The Russian banking sector, once buoyed by record profits and wartime stimulus, is now showing growing signs of financial strain, leading some to ask if a crisis is looming?

Bloomberg put the cat among the pigeons earlier this month with an article quoting senior bankers as saying the level of non-performing loans (NPLs) is rising and banks are coming under increasing pressure as the Central Bank of Russia (CBR) cracks down on their main form of income – voluminous consumer credits – as the regulator tries to artificially manage inflation lower (which is working).

In a detailed analysis for The Bell, Alexandra Prokopenko, research fellow at the Carnegie Russia Eurasia Centre, and Alexander Kolyandr, visiting research fellow at the Center for European Policy Analysis (CEPA), warn that “the situation in the Russian banking sector is expectedly worsening due to the high rate, tightening requirements for borrowers, and a slowing economy.”

Banks have been left with few options to maintain profitability after sanctions gutted key revenue streams such as foreign exchange trading, investment banking and cross-border transaction services. Prokopenko and Kolyandr write that by mid-2023, the sector had effectively “narrowed down to basic functions: lending, deposit products, and participation in government programmes.”

The shift initially produced windfalls. In 2024, Russian banks posted a record RUB3.8 trillion ($41bn) in profits, up 20% year on year. Return on equity was 23% – also a very high figure. And net interest income grew by 11%, to RUB6.7 trillion. Those were happy days as banks rode the wave of the Kremlin’s military Keynesianism boost.

Lending was fuelled by state-backed mortgage and industrial support programmes, while depositors flooded banks in search of high-yield returns amid elevated interest rates. However, those same high rates are now suppressing economic activity and slowing loan issuance.

Last month, German Gref, CEO of Russia’s biggest bank, Sber, warned that this year profits would be sharply lower. “There is no sign of a crisis yet,” Gref told the Rossiya-24 TV channel at the St. Petersburg International Economic Forum (SPIEF).

"I think that banking sector profit will be lower this year. And banks always get all the problems that arise in the economy at the next stage. We see now that a lot of enterprises are starting to have trouble servicing loans, and the cost of risk and provisioning is also going up for banks. This will likely continue until the end of this year," Gref said.

As Central Bank regulations tighten and quality borrowers retreat, banks are increasingly competing for riskier clients. “Banks are literally running after you,” one banker told The Bell, describing the scramble for solvent borrowers with decent collateral to back a loan.

“All this means that it has become much more difficult for banks to make a profit. But this situation in itself does not threaten to lose stability. Banks have enough capital to cover most of the problem debts, and the percentage of problem loans is still bearable,” the authors said.

The result has been a visible uptick in bad loans, although the NPLs are still at a manageable level. From January to May 2025, the share of problematic consumer loans rose from 4.9% to 5.7%. Defaults are also rising in exposed sectors such as coal, metallurgy and construction. “We have problems,” said VTB CEO Andrey Kostin, pointing to the coal industry. “Let’s be honest, why do we need to produce so much coal? … If we do not start rebuilding the economy, closing inefficient production facilities, we will have a labour shortage and costs will rise,” VTB CEO Andrey Kostin complained this week at the Central Bank Financial Congress. VTB holds several large coal companies and a coal port in the Far East as collateral. However, as bne IntelliNews reported, Russia’s labour shortage is also showing signs of easing thanks to Nabiullina’s actions.

Despite the pressure, the analysts caution against overstating the risk of a systemic collapse. “Yes, there is little that is pleasant ahead … But this is not a catastrophe. This is a normal cycle,” one banker told The Bell. The share of total non-performing loans remains modest at 4.2%, and coverage ratios – the capital set aside to absorb losses – remain stable at 72% for corporate lending and 87% for retail, according to the CBR.

“But the problem of non-payments is not yet systemic. Over the year, the share of problem loans in the corporate loan portfolio remained at 4.0%, although the number of applications for restructuring has increased. The problem is growing in retail – from January to May 2025, the share of problem loans increased from 4.9% to 5.7%, mainly due to unsecured consumer loans,” say the authors.

The CMAKS analytical centre, which usually advocates lowering the Central Bank rate, does not see the inevitability of a crisis either. According to CMAKS calculations, the share of all problem and bad loans in the total loan portfolio of the banking sector increased from 5.9% to 6.4% in January-February of this year. For comparison, a year ago it was 7%, according to The Bell. The Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) agrees; there is no sign of a banking crisis yet, The Bell reports.

Addressing these fears, CBR Governor Elvia Nabiullina admitted that the sector was under pressure, but categorically assured Duma deputies that there was “no chance of a banking crisis” in comments this month in response to the Bloomberg article. Nabiullina said the banking system remains stable and well capitalised, and that the “concerns about a systemic banking crisis were unfounded.”

““There are no grounds to consider the situation in the banking sector critical or to talk about systemic risks. The Central Bank continues to monitor the situation closely and is taking all necessary regulatory measures,” she said, Vedomosti reported.

The three biggest banks – Sber, VTB and privately owned Alfa Bank – continue to dominate the sector and all three are well capitalised and in profit. Still, smaller lenders are more vulnerable and having some trouble. The lack of income diversification and regulatory constraints could push some second-tier banks into financial trouble. “Competition for clients without the ability to diversify income leads to portfolio overheating,” write Prokopenko and Kolyandr.

The Central Bank is watching closely. From October 1, it will require stricter capital buffers for loans to state-owned firms that lack explicit repayment guarantees. Meanwhile, ministers have begun publicly warning of recession, which may force a delicate balancing act between inflation control and financial stability.

The danger, the authors note, lies in a prolonged combination of high inflation and economic stagnation. “The most dangerous situation for banks would be a combination of recession and high inflation, which would force the Central Bank to keep the rate high.”

But Nabiullina is working flat out to bring inflation rates down. Last year Russia ended with inflation rates of around 10%, but this year the budget forecast predicts they will drop to 7.6%. Indeed, as inflation is now falling faster than expected, according to Nabiullina, Minister of Economic Development Maxim Reshetnikov said in St Petersburg that the target rate will probably be downgraded soon to reflect the progress, opening a space for Nabiullina to put in new rate cuts and alleviate the pressure on banks and business.