Business / Legislation

Friday, Sep. 28, 2001. Page 1

Cabinet Gives Nod To Bank Reform

By Kirill Koriukin
Staff Writer

The government gave the thumbs-up Thursday to a long-awaited restructuring of the banking sector that will open it up to foreign players and bring it closer to Western standards.

But a crucial question about minimum capital requirements for existing banks was tabled for further discussion.

"The development of the banking sector is lagging behind industrial growth," Prime Minister Mikhail Kasyanov said as he opened the Cabinet meeting Thursday.

"The banking sector should become the locomotive of economic development," he said.

Banking reform is one of the top priorities named by President Vladimir Putin in his drive to improve the country's investment climate and attract foreign capital. The issue had taken a backseat to other much-needed reforms such as taxes and land ownership that the government has tackled over the past year.

Now with such reforms in the pipeline or already implemented, the government is turning its attention toward the banking system, which has remained largely nontransparent and distrusted by citizens during Russia's decade-long democracy.

The Cabinet on Thursday gave tentative approval to a go-slow approach for reform favored by the Central Bank. An alternative and more radical plan had been presented by the Russian Union of Industrialists and Entrepreneurs, a group of wealthy bankers and other businessmen.

"It was understood at the meeting that the Russian banking system in many areas will be oriented to norms accepted in the European Union," Central Bank deputy head Tatyana Paramonova told reporters after the meeting.

The Central Bank's five-year plan allows foreign banks to open branches rather than subsidiaries here and cut their minimum starting capital to the same level demanded of Russian banks. same level demanded of Russian banks. It also calls for a lift on quotas for overall foreign capital in the sector.

Currently, foreign banks have a limited ability to lend through their subsidiaries in Russia. The subsidiaries have too low a capital for large loans, and lending by the parent bank requires special permission from Russian authorities.

Michel Perhirin, head of Raiffeisenbank Austria in Moscow, applauded the banking reform plan, saying he hoped the government would allow foreign banks to "open as many branches as they want to."

"The current regulations would discourage many banks from even considering opening local branches," he said.

Foreign bank subsidiaries currently get licenses that allow them to operate only two branches.

Paramonova said foreign banks may be allowed to open branches in Russia that would operate on an equal basis with local banks as soon as next year.

She said the minimum starting capital for foreign banks will be cut from the current 10 million euros to 5 million euros, the plank for Russian banks.

But a final decision on minimum capitalization requirements for all banks was unresolved at the Cabinet meeting.

"The discussion mainly revolved around this question," Paramonova said. "For the time being, we have not been able to come to a consensus."

The Russian Union of Industrialists and Entrepreneurs has suggested that the plank for starting capital be raised to as high as $50 million, with a further increase to $100 million. The perceived objective is to trim down the country's more than 1,000 banks, many of which are dysfunctional or misused.

The Central Bank has strongly opposed a dramatic raise of the plank, saying the reform should go at a slower pace.

Other parts of the plan approved by the Cabinet on Thursday envision the introduction of international accounting standards by 2004 in an attempt to increase transparency and a ban on banks against making commercial decisions for political reasons.

In what some analysts called a symbolic gesture, the Central Bank said it wants to scrap the 12 percent cap on overall foreign capital in the Russian banking sector. The quota, a never-enforced Central Bank regulation, was at a certain point exceeded but now, following capital infusion into some Russian banks, is not filled.

Thursday's talks drew mixed reaction from bank watchers. "The devil is in the details. It is the rules which will be adopted that will make all the difference and we have yet to see them," said Richard Hainsworth, head of RusRating, a bank rating agency. "However, it is hard to believe that the Central Bank would allow a semblance of a 'free-for-all' and appear to let Western giants operate in Russia without any restrictions."

"What the [government] is doing is very logical," said Mikhail Matovnikov, an analyst with the Interfax bank rating agency. "This is another kick in the gut for Russian oligarchs."

The Cabinet told the Central Bank to draw up a way to implement its plan by Nov. 1.


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