Russian banks that primarily lend to the businesses of their owners should think about changing their business models, Russian Central Bank Governor Elvira Nabiullina said at the 26th International Financial Congress.
“We want the banking community to know that our intentions here are serious, and we will consistently tighten our approaches. Therefore, I advise those who have a business model built on lending to owners’ businesses to think seriously about changing it”.
Nabiullina called lending to the businesses of bank owners a top problem that the regulator needs to resolve. She said such lending is dangerous for two reasons.
“First, the bank will turn a blind eye to the risks of its own company that is receiving the loan. And this is a risk of default”, she said.
“Second, if the owner’s project runs into some actual difficulties, practice shows that the affiliated bank will be the last one to be repaid money. These aren’t market loans, but rather loans ‘based on understandings’ and the bank cannot refinance or assign them”, Nabiullina continued.
Ultimately, Nabiullina said this is all leading to the bankruptcy of numerous banks. “Among other things, this is what led to the collapse of rather large banks from which we revoked licenses”, she added. She noted that the H25 standard, which restricts financing for the projects of owners, was introduced this year, but it is still being applied in preferential conditions.