A successful banking system is necessary for the successful development of the economy. Increased competition in the financial market increases the requirements for the level of the credit system. One of the elements of its regulation is a well-formed interest policy of a commercial bank (PPKB). If interest rates are formed correctly, the credit institution will have a sufficient level of liquidity and will be able to timely and fully respond to the obligations taken.
The concept and essence of the interest policy of a commercial bank
PPKB is a set of measures in the field of formation of rates for attracting and placing funds that are aimed at ensuring the profitability of a financial institution. It is influenced by such external factors:
- Market condition.
- Inflation rate.
- Demand for services.
- Level of competition.
- Regulator Policy.
- Social environment.
Among external factors, one can distinguish:
- Range of services provided.
- Qualification of staff.
- The size and quality of the customer base.
Bank profit is the difference between the income received as a percentage of the loan granted and the amount of funds payable on the deposit. The credit institution will make a profit if it can correctly form the interest policy.
Directions
Loan interest and interest rate policies of commercial banks are formed separately for different market sectors. The official discount rate of the regulator is used in short-term loan transactions between banks. Separately formed loan interest and interest rate policies of commercial banks in relations with borrowers. RZB rates determine the rate of return on bonds at the time they are issued and resold in the secondary market.
Deposit operations
Passive operations include operations by which a financial institution forms its own resources. These include: raising funds from legal entities and individuals, maintaining accounts, issuing securities, loans from other financial institutions, etc.
The formation of the deposit policy of a commercial bank is the main lever in the competition in the market. Raising the proposed bid provides an opportunity to attract resources. If the bank has a sufficient amount of borrowed funds and few options for their profitable use, then it can reduce its deposit rates.
Consider the theoretical foundations of the formation of the interest policy of a commercial bank. The level of payment on the deposit depends on the amount attracted and the term for placing funds. Pricing is carried out after analyzing the ratio of the rate reflecting the market value of the funds and the cost of servicing each contract. It is worth noting that interest remuneration is not provided for all types of banking services. So, one of the biggest cost items is the cost of maintaining customer current accounts. Therefore, additional income is not provided for them. A part of the expenses is paid by the client himself in the form of payment for operations.
The average price of attracted deposits is calculated as follows:
SD = RPD / 1 - Nr x 100%, where:
- RAP - average level of interest on deposits.
- Нр - reserve norm.
The rate, which takes into account the rate of economic growth and inflation, is called the nominal risk-free. In an unstable economic situation, financial institutions cannot predict the rate of inflation. Therefore, the analysis of the interest rate policy of a commercial bank on deposits is carried out based on the NBU discount rate.If it often changes, then customers are offered a floating loan rate. That is, the essence of the interest rate policy of commercial banks is the formation and timely change of rates for the services provided.
Principles of the deposit policy of a commercial bank
- Rates vary depending on the timing, amount of resources attracted and the category of customers.
- The level of profitability depends on the discount rate of the regulator and the level of reservation.
- For passive operations, real rates should be set, that is, they should not exceed the yield on active operations.
Interest rate analysis of a commercial bank
The deposit policy of Russian commercial banks determines the level of operating expenses. Therefore, a financial institution, on the one hand, is not interested in a high level of rates, and on the other hand, is forced to attract customers with interesting deposit conditions.
Assessment of the deposit policy of a commercial bank is to calculate the value of all borrowed resources. The process is carried out in the following algorithm:
- determines the level of current rates;
- the dynamics of their change is being studied;
- the real value of resources is calculated;
- changes in expenses on deposits in the total cost are analyzed.
According to the Federal Law "On Banks and Banking", the financial institution does not have the right to unilaterally change the rates and duration of the contracts. Income from the deposit is paid in the form of interest in cash, which is accrued on the balance of the deposit at the end of the trading day. Depending on the type of deposit, the calculation uses the size of the bet and the number of days for which the resources were attracted.
Loan rates
Demand and supply for banking services affect the size of rates. Today, financial institutions can independently establish competitive rates, focusing on the state of the market, type of deposit, amount and specificity of the account. Although the government today adjusts the level of rates to ensure priority development of industries. For example, simplifying the process of lending to export industries makes it possible to reduce the trade deficit and create the same conditions for participants in credit relations.
Interest on loans is formed using the “base rate plus” method. That is, a credit spread is added to the discount rate (the difference in the price of two options). The value of the latter reflects the level of risk of the borrowing bank, which is assigned based on the international credit rating. For institutions with the highest rating (AAA), the spread is zero.
For banks that do not have an official rating, the risk level is assessed independently by the lender and depends on solvency, reliability, liquidity and other indicators. The rating determines the possibility of borrowing funds through the issuance of certificates of deposit and other debt obligations. Institutions with a rating of "BB" this source is almost inaccessible. A credit institution may purchase certificates of deposit from other market participants, but at a very high percentage.
Credit Policy Analysis
The rate of return on active operations depends on:
- NBU official rate;
- market conditions;
- the cost of attracting resources;
- project risk level;
- level of solvency of the borrower.
Margin is the difference between interest received and paid. It is designed to cover costs, all risks and create profits. Absolute margin is calculated as the difference between total income and expenses, and between interest on individual active operations.
The credit interest policy of a commercial bank reflects the principle of the allocation of resources between bank operations. You can restructure the capital based on the liquidity of assets or take resources from the “common boiler”.To choose the best way to allocate resources, you should calculate the actual margin ratio:
- KFpm = (% received -% paid) / cf. for the period the balance of assets.
- CFM on credit. operas. = (% received -% paid on resources) / cf. balance of credit debt for the period.
The margin adequacy ratio shows the minimum level of interest required to cover bank expenses. It is calculated to determine the level of rates for future contracts:
To dost. = ((operational costs -% paid) + (admin. costs - other expenses)) / cf. balance of profitable assets.
Coefficients can be calculated on the basis of actual data and predicted values. Comparison of indicators for individual operations allows you to evaluate the real profitability of the selected direction of the bank.
Interest rate policy of the Bank of Russia
Having considered how the interest rate policy of a commercial bank is formed, we turn to the issue of rate regulation by the Central Bank. The Bank of Russia, as a lender of last resort, finances institutions and sets price guidelines. At the macro level, it regulates the money supply, lending to the real sector of the economy, and at the micro level it regulates the liquidity of organizations.
If the essence of the interest rate policy of commercial banks is to regulate the level of profitability of an individual institution, then in the case of the Central Bank the principle of operation looks different. If the regulator aims to reduce the money supply in circulation in order to contain inflation, then the refinancing rate will increase. As a result, credit rates will increase and the country's credit potential will decrease. If the purpose of the Central Bank is to facilitate the access of banks to refinancing, then the rate is reduced, and the country's credit potential is increased. In this case, one should take into account the state of the market and the factors that influence the rate change. They will be listed in more detail below.
In the same way that the interest rate policy of a commercial bank is aimed at adjusting the level of costs and income of a financial institution, the refinancing rate serves as an indicator of changes in the market. Its decline is regarded as a signal to the expansionist policy of the Central Bank, and the increase - to restriction. At the same time, the regulator sets rates for certain operations: discount, pawnshop and in the open market.
Factors
The process of regulating the money supply by changing the refinancing rate will be effective if:
- Inflation is not constant and is monetary in nature.
- The change in the rate regulates the demand for credit resources. At the same time, the money market should have a close relationship with the lending segment of real sectors of the economy. That is, the rate should balance the level of profitability of borrowers and cover inflation risks.
- Refinancing rate does not provoke price increases.
- The dynamics of changes in interest does not contradict trends in the money market. Amid lower interest rates, demand for interbank loans will increase. In turn, the money repo market should be liquid for long periods of time. Then changes in the rate will affect the level of profitability in general.
The interest rate risk and the interest rate policy of a commercial bank in the long run depend on the state of the market, namely:
- The time period through which the rate will affect the level of inflation and the state of the real sector of the economy.
- The effects of reduced market lending. Under equal conditions, an increase in the refinancing rate will increase the cost of loans in the country.
- If the improvement of the deposit policy of a commercial bank is carried out against the backdrop of increasing public confidence in the institution, then changes in the refinancing rate on the institution’s income will not have a big impact.
- Will financial institutions provide loans to households and entrepreneurs through interbank loans.
- An increase in the refinancing rate should not cause an imbalance on the securities market.
- Rate adjustments should be smooth, not irregular. In developed countries, including the Russian Federation, today the rate changes in increments of 0.25 pp only with significant deviations of the real inflation rate from the planned one. With smaller deviations, the costs associated with changing volatility will exceed economic benefits.
- Ineffective interest policy of a commercial bank can be the cause of an underdeveloped financial sector in the country.
Management of risks
The interest rate policy implemented at the level of the regulator should restrain inflation, ensure the stability of the national system and promote the development of individual sectors of the economy. The risk management system can be built on one of the following principles:
- The higher the margin, the lower the interest rate risk. In other words, profitability from active operations should exceed liabilities.
- The essence of the concept of “spread” is to identify the difference between the average rates for active and passive obligations. The larger it is, the lower the level of risk.
- The concept of the gap is to analyze the imbalance of assets and liabilities with a floating rate for excess assets over liabilities for a certain period.
World trend
One of the principles for the formation of banks' interest rate policy is the regulation of inflation expectations. If the decisions of the Bank of Russia are aimed at curbing rising prices, then the Central Bank around the world set as its goal the achievement of a certain level of inflation. They strive to maintain high prices (2% per year) while fighting deflation. Moreover, experts often criticize the Central Bank of the Russian Federation for keeping the refinancing rate at 9.5%.
The Central Bank of other countries build their tasks around "inflation targets." The policy of the Bank of Russia is mainly aimed not only at targeting the inflation rate of 4%, but also at supporting the economic development of the country as a whole. After the financial crisis of 2008, regulators became more responsible for the health of the country's economy as a whole. They began to pay more attention to fiscal policy, financial regulation and exchange rates.
Market situation
The refinancing rate at the level of 9.75% since the beginning of the year is twice the real inflation rate, which hinders the development of the country's economy as a whole. A business cannot attract investment in new projects. After conducting Western sanctions, foreign companies became inaccessible to Russian companies. Amid the lack of affordable loans, all the actions of economists to accelerate GDP growth are in vain.
The actions of the Central Bank are more aimed at strengthening the ruble. This also confirms a number of economic scenarios for the development of the country. So, according to forecasts, in the medium term the price of a barrel of oil will be $ 40. This will lead to a rise in price of imported, and then domestic goods. Some experts argue that real inflation is 7-8%, and therefore the current refinancing rate is not very high. A decrease in the refinancing rate will lead to a decrease in the yield on deposits. Interest on deposits in real terms may not cover inflation.
Forecast values
Despite this forecast for the development of the country's economy, 04/28/2017 the Bank of Russia reduced the rate to 9.25%. According to economists, by the end of 2017, the refinancing level will drop to 8.5%, and by the end of 2018 - to 7.5%. These changes will affect all Russians.
After a couple of months, lower rates will lead to a decrease in the exchange rate. Experts predict that with the growth of imports and the purchase by the Ministry of Finance of foreign currency, in June 2017, the dollar will cost 60 rubles. At the same time, lowering the rate will reduce the cost of loans, which will affect consumption. Sberbank has already announced a reduction in consumer credit rates to 13.9%. Loans for individuals will become more affordable, but not for everyone. The availability of loans will be offset by tightening requirements for borrowers.
The selected monetary policy of the Central Bank is also aimed at solving another problem of the economy: entrepreneurs do not invest in their development. The availability of loans should mitigate this problem.
In April 2017, the price increase was 4.3%. Lower rates should further reduce inflation. But in practice, price increases largely depend on the consumer activity of the population, which is very weak among Russians. In addition, a stable ruble exchange rate and a good harvest are also factors holding back inflation.
How real experts ’forecasts will turn out to be clear in a couple of months. In the meantime, you can prepare to reduce the cost of consumer loans.