Russia’s banking sector faces a growing threat of a systemic crisis within the next 12 months, with internal assessments suggesting a more fragile outlook than official statements imply, Bloomberg reported on June 26, citing current and former banking officials.

Executives from several major banks have privately raised concerns about the rising volume of bad debt, as both corporate and retail borrowers increasingly struggle to meet repayment obligations amid persistently high interest rates. The situation, described as “dangerous” by those familiar with internal discussions, has sparked fears of a wider debt crisis rippling through the financial system unless macroeconomic conditions improve.

However, according to the latest official data, the level of non-performing loans (NPLs) remains a modest 6.2% of the total loan book as of March, which is not putting pressure on bank capital yet, although analysts and insiders suggest the figures may not reflect the true scale of the problem.

A common tactic during times of crisis is for banks to renegotiate the terms of a loan and kick repayment down the road so they don’t have tap capital to provision for loans that have gone AWOL. These measures allow banks to classify loans as "performing" despite delays, thereby understating actual credit risk.

According to the Central Bank of Russia (CBR), the official NPL ratio is up slightly from 4% in December. This figure includes loans overdue by more than 90 days and those considered unlikely to be repaid without realising collateral.

An internal memo from one major lender seen by Bloomberg warned that official figures “may mask the true magnitude of the debt problem”. According to the note, a growing number of borrowers are deferring payments, which means that while public data on arrears may not yet indicate a severe issue, many more loans are effectively not being serviced as scheduled.

“Banks always get all the problems that arise in the economy at the next stage,” said Sberbank chief executive officer German Gref in an interview with state broadcaster Rossiya-24 on June 21, during the St. Petersburg International Economic Forum (SPIEF). “We see now that a lot of enterprises are starting to have trouble servicing loans, and cost of risk and provisioning is also going up for banks. This will likely continue until the end of this year.”

According to people familiar with internal risk assessments, Russian banks are already preparing for further deterioration. Estimates suggest bad debts could run into the trillions of rubles, and banks have started adjusting portfolios and tightening credit conditions. Early signs of a credit squeeze are emerging, with the corporate loan portfolio shrinking by RUB1.5 trillion ($19bn) during the first two months of 2025 before stabilising.

Despite the concerns, Russia’s central bank reported that lenders posted record profits of RUB3.8 trillion in 2024, up 20% year on year. Gref acknowledged that profits in 2025 are likely to be lower than last year’s record, but downplayed fears of systemic instability.

"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 cost of risk and provisioning is also going up for banks. This will likely continue until the end of this year," Gref said. “There are no signs of crisis in the sector,” he said. (chart)

The CBR is already working to cool the economy and bring interest rates down. However, at the closely watched SPEIF economics panel the leaders of Russia’s macro and fiscal management debated if Russia’s economy was already in recession or if the economy is merely cooling. Opinion remains divided.

CBR Governor Elvia Nabiullina remains sanguine and pointed that her plan to artificially cool the economy and bring down is working as inflation dropped faster than expected from over 10% at the end of last year to an annualised 9.45% at the end of June.

The central bank also sees no risks of a retail deposit "overhang" where funds could flood the consumer market as the key rate declines, Nabiullina said during the SPIEF session.

"There is no deposit 'overhang' just waiting for us to cut rates so everything will rush into the consumer market. Many probably confuse this with the pandemic period, when people due to sanitary restrictions saved money they couldn't spend on cars, goods and services, and those savings remained. We don't have deferred consumption - our incomes grew at very high rates, which led people to increase consumption (our consumption grew and continues to grow) while also building up deposits and savings," Nabiullina said.

Economic growth in general has slowed this year as the military Keynesianism boost wears off. Nabiullina pointed out that the fast growth of 4.3% in 2023 and 2024 was due to the uptake of spare capacity, now the economy is running at maximum capacity there is not more growth potential, “and that is where the inflation is coming from,” she said. The economy contracted in the first quarter of this year in real terms although it put in a nominal 1.4% of growth. The CBR’s forecast for growth this year is between 0.5% and 1.5%.