Urged: Abstaining from Providing Loans to Insolvent Clients by Russian Banks for a Decade
In the face of increasing unscrupulous bankruptcies in Russia, driven by deteriorating economic conditions and mounting bad loans, the country's banking sector and the Association of Russian Banks (ARB) have taken significant steps to protect financial stability.
### Current State of Russia's Banking Sector
Russian banks are grappling with a spike in bad loans, particularly in retail lending, as default risks climb to 3.6% in early 2025, surpassing the usual 2% level. Banks have set aside around 2.7 billion rubles in Q1 2025 alone to cover these problematic debts, signalling growing difficulties among borrowers to repay loans taken during the previous credit boom.
The overall loan quality deterioration, decline in new lending, and reduced bank profits (down nearly a third) paint a challenging financial picture. This has raised concerns about a potential systemic banking crisis within a year, as bad debt levels escalate across corporate and retail portfolios.
Banks report that many borrowers are delaying payments, concealing the true extent of repayment failures.
### Proposed Measures by Banks and the ARB
In response, the ARB has urged banks not to issue loans to individuals who have declared bankruptcy in the past 10 years. This move aims to prevent repeated fraudulent bankruptcies and shield banks from bad loan exposure. The current rule allows citizens to declare bankruptcy once every five years, but unscrupulous practices have led to calls for tighter monitoring and controls to curb abuses.
This measure is designed to limit the recurrence of bankruptcy fraud, where individuals exploit the bankruptcy process to evade financial obligations repeatedly.
### Impact on Financial Stability
These steps by banks and the ARB aim to bolster the banking sector’s stability by reducing the risk of further loan defaults caused by repeat bankruptcies. However, the broader economic context remains precarious, with Russia’s economy facing recession risks, rising inflation, depleted reserves, and military spending pressures eroding fiscal health.
The heightened reserve allocations to cover bad loans and cautious lending policies may reduce credit availability, potentially slowing economic recovery but are necessary to prevent a deeper banking crisis. If left unchecked, escalating bad debts and fraudulent bankruptcies could destabilize the financial system, prompting stricter regulatory intervention and possibly government support measures to reinforce bank solvency.
In summary, Russian banks and the ARB have proposed measures, such as restricting loans to recent bankrupts and tightening bankruptcy regulations, to combat the rise in unscrupulous bankruptcies. These efforts aim to mitigate the risk of a systemic financial crisis amid worsening loan quality and economic instability in Russia. However, the ongoing economic pressures mean that financial stability remains fragile and requires vigilant management.
The Association also proposes that debtors should not be released from their obligations if they are not working or improving their financial situation, and if they have taken on unmanageable credit commitments. Furthermore, 7 billion rubles have been forgiven in out-of-court bankruptcy procedures.
Banks and the Association of Russian Banks (ARB) Have taken steps in the industry to protect financial stability, such as urging banks not to issue loans to individuals who have declared bankruptcy in the past 10 years, with the intention of reducing the risk of further loan defaults in the banking-and-insurance sector and limiting the recurrence of bankruptcy fraud. However, these measures may impact business, particularly in the retail sector, by reducing credit availability, potentially slowing economic recovery.
