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Stagnation of the depositary base (in August-September 2011 the influx of households deposits to banks was close to nil) made banks to raise interest rates on retail deposits. The average weighted rate on one-year deposits (except for demand deposits) rose from the minimum values (5% per annum) in July to 7% per annum in December. An indicator of the maximum interest rate (on deposits in rubles) of ten credit institutions which attract the largest volume of deposits of individuals which indicator is monitored closely by the Bank of Russia rose from the summer minimum of 7.85% per annum to 9.42% per annum in December.

However, proceeding from the macro conditions which justified the frontal decrease in the norm of households savings it is believed that growth in interest rates on deposits will not have a serious impact on the dynamics of the market of deposits. Individual banks which were more aggressive in raising of deposit rates are likely to strengthen their market positions. But, generally, the growth rates of that type of bank liabilities will be quite moderate in future. In 2012, households deposits are expected to grow by 15%18%, including ruble deposits (18%20% and deposits in foreign currency (7%10%).

Corporate Customers Funds Funds in corporate customers accounts are prone to serious fluctuations, on the one hand, due to both payment of taxes (a quarterly decrease) and a December surge in budget expenses and, on the other hand, due to the fact that fluctuations in the capital inflow and outflow have an impact on the amount of account balances of corporate customers. In the past few months, the weak dynamics of that type of bank liabilities can be mainly explained by the outflow of capital despite the favorable situation which prevailed on the market of Russias main export commodities.

Generally, within a year, the funds of industries in bank accounts and deposits rose by 24.8%. However, December the period of large-scale growth in budget expenses accounted for nearly a half of that growth (Rb 1.05 trillion out of Rb 2.15 trillion). Within a year, account balances in rubles grew faster than those in foreign currency (28.9% against 3.7%); it is to be noted that virtually all the dedollarization fell into December when account balances in foreign currency decreased by 10%, while those in rubles grew by 16.2%.

The fact that most corporate funds are placed in term deposits, rather than current accounts which serve the economic turnover can be regarded as a negative factor in terms of economic activities. In the second half of 2011, the volume of term deposits of corporate customers exceeded again the amount of funds in settlement accounts. It is to be noted that about 45% of term deposits of industries and entities are placed for the term of over one year, that is, such funds have been withdrawn for a long period of time from companies current operating plans.

RUSSIAN ECONOMY IN trends and outlooks The term deposits of corporate customers exceeded for the first time the amount of current settlement account balances in the mid-2009, that is, in the period of stagnation of the economic activities. At that time, such a ratio in the structure of bank accounts of the corporate sector evidently pointed to the low level of business activities and a lack of motivation to economic development. Companies preferred to receive the minimum return on funds placed in bank deposits, rather than take the risk of expansion of production. In 2010, the volume of industries current account balances grew faster than the volume of deposits which actually remained stable in nominal terms. As of March 1, 2011, the ratio of the value of term deposits to that of current ones fell to 76%.

Source: The Central Bank of the Russian Federation and the IEP calculations Fig. 51. Ratio of the volume of funds in term deposits of the corporate sector to the value of current account balances However, later the banking sector returned to the policy of accumulation of savings in bank deposits. As a result, in 2011 the volume of the current and settlement account balances grew by 10.4%, while that of term deposits, by 40.7%, and the volume of term deposits, that is, funds which are not involved directly in serving of the turnover exceeded again the value of settlement accounts balances (Fig. 51).

Foreign Liabilities In 2011, external financing did not have a decisive role in formation of the resource base of the banking sector. The inflow of foreign liabilities to the banking sector in 2011 (according to the methods of the balance of payments) amounted to the mere $ 7.6bn which figure is 56.5% lower than in the previous year ($ 17.7bn). It is to be noted that according to the balance statements in 2011 the value of foreign liabilities increased only by $ 11.9bn. Accordingly, banks foreign liabilities ensured only 4% of the growth in the aggregate resources of the banking sector in 2011. It is to be noted that in the total volume of banks debt on borrowed funds foreign liabilities amount to 11% as of January 1, 2012. Taking into account the current volatility of the global financial markets it is unlikely that in the short-term prospect banks will manage to return to active external financing.

Section Financial Markets and Financial Institutions Forced Growth in State Support in Autumn 2011 Reaction to the Increased Outflow of Capital A combination of a relative revival of activities on the credit market (see below) and stagnation of the banking sectors main sources of funds resulted in depletion of the reserve of liquidity which was accumulated during the crisis. Starting from summer 2011, banks started to take an active part in auctions of the Ministry of Finance on placement of temporarily available resources of the budget in bank deposits. In September, simultaneously with their debt to the Ministry of Finance remaining considerably high banks started to show demand in different instruments of liquidity provision by the Bank of Russia.

As a result, as of the end of August the total volume of funds of the monetary authorities placed with commercial banks amounted to Rb 950bn, while by the end of the year, to Rb 1.trillion. In 2011, the monetary authorities total depositing of funds in formation of the resource base of the banking sector amounted to 19%.

Table The structure of liabilities of the banking system of Russia (as of the end of the month), % of the total 12.05 12.06 12.07 12.08 12.09 06.10 12.10 03.11 06.11 09.11 12.Liabilities, billion RB. 9696 13963 20125 28022 29430 30417 33805 34009 35237 38443 Own funds 15.4 14.3 15.3 14.1 19.3 19.7 18.7 18.9 18.5 17.3 16.Loans of the Bank of Russia 0.2 0.1 0.2 12.0 4.8 1.7 1.0 0.9 0.9 1.3 2.Inter-bank operations 4.0 3.4 4.1 4.4 4.8 5.1 5.5 5.2 5.2 5.4 5.Foreign liabilities 13.7 17.1 18.1 16.4 12.1 11.5 11.8 11.2 10.9 11.4 11.Individuals funds 28.9 27.6 26.2 21.5 25.9 28.3 29.6 30.0 30.4 29.0 29.Funds of industries and entities 24.4 24.4 25.8 23.6 25.9 25.4 25.7 25.1 24.3 24.4 26.Accounts and deposits of state and 2.0 2.2 1.5 1.0 1.0 1.8 1.5 2.3 3.5 4.9 2.local authorities Issued securities 7.6 7.2 5.8 4.1 4.1 4.2 4.0 4.1 4.0 3.8 3.Source: The Central Bank of the Russian Federation and the IEPs Center for Structural Research calculations.

3.9.5. Assets of the Banking Sector Growth in Retail Lending as a Factor of Support of the Level of Households Consumption In 2011, dynamics of retail lending was determined to a great extent by the ratio of households income and expenses. As was stated above, in 2011 households real disposable income increased by the mere 0.8% as compared to the previous year, while expenses, by 5.8%.

As a result, the share of consumer expenses in households cash income rose from 68.8% in 2010 to 72.0% in 2011. Such a situation resulted, on one hand, in reduction of the share of the income allocated for savings in cash funds and with banks. On the other hand, support of the consumption growth required additional resources which situation resulted in growth in households demand in bank loans.

In 2011, the volume of loans was nearly 50% higher that in the same period of (Rb 5,420bn against Rb 3,649bn). In 2011, growth in extension of new loans1 to individuals amounted in real terms to 37%. Such a situation resulted in the speed-up of the growth in the Deflated by the average index of consumer prices in that period.

RUSSIAN ECONOMY IN trends and outlooks households aggregate debt to banks. Within a year, its volume grew by 35.9% (against 14.4% a year before).

In the currency structure of retail lending, loans in rubles oust loans in foreign currency.

As of January 1, 2012, the share of loans in foreign currency fell to 5.5%, which figure is the minimum level in the entire period of development of the Russian banking sector. The precrisis minimum level of lending in foreign currency (10.4%) was registered in summer in the period of the highest appreciation of the ruble exchange rate (the US dollar cost then less than Rb 24). After the revaluation which was caused by the ruble devaluation late in and early in 2009, that share rose somewhat (to 13.0% as of March 1, 2009). Simultaneously, the process of restructuring of the households currency debt to banks began. It is to be noted that the demand in new loans in foreign currency does not exceed the value of the repaid debts from autumn 2008. Such a situation can be regarded as a favorable trend which points to the fact that most retail customers have adopted a more weighted approach to evaluation of currency risks related to lending in foreign currency, particularly, such exotic ones to the Russian market as the Swiss francs and the Japanese yens1.

The speed-up growth in provision of retail loans usually conceals the accumulated problems related to the quality of the banking credit portfolio. In 2011, the share of the overdue loans to individuals fell from 7.1% to 5.3%, while the ratio of the formed reserves for retail loan losses to the aggregate retail credit portfolio, from 9.7% to 7.5%. It is to be noted that both the value of the overdue debt and the volume of the reserves remain at the stable level;

such a situation points to the fact that the problem of bad loans accumulated during the crisis actually remains unresolved and is merely concealed by the renewed speed-up growth in the credit portfolio (Fig. 52).

500 250 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-the overdue loans, billion Rb the total reserves for loans to households the share of the overdue loans, the right-hand axis the reserves as % of loans, the right-hand axis Source: The Central Bank of the Russian Federation and the IEP calculations.

Fig. 52. Indices of the quality of loans to individuals In 2007, in the midst of the credit boom the supply of long-term loans in such currencies to individuals (mostly mortgage loans) rose actively. However, as seen from the experience of the previous crisis the negative effect of the foreign exchange revaluation of loans in those currencies has considerably exceeded the expected profit from low interest rates.

Section Financial Markets and Financial Institutions Lending to Corporate Customers Along with active retail lending in 2011, banks increased lending to corporate borrowers as well. During the eleven months of 2011, the volume of new loans to industries and entities rose by 40% as compared to the similar period of 2010 and amounted to over Rb 25 trillion.

The growth rates of the loan debt increased from 9.8% in 2010 to 24.2% in 2011. Rise in intensity of lending can be seen in the growth in the ratio of the volume of the extended loans to the total output. In 2011, that index amounted to 27% against 24% in 2010. It means that over a quarter of the economic turnover is carried out with use of credit funds. It is to be noted that in the pre-crisis year of 2008 that index amounted to 33%.

As in the retail segment of the credit market, the process of gradual dedollarization is observed in corporate lending. The share of debt in foreign currency of the corporate customers fell from the peak value of 29%30% in spring 2009 to 19%20% by the end of 2011. It is to be noted that the share of foreign currency in the newly extended loans decreased to 11% (in 2009 it amounted to 17%, while in 2010, to 13%).

Dynamics of the quality of the portfolio of corporate loans is similar to a great extent to the situation in the retail segment of the market. Relative indices show positive changes. The share of the overdue debt fell from 5.5% as of the beginning of the year to 4.8% by the end of the year, while the volume of the reserves, from 10.1% to 8.3% of the aggregate portfolio of corporate loans. It is to be noted that within the year the volume of the reserves did not actually change, while the volume of the overdue debt grew by 9%1.

Source: The Central Bank of the Russian Federation and the IEP calculations.

Fig. 53. Indices of the quality of corporate loans The borrowed funds of the corporate sector have the following three main sources Fig. 54 :

external borrowings from non-residents, bank loans in rubles and foreign currency and bonds placed in the domestic market. The external borrowings account nearly for the one-third of In 2011, growth in the overdue debt in the banking sector in general was justified by the situation related to the Bank of Moscow. If in general the volume of the overdue debts in the banking sector grew by Rb 60bn within 12 months the volume of the overdue debt in the portfolio of the Bank of Moscow increased in the same period by Rb118bn. Thus, without taking into account the Bank of Moscow the share of the overdue debt in the corporate loans fell to 4.4%.

RUSSIAN ECONOMY IN trends and outlooks the aggregate borrowed resources of the corporate sector. It is to be noted that from the beginning of the crisis of 2008 the share of the external financing keeps gradually declining. Before the crisis, the volumes of non-banking corporations outstanding debt obligations on the domestic market amounted to about 10% of the borrowings on the domestic market (excluding foreign debts) and 6%7% of the aggregate liabilities of the corporate sector.

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