Bank of Russia Payment System and Financial Messaging System and the standards on cards. Therefore, we suggest introducing a legislative requirement to use only one QR code at cash desks — a universal QR code that should work in an arm’s-length infrastructure. In our opinion, it is critical to make this mandatory by the moment of full-scale introduction of the digital ruble. This draft law is being prepared and we will be discussing it.

This is the way preferred by many countries. We know that a single standard on QR codes is mandatory in Brazil, Indonesia and Malaysia, for example. These are universal QR codes that many economies with advanced fast payment platforms use.

I would like to emphasise that banks will maintain all their payment solutions and fee models, including loyalty programmes. This will be beneficial to banks and will not limit their opportunities for deploying in-house client management systems. Moreover, small banks will thus become less dependent on large players’ solutions. This will help create a fair system. Overall, in terms of digital innovations, we will be doing our best to support them. As you know, we have been supporting multiple initiatives related to digital financial assets. I believe that we will have a chance to speak of these and other issues at today’s session.

Thank you for your attention.