A Cat in the Bank: The crisis of non-performing assets in the banking system has come to a head, but is yet to have any consequences

The policy rate and the crisis of distressed assets

Last week, the Central Bank once again decided to lower the key policy rate to 14.5%, despite inflation in the first quarter reaching 8.7% when seasonally adjusted in annual terms, and inflation expectations remaining effectively unchanged. Inflation at the start of 2026 was higher than in the fourth quarter of 2025, as were inflation expectations, the regulator acknowledges in its statement on the decision. However, the Central Bank views the inflation uptick as temporary, driven by a VAT increase, and expects it to decline. At the same time, Central Bank Chair Elvira Nabiullina recognised in her comments on the decision that fiscal policy, which lies outside the Bank’s control, and external price conditions may shift the inflation path above optimistic expectations. In its updated forecast, the Central Bank slightly raised the upper bound of the projected average inflation range for the year and the expected average key rate range for 2026 to 14–14.5%. In July 2025 the forecast was 12–13%, and in February 2026 it was 13.5–14.5%. In effect, this implies a significant slowdown or pause in the rate-cutting cycle. The upper limit of the range would be reached if the rate were reduced to 14% only at the end of the second quarter and then held at that level until year-end. In the most optimistic scenario, corresponding to the lower limit, the rate could reach 12% only at the very end of the year, although this appears unlikely. More plausibly, it will settle in the range of 12.5–13.5%.

These rate-cut scenarios are important not only for assessing the degree of economic cooling and the probability of recession, but also for another increasingly acute issue in the Russian economy, namely corporate over-indebtedness, the inability to refinance loans in a high-rate environment, and the growing burden of bad debt and restructurings on the banking sector.

The problem is growing week by week. As early as the summer of 2025, the government granted coal companies a deferral on mineral extraction tax and insurance contributions due to a sharp deterioration in their financial and economic indicators. In the fall, there was discussion of extending these measures to metallurgical companies, which were under pressure due to falling global prices for their products and weakening domestic demand. In April 2026, companies in the forestry sector warned of mass bankruptcy risks. This sector has historically been oriented towards Europe and has been unable to redirect exports to other markets, as logistics costs make exports unprofitable, while infrastructure demand has weakened due to high interest rates, declining activity and payment arrears from clients. Companies have requested a moratorium on bankruptcies. Following this, road construction firms also called for a bankruptcy moratorium. Their accounts receivable increased by 150% over the year and exceeded 0.5 trillion roubles. As a result, the sector is in a state of hidden financial stress and faces the risk of cascading bankruptcies, as RBC reports, citing a letter from road builders to the government.

The problem has long been systemic in nature, and from a formal standpoint, the Russian banking system is in a state of crisis. The Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) reached this conclusion in its February review of systemic financial and macroeconomic risk indicators. According to IMF criteria, based on a study by Asli Demirgüç-Kunt and Enrica Detragiache, the signs of a banking crisis include: (1) the share of non-performing assets in total banking system assets exceeding a threshold of 10%, (2) significant withdrawals of funds by clients and depositors and, as a consequence, (3) the forced reorganisation, nationalisation, or large-scale recapitalisation of a substantial share of banks. The presence of a single indicator is considered sufficient, while the second and third typically emerge as responses to the first. According to CMASF estimates, non-performing assets in total assets of the Russian banking system had already exceeded the crisis threshold at the beginning of 2026.

Although lending growth to both corporates and households has slowed sharply, from 19% to 12% and from 14% to 7% respectively in year-on-year terms according to Central Bank data on the state of the banking sector, the growth rate of non-performing loans has accelerated. The Central Bank defines non-performing loans as high-risk loans, loans with a 100% probability of default, and those with payment arrears exceeding 90 days. In 2025, the volume of non-performing corporate loans rose from 8.9 trillion roubles to 10.6 trillion roubles, an increase of 19%, while their share in the corporate loan portfolio increased from 10.1% to 11.2%, according to the Central Bank’s analytical review of the banking sector for the fourth quarter of 2025. Non-performing loans to individuals increased from 1.6 trillion roubles to 2.2 trillion roubles, a rise of 38%, while their share in the retail portfolio rose from 4.8% to 5.5%. By 1 March 2026, the share of non-performing corporate loans had reached 11.5% of the corporate portfolio, while for households it stood at 5.6%, according to the Central Bank’s latest review. The total share of ‘bad’ loans (to legal entities and individuals) in bank assets rose from 5.4% in 2024 to 6.1% in 2025, and by 1 March 2026, it had already reached 6.5%, or 13.6 trillion roubles.

At the same time, the loan portfolio accounts for around 60% of banking system assets. Within the remaining assets, analysts also classify certain categories as high risk, including non-core assets with elevated impairment risk, intangible assets, and accounts receivable. The share of these rose from 4.2% of total assets at the beginning of 2025 to 4.6% at the beginning of 2026, and 4.7% as of early March. As a result, the volume of problematic assets in the banking system reached 22.6 trillion roubles at the start of the year and 23.4 trillion roubles by early March, equivalent to 10.7% and 11.2% respectively. This supports the assessment that the banking system is in a state of crisis, with its future trajectory highly dependent on the path of interest rate reductions.

Banking system assets, loan portfolio, non-performing loans and assets, 2025–2026

The epidemic of restructurings as a way of managing the crisis

The growth in non-performing corporate debt in 2025 and early 2026 occurred primarily among companies that were hit hardest by the tightening of international sanctions, high interest rates, the weakening of fiscal stimulus, and a sharp slowdown in economic growth. The largest increases in non-performing loans were recorded in real estate (up by 0.6 trillion roubles over the past year), financial intermediation (up 0.4 trillion roubles), oil and gas, and trade (in both cases up 0.3 trillion roubles). As the Central Bank explains in its analytical review of the banking sector for the fourth quarter of 2025, this was driven by a rise in so-called risky restructurings, where the likelihood of an improvement in the borrower’s financial position is low. The share of such restructurings in corporate loan portfolios increased by one and a half times in 2025, from 2.9% to 4.3%.

However, the Russian authorities maintain that the situation with banks’ ‘bad’ assets is under control. The level of coverage of problematic corporate debts by reserves and collateral decreased slightly over the past year, but the Central Bank describes it as ‘acceptable’. The regulator considers the risks associated with the unsecured portion of problem debts (4.9 trillion roubles out of 10.6 trillion, which accounts for up to 60% of banks’ capital reserves relative to regulatory requirements) to be ‘manageable’. Banks, together with borrowers, are seeking solutions that would help borrowers overcome financial difficulties, according to the latest Central Bank banking sector review. In effect, the Central Bank and banks are attempting to manage the problem in a highly centralised, discretionary manner.

Experts at the Centre for Market Analysis and Economic Policy (CMASF) note that the banking crisis in Russia ‘is unfolding in a latent form’, ‘thanks to the masking of non-performing assets through intensive restructuring of overdue loans, as well as the dominance of state-owned credit institutions in the banking sector, which helps prevent a banking panic’, as was also the case in 2022. ‘In this form, the essence of the crisis lies in a partial, but not overtly visible, loss of the system’s function of supplying credit due to heightened uncertainty regarding asset quality’, they note. At the same time, non-market factors, including state dominance in the banking sector and administrative and informal channels of influence, help to contain the visible, market-based manifestations and consequences of the crisis.

At the same time, the boundary between restructurings classified as problematic and those considered standard is becoming increasingly blurred. In 2025, the volume of standard loan restructurings increased by almost 40%, from 11.3 trillion roubles to 15.4 trillion roubles, while their share in corporate debt portfolios rose from 12.8% to 16.3%. Part of these restructurings effectively serves to postpone the moment when a loan must be formally recognised as non-performing. Central bank and major state bank executives have repeatedly highlighted the surge in restructurings. For example, in the summer of 2025, Sberbank CEO German Gref stated: ‘We see that the quality of the portfolio is deteriorating somewhat. Of course, the number of restructuring requests is increasing’. At the same time, he, like the Central Bank leadership, described the situation as ‘manageable’. The Central Bank itself, at the end of 2025, once again extended its recommendation to banks to restructure loans for corporate borrowers facing ‘temporary difficulties’.

Loan restructuring, which is essentially an anti-crisis measure, is becoming a standard tool of economic policy. According to a study by the National Rating Agency (NRA), the number of restructuring applications from small and medium-sized enterprises increased by 70% last year, reaching 280,000. The scale of this phenomenon suggests that a significant share of borrowers is operating on the edge of break-even. ‘If interest rates remain high, we will inevitably see a second wave, repeat restructurings, which will no longer be painless’, said Pavel Samiev, CEO of the BusinessDrom analytical agency, as cited by the NRA. In essence, a significant portion of these restructurings is based on the expectation of a substantial reduction in the Central Bank’s rate. The NRA forecasts that, as risks associated with restructured loans ‘mature’, the volume of overdue debt among small and medium-sized enterprises will increase in 2026.

Thus, in practice, the Central Bank’s strategy of lowering the key rate is forced to balance inflationary risks fuelled by continued fiscal expansion against the risk of a latent crisis emerging from under the ‘cover’ of restructurings. The banking crisis in the Russian economy, like Schrödinger’s cat, simultaneously exists and does not exist.

Bankruptcy risks, budgetary advances, and ‘pockets of inefficiency’

Debt servicing problems are not limited to small and medium-sized enterprises; large businesses are also affected. In the first half of 2025, nearly 60% of corporate debt in Russia was held by companies with elevated interest burdens. The interest coverage ratio (ICR) for such firms is between 1 and 3. If interest expenses rise further due to high policy rates or operating profits decline, these borrowers may face difficulties servicing their loans, the Central Bank noted in its ‘Financial Stability Review’ published in November 2025. In the previous May issue of the review, the regulator had forecast that this share would reach only 34% by the end of 2025 (up from 32% in 2024).

As of the end of the first quarter of 2025, the Central Bank identified 13 genuinely distressed borrowers among the largest Russian companies (ICR below 1), acknowledging that some of them could face bankruptcy. By the end of the first half of the year, this number had increased to 17 (around 8% of the total). According to The Bell’s estimates based on an analysis of financial statements, the troubled debtors include, among others, the coal company Mechel (affected by falling coal prices, the crisis in the coal sector, sanctions, a strong rouble and very high leverage), Rusal (which lost access to alumina supplies from Ukraine and Australia due to sanctions, materials essential for aluminium production), and the United Aircraft Corporation (UAC), where the civilian segment, including Superjet production, remains loss-making, while profitability in defence-related production is only slightly above 2%, according to Rostec CEO Sergey Chemezov.

In its November review, the Central Bank presented two scenarios for the development of the situation in the event of a 20% decline in corporate financial performance, including EBITDA, in 2026. The baseline scenario assumed that the average key rate this year would drop to 14% (although the likelihood of this scenario is declining). Under this scenario, the share of companies on the brink of bankruptcy (the ‘red zone’) would remain at 8%, while the share of companies experiencing debt servicing difficulties (the ‘yellow zone’) would rise from 59% to 64%. In a more pessimistic scenario, the share of companies at risk of bankruptcy will rise to 10%, and the share of companies in the ‘yellow zone’ will rise to 81%. If this scenario were to materialise, more than 90% of all large enterprises would face debt servicing problems.

Distribution of corporate debt according to ICR, 2025–2026, %

Expecting increased revenues from oil exports due to the prolonged war in the Middle East, the government additionally advanced budget spending in March by more than 1 trillion roubles. This measure will reduce companies’ need for bank credit and thereby contribute to short-term stabilisation. At the same time, Elvira Nabiullina noted in her commentary on the rate decision that periods of strong spending growth at the beginning of the year have historically tended to result in higher total expenditure by year-end. In such a scenario, further reductions in the policy rate would be put on hold, the position of firms without access to budget financing would deteriorate, and the share of non-performing debt and risky restructurings would increase.

Experts have often pointed out that the market-based nature of the Russian economy significantly increased its resilience compared with the Soviet system and, in particular, facilitated its adaptation to the sanctions shock of 2022–2023 (→ Aleksashenko, Inozemtsev, Nekrasov: The Dictator’s Reliable Rear). At the same time, it is worth remembering that the Russian banking sector is predominantly quasi-market, i.e. state-owned. This, as observed, allows visible manifestations of crisis to be masked and smoothed over, but it also creates ‘pockets of inefficiency’, areas in which market signals are suppressed and hidden imbalances accumulate. Under adverse scenarios, such as a renewed sharp fall in export revenues, these latent vulnerabilities may translate into additional systemic stress.