Tight monetary policy has not yet stopped the growth of lending, as a significant portion is tied to preferential programs with below-market rates. This is one of the arguments for further raising the key interest rate, which raises the cost of borrowing for those without access to subsidies and who operate under market conditions.
The Central Bank acknowledges that subsidised loans may be justified as a crisis management tool, but their long-term economic efficiency is questionable. If borrowers who could access loans at market rates are using subsidised programs, it does not increase the overall volume of lending or stimulate demand. The result of prolonged preferential programs is not only an additional burden on the budget but also higher inflation and a distortion of competitive conditions across the entire economy.
After the conclusion of the large-scale subsidised mortgage program, which significantly distorted market prices, preferential corporate lending remains a source of imbalances. With the key interest rate at 19%, half of the corporate loan portfolio is serviced at rates below 10%.
Additionally, the widespread use of preferential programs contributes to market concentration, as these programs are predominantly managed by large banks, experts warn. The concentration of assets, in turn, leads to a concentration of risks.
High key interest rate (the Central Bank Raised it to 19% annually in September) has et to curb credit growth, analysts from the Central Bank State in their latest report on the development of the banking sector. The growth rate of retail loans issuance in August slowed only slightly to 1.3% month-on-month (compared to +1.4% in July, and +2% in May and June), mortgage issuance increased by 0.9% (compared to +0.7% in July), and corporate loans grew by 1.9% (after +2.3% in July). To sustainably reduce inflation, a more significant slowdown in lending is needed, participants in the key rate discussions conclude. So far, a clear slowdown in lending is only observed in the small and medium-sized enterprises sector.
The problem is that the high key interest rate affects only the part of the market where market rates apply. Loans subsidised in one way or another by the state are not sensitive to the key rate level. The larger the share of non-market loans, the higher the rates need to be for others. Preferential loans may even have a more inflationary effect compared to direct budget injections, due to the creation of financial leverage, agree analysts from Raiffeisenbank. For example, by taking out a preferential loan, a company can use it as part of collateral to secure a new loan.
Subsidy programs do not always contradict monetary policy, the Central Bank notes in the ‘Basic Guidelines of Monetary Policy for 2025 and the period of 2026 and 2027’. For example, during economic crises, lowering the key rate alone may be insufficient to support demand, especially if market rates are already low. However, subsidisation should be used as a short-term anti-crisis measure, with the goal of quickly stimulating the economy and overcoming the ‘bottleneck’ of the crisis. In the long term, monetary policy should play the primary role in regulating demand, through the impact of the key rate.
Over a longer period, the economic efficiency of preferential lending programs is unclear, according to the report's authors. If borrowers who can access loans at market rates end up receiving them under preferential programs, the volume of lending and demand in the economy do not increase. Prolonged subsidy programs not only increase the burden on the budget but also significantly distort competitive conditions in the economy. For market players, the cost of credit rises because the economy, through the budget, finances those receiving preferential loans, even though their profitability may be significantly lower. In sectors with extended preferential programs, there arises a ‘golden cage’ effect, meaning their ability to survive in market conditions diminishes.
The share of preferential loans in the overall loan portfolio of Russian banks (101 trillion rubles as of August 2024) is about 15%, which is nearly 9% of GDP. Nearly 9 out of the 14 trillion rubles in the subsidised loan portfolio are tied to preferential mortgages. More than half of this amount was issued by banks under the most extensive non-targeted preferential program, launched during the pandemic. The program was extended several times and ended only in July 2024 (→ Re: Russia: (In)stability Factor). Over its duration, around 1.6 million loans totaling 6 trillion rubles were issued. Borrowers purchased housing totaling 76 million square metres.
This program is a vivid example of how broad and prolonged benefits work in the economy. Housing affordability in Russia did not increase as a result of the program but decreased, as demand outpaced supply, causing property prices to almost double, as noted in the Central Bank report. Budget spending on subsidies has already reached 0.5 trillion rubles. If borrowers repay their loans evenly over 10 years and the key rate dynamics follow the Central Bank's baseline forecast, the budget will have to spend another 1.2 trillion rubles on interest rate subsidies. Thus, the end of the program will not stop the rising costs of servicing it.
The portfolio of preferential corporate loans is smaller than the portfolio of subsidised mortgages. However, the state’s support measures for corporate borrowers are not limited to direct subsidies. They also include government guarantees, preferential funding for lending banks, and direct provision of loans at low interest rates through the involvement of state development institutions, the National Wealth Fund, and others. Government programs with subsidised rates account for 26% of the fixed-rate loan portfolio (which, in turn, makes up half of the total corporate loan portfolio). These loans are unaffected by the Central Bank's key rate hikes. Another 11% of the portfolio is supported through other forms of state aid, according to Central Bank data as of 1 July. Furthermore, 44% of the portfolio consists of loans issued before October 2023, when the key rate was lower. As a result, half of the fixed-rate loan portfolio has an interest rate of no more than 10% per year, and for 20% of the loans, it’s below 5%.
The Central Bank notes that preferential corporate loans distort the market less than subsidised mortgages. Since demand is less concentrated, the pressure on prices is lower. Additionally, investment projects financed through subsidised loans may help increase supply. However, in its report on the development of the banking sector, the regulator acknowledges that most corporate loans are used to replenish working capital amid rising costs.
While the Central Bank does not call for an outright termination of preferential programs, it points out that ‘the overall availability of loan financing for the economy is primarily ensured by predictably low inflation and, consequently, a reduction in inflationary risks for investors, allowing borrowers to attract funds on market terms without accumulating imbalances in the economy’. Analysts from the agency Expert RA also warnf about the additional imbalances created by the widespread use of preferential programs. Since the operators of these programs are primarily large banks, this leads to market concentration, and consequently, to a concentration of risks within the financial system. The maximum large credit risk ratio (N7) for these banks increased from 221% as of January 1, 2022, to 278% by July 1, 2024 (the maximum allowed is 800%). For other banks, the level of risk concentration has, in contrast, decreased since early 2022.