The Fourth National Banking Event in Montenegro organized by the Association of Russian Banks, National Banking Club and National Banking Journal has confirmed its status as one of the most prestigious and popular events in the Russian financial community, with such participants as managers of the Association of Russian Banks, high-ranking officials of regulatory bodies, heads of leading federal and regional finance and credit institutions. Viktor Vladimirovich Gerashchenko, a legendary banker, was also a guest at the event. It was not only about the guests - the event held in the ancient town of Budva has also raised important issues to be discussed: expansion of crediting, establishing the institution of financial ombudsman in Russia, and perspectives to expand the range of deposit and credit products. This has not come as a surprise: Russian banks have learned their lessons of the crisis and now strive to use their experience to ensure prosperity for their business.

WHERE HISTORICAL MEETS CONTEMPORARY

In his opening speech for the business part of the event, Garegin Tosunyan, president of the Association of Russian Banks, has pointed out why this small mountainous country in the heart of Europe has been selected to hold the event. “Montenegro and Russia have a long history of friendship, which began when Montenegro was ruled by the Ottoman Empire”, he said. In 2011, Mr. Tosunyan reminded, we will celebrate the 300th anniversary of this friendship: Russian ambassadors of Tsar Peter I have arrived in 1711 to Danila I, the metropolitan bishop of Montenegro, offering to join forces of the two countries to fight the Ottoman Empire. The second milestone was 1715, when Danila has arrived to Russia, having been able to break through the Swedish cordons. Thus, this year may also be regarded as an anniversary, as 295 years have passed since the visit of the Montenegrin bishop.

“300 years is quite an impressive period”, said Mr. Tosunyan to summarize the historical background. “Now we may clearly say that in this period, the friendship between Russia and Montenegro has only been improving, and we give it a fresh impetus by traditionally holding our National Banking Event on the coast of the Adriatic Sea”, he added.

Yakov Gerasimov, Extraordinary and Plenipotentiary Ambassador of Russia to Montenegro, has thanked the organizers of the event to select this country for the event for the fourth time in a row. “The time flies quickly, I still remember how we organized the First National Banking Event, and now we meet for the fourth time already. I am sure that one of the most important reasons why this event has become popular and crucial for the whole business community is that the Association of Russian Banks has made a good choice of the location. Montenegro and the town of Budva in particular is a wonderful place for fruitful work and, what is also important, for friendly talk. For our Russian guests it is also an additional opportunity to get to know the country with really deep historical links!”

The Russian Ambassador has also said that yet another reason why the event was a success was the importance of the issues on the agenda. “Each time the organizers manage to bring forward the most crucial and topical issues for the Russian banking system”, Mr. Gerasimov said.

After the speeches of the head of ARB and the Extraordinary and Plenipotentiary Ambassador of Russia to Montenegro everyone was sure that the next National Banking Event will also take place in this ancient Balkan country, the fifth time in a row. Meanwhile the bankers and financiers who took part in the fourth event will have enough topics for discussion. Indeed, during the business part of the event the participants discussed problems of international cooperation, globalization of world economy, issues that Russian banks are facing and that they, as the recent crisis has proved, are mostly able to deal with successfully.

POSITIVE CHANGES AND NECESSARY STEPS

It should be noted that the crisis, or more precisely, just the memories of it, actually was in the air at the event. Late 2008 and 2009 have divided the history of Russian banking into “before” and “after”. However, it should not be regarded as a tragedy, especially now that Russian credit institutions are showing good indicators and positive development trends. That was what Director of the Department for the Licensing of Activities and Financial Rehabilitation of Credit Organizations of the Bank of Russia, Mikhail Sukhov, said at the beginning of his speech at the event.

“Our banking system is operating dynamically and successfully, which is proved, for example, by the results of the last month, August 2010”, Mr. Sukhov said. “The total assets of Russian banks have increased by 0.6% in this period, which was a double of the growth rate in July. The volume of credits provided to non-financial entities has also grown more than expected. All of this matches the trend that has emerged one year and a half ago: the Russian banking sector is achieving stable and non-inflation related growth”, he also said. Mr. Sukhov said that according to the forecast of the Bank of Russia, the growth of the total credit portfolio of Russian banks may reach 3-5% by the end of 2010, which is not bad considering that recently experts spoke of stagnation and “freezing” of crediting as of an actual fact.

Still, it is too early to calm down and reap the profits, Mikhail Sukhov believes. “We need to create incentives so that banks strive to invest not into venture business, but into existing enterprises”, he pointed out. And such incentives, as Mr. Sukhov believes, are already being created: the Bank of Russia has supported and took an active part in drafting the law on the registration of notices of pledge or other encumbrance on movable property. “We believe that it is very important to supplement the existing system of real property pledge registrations with a system of mandatory registration of notices about pledges of movable property”, he explained. Such improvement of the system will reduce credit risks, will enable credit institutions to earn stable income and will have a positive impact on the volumes and terms of credits.

The topic of bad debt was also covered, even though it attracted much less attention than a year ago during the Third National Banking Event. It came as little surprise since the bad debt problem in the Russian banking sector is gradually being resolved. Still, some concerns remain: it is not a secret that during the acute crisis banks have transferred some of the bad assets into private unit investment funds, and the transferred assets sometimes amounted to billions of rubles. “We do not call for a revolution, but we propose a deadline for banks to transfer such assets out of private unit investment funds and replace them with more liquid assets”, said Director of the Department for licensing of activities and rehabilitation of credit organizations of the Bank of Russia. He believes that the transition may take two or three years.

Still, recovery of crediting will require not only solving the problems of bad debt and credit risks - the trust between banks and customers, and borrowers in particular, should be restored. It is obvious that the crisis has not improved such relationships. That is why Mikhail Sukhov praised the idea of creating the institution of financial ombudsman in Russia, or basically the system of self-regulation of banks. “We support this initiative of ARB and we support the banks in striving to settle out of court their conflicts with private customers, who, by the way, demonstrate big confidence in the banking system, by continuing to open accounts, depositing their money and applying for credits”, he said.

The total amount of deposits attracted by the banks has already surpassed the pre-crisis level, and this figure continues to rise, with the average duration of deposit also increasing. These data have been confirmed later by Aleksandr Turbanov, General Director of the Deposit Insurance Agency. “This brings forward the idea of irrevocable deposits, and this idea should be supplemented with legal framework to enable banks to offer deposits with floating interest rates. Introduction of irrevocable deposits with floating rates will enable to expand the range of deposit products, which, in turn, will help expand the range of credit products”, said Head of Department of the Central Bank.

After Mr. Sukhov's speech, head of ARB Garegin Tosunyan has stressed the importance of cooperation and interaction of the association representing the interests of Russian Banks with the Central Bank acting as the regulator of the national banking market. “We are very inspired by the Bank of Russia's support for the idea of financial ombudsman and the idea of irrevocable deposits. This cooperation and continuous dialogue will ensure successful development of the banking market and the country's economy in general”, Mr. Tosunyan said.

HOW TO DEAL WITH THE MORATORIUM

One of the consequences of the crisis, the moratorium on excluding banks from the deposit insurance system, was also discussed at the event. Mikhail Sukhov, Director of the Department for Licensing of Activities and Financial Rehabilitation of Credit Organizations of the Bank of Russia said that the Central Bank is considering three options to resume participation of banks in the deposit insurance system. “The first option is to do nothing. Banks that take losses may improve their financial indicators by the end of the year using internal resources or intervention of shareholders. The second option is to delay it. A dozen or more banks need time to deal with their assets, but these banks are not trendmakers in the market. The third option is to keep the duration of the moratorium without changes. Some financial indicators may become mandatory and the transition to an integral approach to evaluation may be adopted”, Mr. Sukhov explained. But since the third option may be implemented after this year, he believes that either the first or the second option will be selected.

SMB CREDITS BECOME MORE AFFORDABLE

Russian economy will have difficulties showing stable growth rates without the development of small and medium business, if it is possible at all. Mikhail Kopeykin, Deputy Chairman of Vneshekonombank, spoke in details about credits to small and medium businesses during the official part of the Fourth National Banking Event. In his speech, he pointed out that Russian Development Bank, a wholly-owned subsidiary of VEB, has a policy of continuously decreasing the cost of loaned resources for partner banks participating in the national programme of supporting small and medium businesses. In 2010, VEB received funding from the National Welfare Fund with an 8.5% interest rate, and partner banks received the funds from VEB only with a 9.5% rate, so the cost for end borrowers was only 13% per annum. In early September, a resolution of the government decreased the interest rate on the funds provided by the National Welfare Fund. Thus, the rates for partner banks will be decreased by 2.5%, as well as the rates for end borrowers within the national programme to support small and medium businesses.

IRREVOCABLE DEPOSITS AND TIME LAG

The role of the Bank of Russia in establishing, developing and preserving the stability of the national banking sector is a topic for a long conversation, and a subject for countless works, especially after the recent crisis. The Central Bank was much praised in unofficial conversations for its very prompt and clear interventions in late 2008 - early 2009, mitigating the most harsh effects of the global financial crisis. However, the role of the Ministry of Finance is of no less importance - this became obvious when Sergey Barsukov, director of the Department of Financial Policy of the Ministry of Finance, made his speech. He reminded that his ministry has the right to suggest laws, and several laws concerning the banking sector are being currently drafted.

One of the crucial laws being proposed is the law about creating the national payment system. It requires serious effort to amend the Civil Code of the Russian Federation before this law can be adopted, the Ministry's representative explained. The result of the new law will be the regulation of electronic payments, increased responsibility of operators etc. However, since the event was attended by “active” bankers, as Mr. Barsukov put it, the most important law for them is probably the law about irrevocable deposits. “I would like to draw your attention to the name of this instrument: the term 'irrevocable' may sound negative for a layman, so it would be more appropriate to introduce 'deposits with fixed repayment date'”, Mr. Barsukov said. Garegin Tosunyan, President of ARB, agreed with the Ministry's official. “Indeed, the word 'irrevocable' may create the impression that the rights of the depositors are infringed. The association, of course, strives not to infringe on their rights but to create long-term deposits and improve the current situation when fixed-term deposits may be withdrawn at any time”, he said.

Continuing the topic of long-term deposits, Director of Department of the Ministry of Finance has supported another much-discussed idea - about making a certain gap between the customer's request or notice about the withdrawal of the deposit and the actual repayment of funds, with this lag being possibly dependent on the amount of deposit. If the amount is less than 700 thousand rubles, it should be 3 to 4 days, and a week for bigger amounts.

Implementation of this approach would stabilize the passive base of banks, the participants agreed. It is well-known that for many overly “sensitive” customers a week is exactly the time when they can calm down (if they want to withdraw their deposit due to rumours about financial instability of the bank). During this week or even less, people will have a chance to understand that their fears are irrational, that the bank performs its obligations to the customers, and then they may change their mind about withdrawing the money.

DEPOSIT INSURANCE AGENCY AGAINST ELEPHANTS IN CHINA SHOP

Probably one of the main differences between the third and the fourth national banking events in Montenegro was the mood of the speakers and participants. A year ago the main idea of speeches was that the Russian economy was seriously ill, and consequently, the national banking sector is ill as well. As Aleksanrd Turbanov, General Director of the Deposit Insurance Agency, said in the beginning of his speech, “the patient has started to recover, and not just started”. Since the agency, as the market players know well, always keeps the finger on the pulse, this opinion is really important.

Bankruptcy among the banks participating in the deposit insurance system and cancellations of licenses have been isolated cases and the Deposit Insurance Agency forecasts that this issue will not worsen, and consequently, the insurance fund will not bear the burden of additional liabilities for the repayment of deposits. As the head of the Agency pointed out, the deposit insurance fund currently holds 117 billion rubles and the Agency expects it to exceed 130 billion rubles by the beginning of the next year.

Aleksandr Turbanov commented on the opinion stated earlier by Bank of Russia's Mikhail Sukhov that the Agency should keep the rehabilitation functions, and has praised the mechanism of rehabilitation itself. He believes that it was the rehabilitation measures implemented by the Agency together with the Bank of Russia that helped to convince the people that the national banking system is stable. “That is why we believe that it is appropriate to preserve the mechanism when the 'bad' part of the bank's business is isolated when it is on the brink of bankruptcy, and the 'healthy' part was transferred to a stable bank. As it is known, this procedure has been tested during the acute crisis period, and now there are no reasons to abandon this practice”, the head of the Agency said. This mechanism will enable, on the one part, to keep the depositors calm, and on the other hand, to decrease the burden on the deposit insurance agency. The second reason, which may seem not so important now that the banking system is stable, will be very important, if not decisive, in times of economic instability, when large banks may be on the edge of bankruptcy.

Mr. Turbanov also praised another initiative of the Association of Russian Banks that has already been implemented - the one about financial ombudsmen in Russia. The Director of the Deposit Insurance Agency has praised it as very helpful and fully consistent with the existing practice of resolution of disputes between banks and customers in developed countries. “This practice already exists in the USA and Canada, and the UK is going to create a special entity for this purpose. I believe we should consider the experience of Western countries in this issue. Now our customers apply to Federal Consumer Rights Protection Service and the Federal Anti-Trust Service, and to other organizations. However, protecting the rights of customers of financial institutions is not their dedicated and priority task”, General Director of the Deposit Insurance Agency said. “And sometimes, unfortunately, those who receive customer claims, and most importantly, the Consumer Rights Protection Service, act on these issues as an elephant in china shop. Disputes of banks and customers should be resolved professionally”, he added.

HAVING A REST ALSO TAKES SKILL

As usual, the banking event in Montenegro has attracted its participants not only by its rich business schedule, but also by the opportunity for informal communication, bright and interesting tours and festive events. The event, also called a festival, felt like a holiday, since the word “festival” itself means “holiday” in Latin. The participants had an opportunity to go on a tour to the ancient town of Cetinje and visit an Orthodox Christian monastery that stores a unique relic -the hand of John the Baptist. The participants sang WWII songs to commemorate the 65th anniversary of the victory in the Second World War. A traditional amateur concert also took place. And of course, the event ended with the magnificent and bright gala night.