Good morning and thank you for inviting me to this conference.
It is very important that this particular bank association conducts annual reviews of the banking sector's performance. We support such conferences and the fact that this association is actively involved in the formation of the country's financial system. That is why we always listen attentively to all the ideas that emerge from these conferences.
Most forecasts of the world economy agree that the crisis bottomed out at the beginning of 2010. The main challenge now is to emerge from the recession and create conditions for economic growth. This is generally true. At the same time it is precisely now, at the beginning of 2010, that a growing number of economists are not ruling out a second wave in the world recession. Representatives from the Federal Reserve System, the US Administration and the European Central Bank have made tentative statements to this effect.
Therefore, in spite of the positive trends, it is very important (especially in the financial sector) that the heads of the financial institutions bear in mind that additional problems in world development and growth may arise. There could be further recession and assets could contract again. There could again be losses. There has to be a certain margin of strength, this should be a standard feature of financial institutions which form reserves and adjust for relevant norms.
Sometimes investors feel this is a good time to make money on growth, that now is the right moment... But risk is not always advisable. One can only risk within proven parameters and proven strategies which must always have a certain safety margin.
Late 2008 and early 2009 were important times for testing the strength of the Russian financial system. We can say that the Government, the financial system and the financial regulator, the Central Bank, were aware of the possibilities, but they did not know when it would occur or how deep these crises and challenges would be.
Generally, the burden was put on the resources of the Central Bank, the gold and currency reserves and the Government's reserve. We have managed to keep the financial system from serious upheaval within the context of the normal problems in such a crisis. Yes, not all the banks emerged from this situation successfully. But summing up the results of the first stage, I can say that the financial system has successfully passed the peak of the crisis. That said, the crisis has revealed many problems and outstanding issues that have to do with the quality of the banking system, which must be improved.
In early 2008, when the system of unsecured loans was introduced, we were not aware of the risks when the Central Bank issued 2 trillion roubles to banks without collateral. But speaking of these loans, we note that the banks have a little over 100 billion roubles left out of that sum. Most of it has been repaid. Some incredible scenarios suggested that much of the money would never be recouped, that certain banks would divert them and that there would be more nervousness during the crisis. Overall I can say that it has worked thanks to the prompt actions of the Government, and the State Duma because all these laws were passed quickly. All this worked.
As we promised a year ago, interest rates, the Central Bank refinancing rates have been going down since the second half of 2009. I spoke about it exactly a year ago. I don't remember whether it was here or in a similar situation. The Central Bank cut the rates 13 times down to 8.5%, and we will continue to lower the rates as inflation drops. The Central Bank will most probably reduce rates.
We are not yet in a comfortable zone. Oil prices are high. You have to admit that they are very high. The price of oil is above $70 per barrel, it has only been that high twice, in 2007 and in 2008. These are practically the highest prices in the last 40 or 50 years, in adjusted dollars. Only during two years was the average annual price above $70. This means that we are living with high prices. Once again world market conditions are highly favourable. We again have our stock exchange index and we see a strengthening in the national currency partly due to the massive influx of currency because of high oil prices. We must understand that if the price fluctuates, and perhaps it will go down, that the markets, including the value of assets and the value of oil contracts could suffer. We should carefully weigh the current situation.
One result of the past year was defaults on bad loans by companies which have not done well. We have seen more than 500 defaults, of which only 10-15% were technical. The amount of defaults exceeded 200 billion roubles. The least solvent sectors during the crisis proved to be transport, retail, construction and the food industry. Under favourable pre-crisis conditions, these were the fastest growing sectors. Today we have to admit that these sectors had been somewhat overheated and prices were too high. I have cited examples before: loans in these sectors increased by 20 or 30% in 2007. In the real estate sector, loans increased by 80% in 2007. No wonder these sectors proved to be the most vulnerable during the crisis.
The reason for this, as I said, was high oil prices. This fed liquidity into the economy and shored up the rouble which was the currency in which short money and foreign credit came. The Government also took a pro-cyclic approach to some parts of public spending based on our oil and gas resources. We have often been told that we should spend more and boost the economy. That, in fact, was a disservice because it boosted liquidity, and credit within the context of high inflation for the sectors that turned out to be overheated.
Since October 2009 real estate prices have been growing. That will again make real estate an attractive investment prospect. But let me warn you that there is no sign that real property prices will grow to pre-crisis levels. Nevertheless, because of impulse buying or excess liquidity which we are already seeing in the market, this growth in property prices is possible. This should put us on guard.
If we assume that there will be no such external factors, no such domestic demand, real estate prices will not rebound to pre-crisis levels. I repeat, while there may be some growth, it is important not to be drawn into a race which we may again lose. Real estate in any crises, especially for financial systems, is a minefield in terms of the quality of assets and the quality of collateral. So, I urge you once again to be cautious. We must move forward, but be deliberate, weigh the pros and cons and draw lessons from the past.
Another result of the past year is the 5% growth in assets while credit remained at the same level. There have been different assessments of the chances for credit growth while the GDP falls. It is hard to increase loan volume when many sectors are curtailing their activities. And considering that part of the overall credit portfolio was problem loans, it is important to significantly build up reserves. The banks have accumulated up to 2 trillion roubles. But if economic growth is less favourable and if there is a second wave in the world recession, 2 trillion roubles is not all that much. We may have to tap into these 2 trillion roubles.
I am aware of the current mood: make more active use of reserves, report profits and become engaged in other transactions. On the whole the reserves will shrink because we see a positive trend. But again, one has to be very careful. Uncertainty about future development in various sectors of the economy will persist this year and throughout the following year.
My forecast for credit growth this year is 5%, perhaps 10%. Between 5% and 10% is an optimistic forecast. It is moderate growth although, again, we welcome work with the real sector. This is what the financial system is for. The financial system today must display competence in choosing projects and assessing the quality of project loans.
Another welcome result is that the number of banks has dropped. Banks have been tested by the crisis. Last year 119 banks had their licenses revoked. Early this year several more licenses have been recalled and the number of banks has dropped below 1000 for the first time. About ten days ago there were 997.
The consolidation of the banking sector continues, and that is a very positive process. In general, last year bank capital increased, and that is also a positive trend. The assets of the banking system amounted to 75% since the beginning of the year compared with 67% the year before.
I think the rule on increased capital requirements, especially for the well established banks, has played a very positive role. I consider it a plus. We must prepare for the new stage in 2012. We have seen robust growth in household deposits connected with high deposit rates.
The banks will undoubtedly be reducing deposit interest rates so we will not see continued growth in deposits. Last year saw a record number of deposits, about 25%, which was even higher than before the crisis. Clearly, this follows a period after an outflow and a period when bank deposits were, for households, more reliable than other investments.
This year we face the serious task of improving legislation. Previous speakers have stressed the need for Russia to immediately adopt the financial oversight and regulation measures generated by the Financial Stability Council, the G20 and the Basel Committee. That will be a continuous and ongoing work.
We propose a wide range of laws this year, above all, the law on the national payments system. Please do not confuse it with the national payment card system. During the course of discussions the national payment system is often confused with the system of payment cards. Today the national payment system basically exists. We have calculations, agents, operators and responsibility under agreements and contracts. But we need a legal framework of laws for the system, more precise definitions and a concept of liability for its participants, the participation of foreign companies, including foreign payment cards and systems in our market. All this will form the content of the law on the national payments system. A draft of the law is in the finishing stages. The President has given us until April 1 to complete it.
The national payment card system is more debatable. In our working group it is based not in the law on the national payments system, but in the law on government municipal services. That is a different system that depends on the potential of the national payments system. It is an agreement between the state and key banks that are willing to enter a partnership and jointly develop the standards for payment cards that would be attractive and could be joined by various banks thus offering additional consumer financial services. That part of the work is more complicated. Even so, we have already resolved a range of contradictory issues.
We believe that such an organisation will be created, that the state for its part will make it possible to render government services, be it pensions or utility services, through these payment cards. The banks will add their products to these cards. Experts are working on the models of these cards. We are primarily including banks that have experience working with such cards. We try to determine the role of international systems in such a union and such an organisation. That work is ongoing. Again, we are ready to bring your association into this work.
The next law deals with micro-financing activities and micro-financing organisations. It will regulate the relations involved in the creation of non-deposit micro-financing organizations. The market is now estimated at 24 billion roubles of which 55% are loans for business development and 45% for consumer needs. Most loans are for a term of one year. In the future we think this market may exceed 200 billion roubles. We think this area needs a boost to make financial services more accessible to consumers.
Amendments are proposed to the laws On Banks and Banking; on the Central Bank in the section dealing with requirements for candidates and individuals holding executive positions in credit organisations, the founders of credit institutions and above all, requirements for business reputation. The bank would have the right to refuse to sell the shares in a credit institution if the buyer's business reputation is found to be unsatisfactory. For instance, if the buyer of the bank's shares has been indicted by a court of law or has been proven to have committed unlawful acts.
The laws On Banks and Banking and on the Central Bank are to be improved with respect to consolidated supervision and disclosure of information on their activities to interested users in accordance with current international practice. A law has been drafted to introduce amendments to the Federal Law On the Central Bank vesting the Bank of Russia with the right to present claims to credit organisations to limit the risk in credit-related transactions and agreements with affiliated individuals who have a substantial influence on the activities of credit organisation.
I forgot to say that the law on the payments system will hopefully contain a chapter on electronic money. The CB must expand its supervisory activities using various forms, above all, electronic money which is not yet properly regulated in the sector where that money is in circulation today. But that is a very labour-intensive project. I am not sure we will be able to finish it before the end of March. But we have set ourselves this goal.
In 2010 the Finance Ministry will be vested with the function of regulating credit cooperatives. A number of regulatory legal acts are being prepared to regulate the keeping of a register of credit cooperatives, the reporting procedure of credit cooperatives and the exercise of other supervisory functions.
Among the Finance Ministry's new functions is accreditation of rating agencies. Russian financial regulation contains references to ratings. Accordingly, the accreditation of rating agencies is very important for all our goals and tasks.
In conclusion I would like to say that our performance in 2010 has so far been satisfactory. Once again, the risks remain, but the Government's actions should mitigate the fundamental disproportions and risks in our economy. One such area is cutting the budget deficit, and covering the deficit through domestic and foreign borrowing rather than by using the reserves.
In 2010 the net borrowing, i.e. less repayments, may amount to 1.5 trillion roubles if one combines the domestic and foreign markets. That is a fairly large sum. If Russian banks take part in buying these blocks of bonds, it would account for a significant part of the portfolio in question. It is important to prevent the deficit from growing. We must keep it at a certain level in order not to compete with the private sector, so that investment in government securities does not become the sole investment option or one more lucrative than investing in the real sector.
In this connection, reducing the deficit is the overarching objective for the next 2-3 years. We are talking about a 4% deficit beginning next year and 3% 2012. But we are already under heavy pressure from the ministries to preserve a whole range of programmes and even enlarge them. That work will be completed by the autumn and the Government must create favourable conditions for the development of that aspect of the financial system.
I also hope that borrowing in the above-mentioned proportions in world markets will yield positive results. Russia is entering capital markets at a time when we have good economic opportunities, a balanced financial system, a decent budget and some reserves. We will have spent the Reserve Fund while the Fund of National Well-Being will still be untouched. So I think the borrowing indicators will be good enough and that will maintain Russia's rating and improve the private sector rating. These things are interconnected.
I wish you success in your work.