Bank accounts: selecting the right bank in Russia
By Armen Danielyan, AC Delovoy Profil JSC.
Three years ago, a wave of bank licence revocations began and this continues to impair the russian banking sector. As a result of the impact of the crisis, an increasing number of banks have allowed violations in their work which places them on the list for a licence reduction. If the general public deposits in these banks are insured, customers’ current account balances are simply frozen until the situation is resolved. The problem of selecting the correct bank for an account is of increasing relevance.
Most entrepreneurs select banks from the top one hundred, as they believe only major banks can be reliable. But BFG-Credit Bank was ranked 98th at the time of licence revocation. The fact that only large, systemically-important banks have government support also adds to this delusion. Overall, 90% of banking system assets belong to the 200 largest banks. Even licence revocation of just one of these can lead to a non-payment chain in others. So these banks are prioritised when it comes to deciding which to support. Last year, RUB 830 billion were used to support 27 banks. However, even this measure did not help some of those banks to ensure their financial stability.
People believe that the longer the bank operates, the more experience it has with which to combat crisis. Despite this, Credit-Moscow Bank, which has been operating since 1988, still lost its licence. Another incorrect assumption is the preference for state-owned banks, as government participation ensures the stability of the bank, but stateowned banks often have a poor level of service, slow decision-making systems and a lot of bureaucracy.
A reasonable ratio of assets and liabilities as well as a balanced approach to risks can therefore ensure the stable operation of any bank. But not everyone can take a look at the bank’s balance sheet when considering its reliability. In this case, it is useful to examine a bank’s rating as published by rating agencies and the Central Bank of the Russian Federation. The website www.banki.ru features pre-calculated indices which can be used to determine a bank’s suitability and how to deal with them. Some of the indices are mentioned below:
1. The criterion of capital adequacy (H1.0). At the expense of its own capital, a bank can guarantee the implementation of its obligations. A lack of own capital is the most common reason for licence revocation. The standard level of H1.0 is 10-11%. If this is below 2%, the bank will lose its licence.
2. The bank’s profitability. If the bank demonstrates losses, this reduces the size of its own capital and leads to difficulties implementing its obligations. These losses are due to the need to extend the reserves for increasing risks. If the level of risks falls, these reserves are restored and the bank shows a profit. So one should be apprehensive of losses demonstrated during a number of serial periods. The most profitable banks are also not reliable as they often gain profit from very risky operations.
3. Activity providing loans and drawing deposits. During a crisis, universal banks dealing with both the public and with companies which carry out operations in the foreign exchange and stock markets are the most reliable. If, for example, a bank focuses on a particular group of customers, such as small businesses or consumer lending, the risks in such a bank are extremely high as these types of customers often have payment delays.
4. Structural changes in loans and deposits. Here, not only the amount of overdue loans should be considered, but also the increase in the amount of long-term loans (given up to one year). Banks often renew overdue loans for longer term and a significant increase in the amount of such loans can lead to problems in calculations. Also, a sharp increase in short-term deposits and call deposits may demonstrate problems with liquidity, the lack of which the bank is trying to cover by drawing on expensive short-term resources, and this does not guarantee recovery of stability in future. At the end of 2015, Vneshprombank was 56th in the ranking of banks providing retail. After its licence was revoked, it became apparent that the bank’s liabilities exceeded its assets by RUB 187.4 billion. It was clear that the bank had been falsifying reports. Below, we outline the factors which may have given cause for concern.
Individual deposits increased by 77.2% during 2015, mainly due to expensive time deposits. This significant increase shows the bank’s desire to increase liabilities by drawing on expensive resources. The advances portfolio of the bank only increased by 36%. Business sector loans increased by 35.9%, but loans with a payment period over three years increased two-and-a-half-fold. The share of overdue loans was only a little higher than 1%, which was much lower than the average market value of 7.8%. In contrast to the nearly non-existent credit debt, there was a significant increase in the amount of interest accrued but not received.
5. The credit and deposit interest rate levels. A deposit interest rate level which is too high may mean that the bank is so interested in raising funds that is ready to pay for them. High credit interest rates show a bank’s desire to make money even with the risk of losses, as not everyone can afford to repay a loan taken with high interest rates in time.
6. The availability of tariffs for settlement and cash services. It is a mistake to believe that the rates of most banks are equal. However, the difference can be very significant – as much as 2-3 times.
There are other characteristics considered by customers:
- The range of services provided to the client;
- Territorial accessibility, the bank’s working hours, transfer speed, service level.
Some banks offer a quick loan after opening a current account for clients, but the rate will be high, the amount will be lower than expected or requirements for getting such credit will be tough.
Published: November 2016 l Photo: Roman Sigaev - Fotolia.com