NBJ: Garegin Ashotovich, what is your view of today's situation on the bank crediting market? The regulating authority - the Central Bank - is upbeat, predicting a 10 to 12-percent growth in crediting by the end of 2010. Do you think such predictions are a sign of revival in the sector?

G. TOSUNYAN: I think that lending is stagnating now. Even if the growth does go up 10-12 percent by the end of the year, considering the lack of credits in the economy and amount of financing that businesses need today, this is not a full-scale growth, but stagnation. And if we deduct from the total volume amounts borrowed by major businesses, the ultimate growth rate figure may well be within the statistical discrepancy.

NBJ: Yet still it's going to be a “positive” statistical discrepancy, isn't it?

G. TOSUNYAN: Even a little minus is quite possible. In this context, perhaps the only fact that instills optimism is the revival of consumer lending, which is essentially a bridge towards the crediting of small and medium businesses. From the 11,6-percent slump of the last year, it has gone on to a one-percent growth over the last few months. I think, however, that this is an unstable trend yet, although perhaps there is hope that this could be the turning point.

NBJ: Lack of credits available to Russian businesses is being discussed now on most different levels, including our government and the President. From time to time, the blame for the current situation is laid on the country's banks, who, as some experts think, occupy a passive position on this matter.

G. T0SUNYAN: Banks are passive not because they are always this way, but because they are being held back by many factors, including unequal competitive conditions. Unfortunately, this shortfall is characteristic not only of the banking system; it permeates Russia's economy on the whole. No conditions are being made to encourage people to generate ideas and develop their own businesses on their base. In today's conditions, it is far easier to “lean upon” this or that governing authority and use the unfair competitive advantage to one's own benefit. I repeat: this is a general -not industry-specific - problem, because we're talking about a transformation of minds, about forming a certain psychology, about “tuning” the society. This “tune”, may be, favours to prosperity of separate persons and their enterprises, but not to prosperity of business, company and the country as a whole. Because there is a big difference between talent of creation and talent to stick to the state.

NBJ: By all appearances, is this the very factor that makes Russia lag so far behind developed countries in many aspects, including the share of various kinds of crediting in its GDP?

G. T0SUNYAN: Of course. To find proof of that, just look at China. Just like Russia, it is a country with a Communist past, which means our basis is pretty much the same. As for our superstructures, they are different, and that is why China has been going ahead of many developed countries in many fields, while we are still lagging behind. I have many times proved, citing specific figures, that in the volume of mortgage crediting, our gap from the Holland, the Switzerland, and other countries varies from several hundred to a whole thousand times. Look at the situation with patenting discoveries. Over the last year, Russia has registered 655 patents, whereas developed countries - USA, Japan and South Korea - have registered over 59 thousands of them. That's a difference of 800-900 times! And that's the case everywhere, be it crediting, patents, or transport infrastructure. The gap varies from 20-30 times to several hundred times. Isn't all this a consequence of a lag in the development of financial system, or the result of the fact that in Russia, finance flows are concentrated on the top and then distributed vertically from there? As the result, we are gravely short of “points of growth” and have an undiversified economy.

THE REGULATION SYSTEM SHOULD BECOME MULTI-TIERED

NBJ: The state is currently discontinuing its anti-crisis support measures while, on the other hand, reverting to its pre-crisis principles of regulating the finance sector. Isn't it premature yet to be doing so?

G. T0SUNYAN: There is no definite answer to that question. Indeed, regulation privileges introduced during the acute phase of the crisis are now gradually being removed. Arguments used by those in favor of removing them look fairly logical: one can't endlessly live in preferential regime. The only thing that's unclear, though, is whether that regime was preferential or just more sensible compared to the one that was in effect before the crisis.

In my opinion, the answer is obvious. For several years, we argued with the regulating authority about the matter of forming bank reserves for possible losses, noting that the existing requirements to reservation are more of prohibitive nature. Those requirements limited banks' capability to use their own judgment when assessing borrowers' solvency and to use more flexible approaches, thus promoting lending. During the peak of the crisis, the regulator loosened those requirements, yet made it very clear that it was a temporary measure.

Now I think that two mistakes are being made. The first one is that the crisis is considered to be over. In fact, judging by the stagnation of the lending market, there is still a long way to the end of the crisis. Mistake number two is the fact that obstacles standing in the way of crediting are not being removed for a number of reasons, including fear of inflation. Frankly speaking, this is perplexing: it was the crisis that showed vividly that crediting is not the source of price growth, and that inflation has very different sources.

NBJ: But some steps are being taken to stimulate lending. For example, interest rate is being dropped consistently.

G. T0SUNYAN: Dropping the interest rate is good. The ARB consistently advocated that during the acutest period of the crisis, when it was really essential to reduce the cost of refinancing. It is very good that the Central Bank heard us back then and went on to drop the rate 14 times since April 2009. However, now we think it is important to exercise discretion, for if the interest rate drops next to zero, crediting will stagnate again, for lending will become unprofitable. Besides, we need to take into consideration the fact that the market cannot “catch up” with such rapid reduction of the rate. Thus, a weighed approach is essential here. What is important is not only whether the rate will be 6, 7, or 8 percent, but what's far more important is predictability of the situation. There must be an understanding of what banks can expect in the future; important is their confidence that funding will be long-term and affordable; that is, for example, there must be confidence that, when launching new financial products, for example, there will be no strict requirements to bank capital size. Unfortunately, such confidence isn't there yet, because when asking whether this trend towards lower costs of refinancing will persist, we hear that it will depend on world oil prices, macroeco-nomic parameters, and so on.

However, important as it may be, reduction of the refinancing rate is just one of measures aimed at reviving crediting. As for a systematic approach to solving the problem of shortage of credits in the economy, it doesn't exist. There is no doubt that the state is interested in the activation of credit processes, but it is trying to “push” it either with money granted to specific market players or with instructions. It is good when the state gives money, but most often it just orders lowers interest rates, which can hardly be viewed as a market mechanism. The resulting positive effect is insignificant.

Attempts to introduce limitations on credit and deposit rates are a good example of the above. Indeed, a number of countries practice that: interest rates on deposited and borrowed funds there cannot differ from the current discount rate by more than a certain amount. But that is good when there is a balanced market and when refinancing is equally accessible to all banks. In Russia, this is not the case, and forcing small and medium banks to keep up with major players in terms of interest rates means dooming to a low profit margin or the need to quit the market.

Russia's economy, with its need for diversification, needs something very different. It needs conditions when such banks could work too, because they have their own advantages: they are willing to work with clients that are not interesting to major players, and they are quicker and more flexible when making credit decisions.

NBJ: A lot has been said recently about the shrinking role of smaller banks - and commercial banks in general. Even a special term has been coined - “gov-ernmentalization” of Russia's banking system. All experts acknowledge this fact, yet few say about how this effect of the crisis can be overcome and how traumatic it is from the viewpoint of further development of the national banking system.

G. TOSUNYAN: I think the term “traumatic” is not good. It shouldn't be perceived as a tragedy. We should understand that existence of state-controlled banks is a normal fact, and state banks fulfill their functions properly. But on the other hand, excessive concentration of banking assets in the hands of the state is not good for economy diversification and development of competition. The reason is simple: big players are interested in big clients and large-scale projects.

NBJ: But state-controlled banks also develop programs to credit small and medium business and go into retail.

G. TOSUNYAN: Yes, sure, they go there, but the emphasis is still on servicing big businesses, while it is important to us that small and medium businesses also get the financing they need to develop. As for your question about what needs to be done to overcome the “governmen-talization” of the banking industry, I'll say the following: differentiated approach must be used here as well.

NBJ: For example?

G. TOSUNYAN: For example, the Association of Russian Banks has repeatedly called for the introduction of the institution of regional (“local”) banks. For such credit organizations, the mode of regulation and supervision should be different from the one used for banks operating on the interregional level and even more so from the one used for banks operating internationally. Thus, a three-step gradation is possible…

NBJ: Which, it seems, should be institutionalized legislatively?

G. TOSUNYAN: No. This is a situation that doesn't require any amendments to the existing legislation. It is enough to mark such gradation on the level of Centrobank instructions for us to be able to encourage banks to work with clients of certain scale, because when we introduce stimulating norms and requirements, smaller banks stop “chasing” clients of certain scale, thus reducing the “crowdedness” of the market. Small and medium players start “digging” into the client segment that is closer and more understandable to them.

This is one point. The other is that now we see the development of microfi-nancing; in particular, a special law has been passed that regulates it. However, organizations operating on this market today are working under a far more liberal regime. What we ultimately have is that banks are regulated by similar, quite strict, norms and rules, including those of non-financial nature. That implies extra liabilities for them that are often inadequate to the size of those banks, and they are applied “on common grounds”, regardless of a bank's size. At the same time, when granting state resources - such as subordinate credits - limitations on capital size are imposed. In the end, we have a situation when small and medium banks are cut off from state support both from top and from bottom: from top - because of existing requirements to capital, and from bottom - because they are credit organizations and, unlike microfinancing entities, cannot work under the “mild” regulation regime.

NBJ: Well, this must be only natural in cases when state support is provided to major players - the state provides help to those who can pay it back.

G. TOSUNYAN: OK, but why don't we do the same in other situation - for example, when we are talking about supporting the crediting of small and medium businesses? Why not establish a certain level there as well, so that funds to refinance such credits would only go to banks with capital below a certain level? That would be logical, and this logic works on other levels. After all, everybody agrees that people below a certain age cannot vote, but children have preferences when using certain kinds of public transport. Or here is another example: law enforcement officers have greater power than common citizens, yet on the other hand, they face greater responsibility for crimes or violations. That is, in everyday life, a certain balance of additional rights and additional limitations. In the case of banks, though, there is no such balance. Here, so far as requirements concerns, they are general for everything, and so far as subordinate credits or unsecured auctions concerns, financial organizations whose assets are below certain requirements are cut off.

NBJ: But what if this market structure limits banks in their growth? For example, “local” banks will only be able to operate in their home regions, while expanding beyond that region will automatically mean loss of that status and therefore the “mild” regulation regime.

G. T0SUNYAN: It will be up to every bank: whether to stay local and enjoy the milder regulation and control regime, or to become interregional or international. If you don't plan to expand your business, if you're satisfied with the niche you occupy as a “local” bank and center of microfinancing - well, go ahead. You will have an opportunity to work and better compete with major market players due to the “mild” regulation regime.

FINANCIAL OMBUDSMAN - A WAY TO OVERCOME “BANCOPHOBIA”

NBJ: So you think it is time now to introduce the institution of “local” or regional banks in Russia. What are your thoughts on another matter that has been   actively  discussed   recently  - establishment of the institution of financial ombudsman?

G. T0SUNYAN: We support this idea, and it was the ARB that first drew the attention of the banking community to it seven years ago. Unfortunately, it didn't find adequate support among market players at that time.

NBJ: Perhaps because introducing such an institution requires changes to the legislation, among other things?

G. T0SUNYAN: No, it doesn't. Such an institution can be formed on the basis of existing organizations, using, for instance, facilities and reputation of the Association of Russian Banks. But the key condition to its implementation would be the motivation of the banking market participants and their willingness to comply with financial ombudsman's decisions.

NBJ: At the same time, the ombudsman sees its role primarily in protecting the interests of financial consumers rather than banks, wouldn't it?

G. T0SUNYAN: It certainly would. From our viewpoint, it is vital that the ombudsman would be willing to tackle not just the financial, but moral claims of consumers as well, such as quality of service in banks. It's no secret that people are often outraged by disrespect rather than by their financial losses. Because of improper actions of certain bank employees, and I'm talking about some employees only, people often develop a strong bancophobia. This besmirches the entire banking sector however, and banks should clearly be aware if it. Many market players do realize that moving in the right direction would result in attracting a large number of clients and consequently increase their profit and enable successful business development.

NBJ: It seems the attitude toward the idea of establishing financial ombudsman has improved over the last seven years, hasn't it?

G. T0SUNYAN: It has indeed. Strange as it may seem, this has changed under the influence of the recession. It became obvious that banks could suffer significantly because of mistrust on the part of clients, financial and ethical mistakes in serving the clients being among other reasons for that. On the other hand, we don't insist on implementing the institution of financial ombudsman immediately. At fist, we have to assess and estimate all aspects, including the cost of maintaining this institution. A large promotion campaign would be required to explain that implementation of the ombudsman would especially benefit retail clients. It doesn't mean however that their potential irresponsible actions wouldn't be encouraged; they'd rather be given the opportunity of an “eased” procedure for solving their conflicts with banks. The ombudsman would be acting on legal grounds, or rather, on adequate interpretation of the law.

NBJ: So the ombudsman would still judge by the law rather than by “fairness”, wouldn't it?

G. T0SUNYAN: It sure would. The purpose of this institution is not in pardoning those who demand forgiveness of their debt because their living conditions have declined. Ombudsman would protect those who're asking for a well-grounded debt restructuring or rescheduling, or for a respectful bank service. In this case, one wouldn't have to go through hell trying to prove their rights in numerous judicial authorities.

NBJ: Would the ombudsman have the right to fine banks?

G. T0SUNYAN: I think it should be given the power to do so. Banks should be fined for those cases that are not covered by the arbitral or civil legislation but rather break the moral and ethical code. Therefore, this institution would provide the moral damage compensation. I believe this would be a reasonable solution, since people tend to be outraged by humiliation than by their financial losses.

NBJ: How likely are banks to comply with the ombudsman's decisions?

G. TOSUNYAN: If they sign a relevant agreement, they would comply. Those who refuse would have to be aware that this would only benefit their competitors. This would mean the latter would tackle their issues with clients quicker and less painfully; their reputation on the market would expand; and individuals would prefer using their financial services.

In my opinion, the key purpose of this institution is not to benefit particular banks, but rather to develop a special psychological climate in our society and help people trust the banking system in general. It is vital that we remove the “toxins” that have been poisoning the system. We'll demonstrate that not only the large clients capable of protecting their interests are cared for, but a less protected social class as well.

ENTERING THE IBFED IS A VITAL STEP

NBJ: Recently, it became public that the ARB has entered the International Banking Federation.

G. TOSUNYAN: Yes, the ARB was invited to participate in it along with the leading banking associations of China, India, South Korea and South Africa (Founders of IBFed - USA, European Union, Canada, Australia and Japan). For our country, this invitation was very important. As of 1996, Russia represented by the ARB is the associate member of the European Banking Federation; and now we're entering the new global level beyond the European Union. Russia is just the tenth country to enter the International Banking Federtion, an organization whose opinion is reckoned with by the G20 and the G8 when tackling vital economic issues. The recent discussion of the special bank tax is a good example. The Federation's position on the issue was conveyed to the G20 summit participants. The outcome of this summit shows that it wasn't just heard, but also considered in their decision.

NBJ: Does this mean that the Federation will be considering the views of the Russian banking society when determining their position on various matters?

G. TOSUNYAN: It does. We believe this invitation proves that there's a global understanding of Russia's growing role on the international banking market. And they do understand that the Russian banking sector has reached such a development level that its opinion should be listened to.

NBJ: As I know, implementation of special bank tax was among the key issues that had been discussed at the recent Federation meeting. What was the IBFed's position on this?

G. TOSUNYAN: The Federation believes that considering the suggestions of introducing additional bank taxation which have been brought up to the top level is at least untimely. The IBFed's position is based on the fact that firstly, the issue of covering budget expenses to support banks during the recession shouldn't be mixed up with the task of preventing potential budget losses in future financial perturbations.

Secondly, matters of taxation are rather the jurisdiction of national, not transnational, authorities, and should be addressed with all circumstances and economic development plans of this or that country taken into account.

Thirdly, it's not fair to punish banks by activity tax, even more so that its cost burden is likely to fall on clients including those of the industrial sector of economy, the growth of which banks must support.

And fourthly, it's illogical to weaken banks positions which had been supported by such significant budgetary allocations. It's even more illogical to do it now when the banking sector situation has just started improving, whereas the future looks far from bright.

NBJ: Was Russia's opinion considered in this case too?

G. TOSUNYAN: It was. Along with many of our fellow banking associations from other countries, we were consistently speaking against this initiative, as we completely share the abovementioned arguments. In the case of Russia, implementation of this special tax is more than objectionable. Our crediting has been stagnating so far as it is; so why take steps that would inevitably entail rise of borrowed assets cost. There's still a lot to be done to bring crediting growth rates to the pre-crisis level at least, not even making it more active and diversified. Therefore we're very happy that our position on the issue of bank taxation matches that of the market regulator: the Central Bank believes that implementation of special tax is an unconstructive and excessive regulation method.

Generally, whether we're talking about the idea of additional bank taxation, or about limiting banks activity under the pretext of fighting money laundry, or about implementation of financial ombudsman, or about participation of the ARB in international financial organizations, - all our actions, including our law-making, should have a clearly set goal. If we realize that crediting development is our goal, we should make it our priority. Going back to what I've said earlier in the interview, I want to emphasize again that we have to focus and “tune” our society on reaching the goals that benefit population standard of living that includes also availability to it of credits. In turn, it will promote the development of our competitiveness and economy, rather than goals that benefit particular large market players, or departments that are trying to seize as much capital and power as they can.