The explosion in the number of commercial banks in Russia limits the Central Bank's ability to supervise them and casts doubt on the soundness of the financial system, senior IMF and World Bank economists said Wednesday.


Kathleen Dillon, chief economist at the International Monetary Fund's Moscow office, told a seminar the growth in the number of banks -- over 2,500 in September compared to 2,000 at the end of 1993 -- was hampering the industry's development.


She said about 115 smaller banks had merged with bigger banks since the start of 1993 to improve their capital base, but this was offset by more banks opening up at any given time.


"The explosion in banking is continuing apace. This is outpacing the consolidation of the banking system and the growth in capital," she told the seminar, organized by the IMF.


"Is the Central Bank capable of handling supervision in a system this large and changeable and growing so fast?"


Dillon warned that Russian banks were building up arrears due to a growth in risky new loans since interest rates became positive in late 1993 and inter-enterprise debts started rising.


She said the large number of banks owned by industrial enterprises -- so-called "zero banks" where shareholders, lenders and borrowers are the same group of people -- caused a misallocation of savings into loss-making enterprises.


"Can you really expect a dynamic banking system when ... three-quarters of banks and one-third of the top 100 banks are zero banks?" she asked. "It raises questions vis-a-vis the safety and soundness of the system.


"To what extent are these agent banks able to say no to their clients? To what extent are household deposits being transferred to bailing out state enterprises? To what extent is the interbank market able to assess the borrowers?"


Millard Long, a senior World Bank expert on East European banks, said the Russian government should prepare for looming collapses in its deregulated banking system.


"Most East European countries are acting to prepare legislation for regulation and supervision of banks. But this has not kept pace in Russia," Long said.


He said it was the government's task to restructure banks to enable them in return to restructure enterprises.


"Banks should take action against enterprises, start bankruptcy procedures when necessary, and introduce a new system of corporate governing by sitting on the boards of companies."


He added: "The government has to start thinking what to do with depositors when the number of insolvent banks grows."


Bankers are warning that collapses are imminent in the banking sector in the wake of last week's ruble crisis, when many banks were caught with open positions totaling an estimated $500 million or more.


For the government, far too busy keeping the country together, creating a healthy banking structure has not been a priority. Russia does not even have a banking act. A draft law drawn up two years ago has yet to pass parliament.


"Restructuring in Russia will be much slower than all of us desire," Charles Blitzer, chief World Bank Moscow economist, told the seminar. "Russia is too big and its problems too severe."