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INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru Although legal novelties in the field of corporate law proper (protection of shareholder rights) had, to a considerable extent, achieved their limit from the point of view of the existing economic conditions, the prospects for the improvement of the existing norms are quite good. This regards both the fundamental law "On Joint-Stock Companies" and the more specialised fields, such as reorganisation, acquisitions, groups of companies, affiliates, insider deals, information disclosure, reporting, bankruptcy and others. It is also apparent that it will be impossible to develop the methods used to protect shareholder rights any further without adequate general measures in the field of enforcement and changes in the law of procedure.

4.6. The Banking Sector The year of 2002 was a good period for Russian banks: the overall sectors growth continued with assets in real terms increasing by 20%, loans to non-banking sector by 26%, deposits by 27%, including an encouraging 39% growth on deposits from individuals.

On an equally inspiring note, Russian banks have also stayed away from devoting too much of their funds to securities, which, as of December 1, 2002, constituted only 14.9% share of banks overall assets with only non-Treasury bonds registering a small rise.

The year of 2002 was particularly favorable for banks investing in Russian Treasury foreign currency-denominated (FCD) bonds, whose rise throughout the year allowed banks to book healthy profits in ruble-terms. Despite such good performance, the number of Russian banks investing in their countrys sovereign FCD debt remains limited with usual suspects, Sberbank and Vneshtorgbank holding largest portfolios.

In 2002, as in the past, Russian banks continued to act as main investors in the Federal ruble-denominated debt, although its concentration in the banking sector has slowed down somewhat. The end-year data also show that in 2002 an average Russian bank has reduced its FCD assets in favor of ruble-denominated instruments.

Credit to the Real Sector In 2002 crediting the non-banking sector (NBS) continued its 2001 trend to relative growth31 (i.e. outpaced growth of banks other assets). Thus proportion of loans to NBS in the banks overall assets notched up to a 48.9% level from a 46.7% a year before, although in inflation-adjusted terms the 2002 pace of growth was somewhat lower than in 2001. Loans to NBS at the start of 2002 made up 44% of overall assets and by the end of the year this figure rose to 48%. For 11 months in 2002 the growth of banks aggregate loan portfolio constituted 17.4% (18.9% in annual terms) against a 25.4% level in 2001. And although proportion of overdue loans have risen somewhat from a 1.7% in the start of the year to 1.9% in the last month, their share remains at a very low and stable level (annual average of 1.8%).

However, while proportion of NBS loans has risen relative to banks other assets, it has to be noted that this base (i.e. funds made available to banks) has declined from 31.4% to 29.8% within 11 months. Again, without Sberbank in the picture the reduction is even more pronounced from 38.8% at the start of the year down to 34.4% by December.

About 94% of countrys banks are engaged in NBS loan activity. With 30% of all NBS loans outstanding, Sberbank is by far the largest creditor with Alfa Bank, its closest rival, holding five times less. Sberbank, in general, holds a leading position for all rubledenominated loans. As of December 1, 2002 it controls 37.2% of the market. Sberbanks grip Here and further throughout the text without regard of ARCO-managed banks RUSSIAN ECONOMY in trends and outlooks is less deadly on foreign-currency denominated loans where its 14.8% market share is not too far ahead of Vneshtorgbanks 9.9% share, although this gap is greater if only loans to resident-enterprises are taken into consideration.

In contrast to 2001, in 2002 growth of foreign-currency denominated loans outpaced that of the ruble loan portfolio. Thus foreign currency segment of the NBS loan market has grown in the year from 32% to 34.3%, while the proportion of ruble loans has declined from 68% at the onset to 65.7% by the end of the year. Excluding Sberbank figures, the share of foreign currency denominated loans has gone up from 39.5% to 41.3%. It has to be noted that the changes in the correlation between ruble and FCD loans were happening against backdrop of expansion in both of the segments.

For loans in foreign currency, the banks in 2002 had to rely more on local demand (enterprises and private individuals resources) (see Fig.1). If prior to 1998, banks liabilities before non-resident customers exceeded banks foreign currency loans extended to non-banking resident clients, by the end of 1999 those figures leveled and by the end of 2002 banks liabilities before non-resident customers amounted to only 58% of the loans proffered to resident non-banking clients.

One of the important factors behind the growth of foreign currency loans was the increase in the time foreign currency-denominated deposits from private individuals, which in 11 months of the year has grown by 49% in dollar terms.

USD bln as of the end of hte month 1 loans to resident enterprises 2 liabilities before non-residents Fig.1. Foreign Currency Loans to Resident Enterprises vs. Banks Liabilities Before Non-Resident Clients (in US$ millions) Unfortunately, the reality of Russian banks inability to attract adequate funds from worlds financial markets translates into higher lending costs for Russian economy. As Fig. demonstrates, interest rates paid in 2002 on 6 months to 1 year deposits from individuals fluctuated within 6.5%-8% range, while 6-month LIBOR rate for the same year hardly exceeded 2.5% 7,6,6,6,6,12,12,12.12,12,INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru % 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 1 - weighted averages of interest rates charged on foreign currency loans with.5-1 year maturity 2 - weighted averages of interest rates offered on foreign currency.5-1 year savings deposits from individuals 3 - weighted averages for LIBOR.5 year rates Source Russian Central Bank and Finmarket data Fig.2. 2000-2002 Weighted Averages of Rates Charged on Foreign Currency Loans with 6 month-1 year maturity vs. Rates Offered On Foreign Currency Individual 6 month- 1 Year Savings deposits (as %, including re-investing) Another 2001 trend that did not continue in 2002 was the proliferation of short-term loans, number of which has fallen from 23.4% in the start of the year to 22%. At the same time, the market saw an increase in mid-term (more than a year) loans both in the ruble and foreign currency segments (see Table 11).

Table Time Structure of Loans to the non-banking sector (NBS) in 2000-In Proportion to Base Loans (%) Type of NBS Loan Jan 1, 2000 Jan 1, 2001 Jan 1, 2002 Dec 1, All NBS Loans 100 100 100 up to 90 days 17.8 16.9 23.4 90-180 days 10.8 15.7 14.2 14.180 days- 1 year 33.2 34.4 31.1 28.More than 1 year 38.2 33 31.3 34.Foreign Currency NBS Loans 100 100 100 up to 90 days 9.5 8 10.7 9.90-180 days 9 8.4 10.7 12.180 days- 1 year 25.1 28.1 28.6 24.More than 1 year 56.3 55.4 50 53.Ruble NBS Loans 100 100 100 up to 90 days 24.5 21.7 29.3 28.90-180 days 12.2 19.6 15.7 15.180 days- 1 year 39.8 37.7 32.3 30.More than 1 year 23.5 20.9 22.7 24.Source: computed basing on STIiKs data As to lender profiling, 2002 data show that banks are giving more loans to private individuals. In 2000 their category accounted for a little over 5% of all banks loans, while by the RUSSIAN ECONOMY in trends and outlooks end of 2002, that number has grown to 8.2% (see Table 12). This general tendency could be seen both at Sberbank and other private banks. For 11 months of the year Sberbank has increased loans to private individuals by 65.6, while other banks by 47.3%.

Bank financing for government and public enterprises has reversed its 2001 decline and has also seen an increase, albeit, of a less significant nature.

Table NBS Loans by Lender Type Loan Break-up in % terms* Type of Loan Jan 1, 2000 Jan 1, 2001 Jan 1, 2002 Dec 1, Loans to Government and 5.8 1.7 1.3 1.Public Enterprises Loans to Resident Enterprises 82.8 88.1 87.8 86.Of those state-owned 8.4 8.1 5.6 5.Of those Private 74.4 80 82.2 Loans to Non-Resident En6.1 5 3.9 3.terprises Loans to Private Individuals 5.3 5.2 7 8.*Includes overdue loans.

Source: data from STI&K consultancy.

Entrepreneurs accounted for a fairly large percentage of all loans issued to individuals (19% as oflate 2001 and 21% as of late 2002). Another 1-2% was issued to non-resident individuals with the remaining three quarters taken out as consumer loans. At the end of the year the latter category amounted to RR113.3 billion, a half of which was issued by Sberbank alone. Most of these consumer loans were issued in rubles (80% for all banks and 70% for all banks excluding Sberbank). Sberbank leading position for this category of loans comes in especially strong for consumer loans with re-payment term of over a year. Conveniently, most consumer loans are taken out for periods of over 3 years.

Other banks, unable to compete with Sberbanks massive branch and product structure, try to beat the rival by offering a quicker service. Russkii Standard Bank and First O.V.K., for instance, advertise express loans when a loan can be issued within the day of the application. The catch is that due dates for these express loans rarely exceed 1 year, while interest and service fees are higher than those offered by more conservative banks.

Table Consumer Loans Term Structure All Banks All Banks, except Sberbank Type of Loan Jan 1, 2002 Dec 1, 2002 Jan 1, 2002 Dec 1, Consumer Loans Total 100 100 100 Overdraft.5 1.6 1.Up to 90 days/recall date 6.6 5.3 11.1 9.90 to180 days 2.8 2.9 4.6 5.180 days to 1 year 17.8 18.5 27.9 29.Over 1year 72.3 72.3 55.8 54.Including loans over 3 years 50.6 51.5 31.7 28.Source: data from STI&K consultancy INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru Banks Role in Market for Government Debt As mentioned, in 2002 banks have stayed away from significantly increasing their securities portfolios. In fact, their levels barely nudged from 13.9% of banks total assets in January to 14.9% by the end of the year. Even then, this 1 percentage point rise was mainly achieved by an increase in non-government securities. Whereas holdings of government bonds did not rise, they did undergo a change in denomination terms, with banks now preferring ruble-denominated instruments (up to 4.9% from 4.2%) to foreign-currency debt (from 7.8% down to 6.9% of all assets).

Ruble Denominated Government Bonds Russian banks remain large holders of Russian Government ruble denominated debt. In 2002, however, the process of further concentration of government issued ruble debt in banks was somewhat halted. In 2001, banks share of the debt grew impressively from 61.5% to 75.6%. In 2002, however, after a brief rise up to 78.2% in February-March, banks holdings of government debt plummeted down to 2001 level and by the end of the year amounted only to 76.1%.

A conventional explanation attributed this halt in concentration to the 2002 launch of a savings element of the Russian pension system, which allowed investing earned insurance premiums into GKO-OFZ.

A closer look at the dynamics of banks share of government debt, however, does not necessarily point to such an easy explanation. Rise of banks share of government debt had already showed signs of softening in the fall of 2001 (please see Fig. 3), a good few months before first premiums for the new pension system were collected. While investing these premiums since April 2002 have not yet caused banks to reduce their holdings of government debt as compared with December 2001.

% 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 2 Source: Russian Central Bank Fig 3. Banks Share of Government Debt in the Aggregate GKO-OFZ Portfolio in 2001-2002.

Unfortunately, data on government debt published by the Central Bank does not differentiate between holdings of the Central Bank itself and those of commercial banks. In this RUSSIAN ECONOMY in trends and outlooks case, commercial banks balance statements are the only sources for establishing the amounts of government debt held by banks.

As of January 2002, out of a total number of 1,300 existing banks, only 500 had investments in government ruble-denominated bonds. By the end of November that number has further dwindled down to 434. At the same time, total value of government bonds in banks possession has risen in 11 months of 2002 by 38% (from RR114.1 billion up to RR158.3 billion).

Curiously enough, Sberbanks share of government debt grew at a slower pace than at the rest of the banks (34.2% vs. 58.7%), which lead to an annual reduction in Sberbank total holdings of government debt (from 81% to 79%).

In 2001, on the other hand, things were different. Banks share of government debt grew at a much slower pace (10.8%), most of which was achieved by rises in Sberbanks holdings.

Its portfolio of government debt rose from RR63.4 billion at the start of 2001 to RR92.9 billion by the years end, a staggering annual rise of 46.5%. While other commercial banks were undergoing a reverse process and reduced their government securities holdings from RR39.billion to RR21.2 billion in the year, a staggering annual decrease of 46.4%.

In 11 months of 2002, Sberbank holdings of GKO-OFZ have increased somewhat (11.5% to 12% of total assets). The same insignificant rises of GKO-OFZ were seen at other commercial banks (from 1% to 1.3% of total assets). As of December 2002, government ruble-denominated bonds made up 45% of Sberbank total assets. For commercial banks that figure was much lower, and at the end of last year stood at only 25.5% of total assets.

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