Dealing with Bad Debt

This one comes from Lex over at FT.com … also see recent commentary on Russia’s debt problems from Yulia Latynina.

Russian banks do not have the same US subprime-related toxic assets that laid low US and west European counterparts and did not ape the huge foreign currency lending of central European banks. Since credit demand in Russia, unlike in the west, exceeded supply even during the credit boom, banks could also be choosy in lending. NPLs could nonetheless rise to 10-20 per cent of credit portfolios, ministers and bank executives warn. Forecasting is complex because it is unclear how big the problem already is. Overdue loans have doubled in recent months to about 3 per cent, according to figures from Russia’s central bank. But these count only overdue interest and the overdue portion of loan principal; under international definitions, NPLs may be three or four times higher. Alfa Bank, Russia’s number two privately owned bank, warned last week that its overdue loans were nearing 10 per cent and provisions might wipe out this year’s profits; its president has said sector-wide NPLs could reach 20 per cent.

At that level, Citigroup estimates Russia’s top 50 banks would needrecapitalising to the tune of $88bn. Russia could afford that althoughit might be politically tricky. After spending hundreds of billions onanti-crisis measures, Moscow might choose a fudge, simply relaxing loanclassification rules and capital requirements. But, while banks mightmuddle through, their lending capacity would be impaired, slowingRussia’s recovery. Better to tackle recapitalisation head on. Afterall, Russians have been pretty tolerant of costly government measures,provided cash still flows from the ATMs.