The Central Bank's latest cut to its benchmark interest rate could have a negative impact on the country's banking sector, Sberbank president German Gref said Tuesday, cautioning that lenders still faced considerable risks from bad loans.
"Interest rates are unjustifiably low and don't reflect the real risks assessment," Gref, a former economic development minister, told reporters at an economic strategy conference.
Gref's comments came a day after the Central Bank said it would reduce its refinancing rate to a historic low of 7.75 percent, even as some banks have begun to question whether they can afford to continue issuing cheaper loans amid a still tentative economic recovery.
Risks in the Russian economy are currently much higher than in the period from 2006 to 2008, although interest rates are lower than they were before the financial crisis, Gref said. A number of banks could end up facing negative margins as a result, he said, calling the falling rates a "sign of volatility."
The Central Bank indicated that its reduction Monday would likely be the last for the summer, and possibly the final reduction in this cycle, which has seen 14 separate reductions for a combined 5.25 percentage points since April 2009.
The regulator has been trying to help spur an economic recovery by encouraging lending to the real economy, while balancing fears that the cheaper money could lead to a surge in inflation later this year.
Finance Minister Alexei Kudrin defended the latest reduction, saying it was appropriate given the relatively low inflation.
"Inflation was 13 percent before the crisis, and now it's 6 percent in annualized terms. This factor is affecting rates as well," he said.
Gref said Sberbank did not plan to increase its interest rates, even as other lenders have suggested that they are ready to push rates higher.
"We'll move in accordance with the economic situation," he said. "Currently, the trend is for rates to decrease, and they will decrease."
But the situation could change toward the end of the year, particularly if the Central Bank decides to reverse course and raise its refinancing rate, Gref said.
"It will be a hard situation for banks, which will seek to shift [the costs] to the real sector," he said, adding that a subsequent rise in rates could put new pressure on companies and raise lending risks for banks.
The main danger for the banking sector now is rising bad loans, said Metropol analyst Mark Rubinstein.
"The risks of bad loans are much higher now, since the situation in the economy is not as stable as in was in 2006," he said.
Rubinstein argued that interest rates were too high, compared with international capital markets, and that a further decrease was needed. "The rates are unjustifiably high, and they were unjustifiably high in 2006," he said.
The refinancing rate was cut from 12 percent to 10.5 percent by the end of 2006, while inflation averaged 9.7 percent.
Although many banks were quick to follow Central Bank rate cuts last year — particularly amid frequent reminders from Prime Minister Vladimir Putin that lending to the real economy must be a priority for banks receiving state assistance — the primary impulse now is trying to remain competitive, analysts said.
"The banking sector is one of the most competing sectors in Russia's economy, and that's why we'll see a further decrease of rates in corporate and retail lending. The banks that don't do that may lose their market share," Rubinstein said, adding that the cuts would come as a growing economy reduces risk levels.
UralSib analyst Leonid Slipchenko said banks could respond to the low rates by diversifying their activities, rather than stepping up cheap loans to riskier borrowers.
"Given that it's quite difficult to find qualified borrowers now … banks may look to offer other services to increase their profit," he said.
VTB Group said last week that it planned to boost deposits and reduce the importance of corporate lending over the next three years, while keeping provisions for bad loans high.