The Central Bank sees a threat to the banking system in long-term state support programs

The Bank of Russia notes that concessional loans are useful for business, but pose a certain threat to the banking system. Such programs provoke banks to issue loans to more risky borrowers, and not only within their framework, the regulator is sure. Experts agree that this may create problems in the future, but curtailing preferential programs is difficult and generally pointless: lending will slow down on its own due to rising rates.

The Central Bank published an analytical note (.pdf), in which he concluded that preferential corporate loans encourage banks to issue riskier loans to customers.

The authors of the document examined loans issued to businesses under various preferential state programs starting from 2020. According to their observations, one of the side effects is an increase in the volume of loans issued to companies with low credit quality.

“The concern is that the share of loans to companies with a high probability of default, assessed as such even before the pandemic, has also increased for loans issued at market rates outside government programs,” the study says.

As one of the reasons, the authors of the document name “a possible increase in the propensity of banks to take risks against the backdrop of issuing low-risk preferential loans for the bank or refinancing part of the loans under the preferential program.” The effect, in their opinion, becomes stronger, the longer the concessional lending programs last.

In order to minimize the side effects of anti-crisis programs of preferential lending, the Central Bank believes, it is advisable “to curtail them in a timely manner after the passage of an acute crisis phase.”

However, according to experts, in the current situation it will be extremely difficult to do this. According to the Bank of Russia, at the beginning of the year, the debt on loans to small and medium-sized businesses (SMEs) provided by the banking sector amounted to 9.61 trillion rubles. Of these, 17% accounted for loans issued at rates of less than 3% per annum, their volume amounted to 1.6 trillion rubles.

In addition to the already existing large amount of debt on soft loans, there are other factors that complicate the curtailment of government programs. As Yury Belikov, Managing Director for Validation at Expert RA, notes, the problem is that the economic cycle has been greatly reduced and the market is moving from one crisis to another without having time to accumulate a margin of safety.

The delinquency on loans is not currently growing strongly and systematically, but in the corporate segment, according to the expert, this is ensured not by impeccable payment discipline, but by restructuring and longing, as well as long terms and the procedure for repaying investment loans, when a significant part is returned at the end of the term in one tranche or converted into a new loan. “The latter could also be formalized as part of programs for restructuring the economy and ensuring technological sovereignty, but in some cases such financing was more motivated by general agitation than feasibility study,” says Yuri Belikov.

At the same time, the expert believes that the state is unlikely to introduce measures to cool the corporate lending market today, by analogy with the retail lending market.

“Against the backdrop of external restrictions, unfavorable macroeconomics, and taking into account the scaling of debts in periods of low rates (starting from 2020), everyone needs additional financing or at least refinancing: from state corporations to micro-enterprises,” says Mr. Belikov. But, according to him, the dynamics of lending in the near future will slow down by itself due to rising rates after a sharp increase in the key rate.

In turn, Valery Piven, head of the financial institutions rating group at ACRA, believes that at present there are no signs of a deterioration in the quality of the loan portfolio. “Loaning under concessional programs does stimulate an increase in risk appetite, but in general, banks tend to adhere to approved risk policies,” he says. As for the likelihood of tightening requirements, according to the expert, much will depend on the default of new borrowers: “If we talk about the economy as a whole, then the problem of corporate clients’ debt load is not pronounced.”

Maxim Buylov