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Banking services in Russia: theory and fact


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Banking services in Russia: theory and fact.

The economic situation in Russia, due to the historic and unprecedented
on-going changes in this country, is one of the most interesting fields
of analysis and research. I have chosen the banking system for the topic
of my essay as it is one of the most important instruments of the
economy. While studying materials on the banking system in Russia I came
across many deviations from the well-established standards of the
banking system in Europe and some facts showing that in real life banks
in Russia does not follow the laws and regulations. In my research I
have tried to answer two questions.

Is the banking system in Russia fully developed?

Banking services in Russia: theory and fact. Do they differ?

In order to answer the first question I compared the European banking
system and the current banking system in Russia as it is regulated by
laws and by governmental acts and decisions.

In order to answer the second question I analyzed the information I
received while studying the activity of the ‘’Incombank’’ branch in
Chelyabinsk and while interviewing clients of other banks in Chelyabinsk
in the summer of 1997.

Banks are the most important link in the world of money. This is
because, first of all, banks nowadays perform the main part of the work
of transferring money from a customer to a seller, by operating the
system of payments in the economy. Almost everyone in the world uses or
has used banking services. Families keep their savings there, and banks
pay them interest rates on their deposits and give them loans to buy
expensive goods. Companies conduct payments through them. Commercial
organizations, which work at the market and in production, take loans
for their needs and conduct all payments with buyers and sellers
through them. Landowners and owners of real estate take loans from the
banks to buy an estate or to make use of it and pay back loaned money.

As we can see, everything in the economy is controlled by money, and
banks are a tool-kit for the economy - controlling the money circulation
between firms, depositors and loaners, and offering services to make
that circulation easier for them. Banking services also have a
productive nature. Even such a simple operation as the admission of
money on deposits from people and companies involves a huge productive
force. A bank does not just collect money - it converts non-working,
unused money resources, to working assets. This is also true of credits
given to companies and firms for the development of their productive and
financial activity. A healthy and stable economy of any country depends
on healthy banking services. Now we will see if the banking system in
Russia and, in particular, in my home city of Chelyabinsk gives any
chances for our economy to develop.

All banking services can be divided into specific and nonspecific
services. Specific services include: 1) deposit operations; 2) credit
operations; 3) payment operations.

Deposit operations are the operations of placing clients’ money into

operations are the operations of placing clients’ money into
the bank on deposit. While keeping money for its clients, the bank pays
them interest.

Credit operations are the operations of giving loans to bank clients
and receiving, in exchange interest rates on those loans. Credit
operations are the main operations of a bank. Banks are the biggest
center of credit. Credit operations form the main specific weight of any
bank’s assets because they give the biggest profit to the banks.

Payment operations by banks can be fulfilled in cash or in transfer
payments. Banks can open different account numbers for their clients and
can fulfill their payment orders related to buying or selling goods,
paying wages, transferring tax payments and making all other important
payments. In issuing payments the bank is acting as an intermediary
between sellers and buyers, companies, tax agencies, citizens, and the

These three types of bank operations are commonly called traditional
bank operations. The term ‘traditional’ is applied because all of these
operations together establish what we call a bank.

Cash operations can also be regarded as traditional operations. They
are the operations of giving out cash money to the clients from their
accounts and cash exchanging cash currency. According to the law, these
operations have not been included in the basic operations that form up a
bank, but in their meaning they reflect the essence of the bank system.
It is difficult to imagine a bank that has deposits, gives loans and
conducts payments, but does not have cash operations.

Additional operations can be placed between traditional and
nontraditional operations. They include currency operations, and
operations with securities - with gold, precious metals and ingots. A
bank does not have to include these operations in its activities. In
1994 the majority of banks did not have a currency license, and even
nowadays in our city banks are not allowed to make operations with gold,
precious metals and ingots, yet they have not lost the right to be
called banks.

All other services are included in non-traditional services. There are
many of them, such as:

intermediary services;

services directed to the companies’ development (inculcation of the
stock exchange, placing shares, juridical help, information services

giving guaranties and collateral;

trusting operations (including consultations and help in the management
of the clients’ property);

providing accounting help to the companies;

presenting the clients’ interests in the court;

tourists services etc.

All banking services are also subdivided into paid and free services. A
bank can decide which services will be paid for and which not, but until
now every single activity of the bank has been paid for by clients and
all services have been divided into very expensive and inexpensive
services. I think that this is due to the fact that in the new Russia it
was easy to make money and everyone wanted to do it as quickly as

ted to do it as quickly as
possible. Companies, therefore, had nowhere else to go and they had to
pay extremely high interest rates and charges for services. Nowadays
everything is changing because of increased competition between banks
and some of them are trying to attract new clients by lowering the
charges for their services.

Now, for every service, we will compare how it should work according to
the law and how it really works. All further information will be
presented in facts taken from the activity of the ‘’Incombank’’ branch
in Chelyabinsk for the 1997 year.

In order to illustrate the problem of deposit operations I have to dwell
upon some facts of the history of our economic system. First of all, in
1992, after the fixed prices were ‘’freed’’ in Russia, a crisis occurred
with money circulation. It also led to hyperinflation. So the money with
which you could buy a car in 1985, changed in 1993 to worthless paper
with which you could hardly buy a book. The situation became even worse
when the banks decided to give out the limited amount of money to any
client (not more than 500 roubles in one month) even if this client had
a larger sum of money on his account. Therefore, with hyperinflation,
5000 rubbles on any account in 1985 (5319$), in 1993 became 12$ with
interest rates. So everyone who had a long-term deposit lost all his
money. Also, it was popular among Russians to open saving deposits, for
1000 roubles (1063$), for their new-born children which were paid to the
bank for several years and could be taken out only when the children who
were insured reached the age of 18. Everyone who was too young to take
his money lost it. Even now, while I am writing this work, the central
bank and the government are putting into action another historical
swindle, erasing three zeroes on banknotes. Even after the central bank
had promised their clients to recalculate the savings made before the
‘90s according to the level of inflation all money will loose three
zeros. So that which was 1000 roubbles (1063$) in 1985, will now become
1 roubble (16 cents). The central bank has fooled everyone in the
country. Who will trust the banks after this point? No one. This lack of
trust has led to a shortage in the money supply to banks. This situation
in the country creates a distrust of clients to banks, on one hand, and
of banks to government policy on the other hand. The result is that the
deposit operations have become less in value and shorter in terms.

In the situation of shortage, banks have had to decide how to raise
their money supply. They have decided to do it in a real new Russian
style: if people do not want to give them their money, the banks will
force them to do it. For instance, in our town ‘’Incomebank’’ signed an
agreement with almost all factories and big companies about paying
salaries to their workers through the bank credit cards. The same
agreement was signed with all institutes and colleges. Now, students can
withdraw their grants only by their ‘’Visa’’ and ‘’STB’’ cards. Before

nly by their ‘’Visa’’ and ‘’STB’’ cards. Before
this, the owners of credit cards had been very rich people. Perhaps the
bankers figured that new owners had to feel happy about receiving one of
the privileges of the rich, but the people did not. They now must pay
20$ every year for a credit card and 5% on every amount which they take
in cash. In such a way banks have forced common workers to keep their
money with banks.

Payment operations in Russia are not developed yet. There are almost no
payment services for the private sector. First of all, this is because
just a few shops in our city accept credit cards. The second reason for
this is because a private person is not allowed to make any transfer
payments. Movements of money from a buyer to a seller take place only by
cash, and if someone wants to buy a house or a car he must pay the whole
amount in cash. This is why Russian people abroad almost always pay with
cash. It is because they cannot transfer their money abroad and even pay
for their holidays by transfer payments. It is still so, even after the
central bank representative appeared on a TV news broadcast and gave an
interview to important newspapers insisting from now on people would be
allowed to make transfer payments abroad - but not more than 2000$ per
operation. He said that in May of 1997 and still nothing has happened.
Still, nobody can transfer even 500$ abroad. Dangles, everyone knows
that the law already exists but banks can’t transfer money because they
do not have the permission to do so. It makes life for more difficult
many people, because they can take only 500$ abroad or not more than
10000$ with a bank document. Such a document shows that a person has
exchanged that amount from roubles to dollars. If a man goes to Europe
for a short holiday it will be enough, but if he is going to live there
for a long time or he is going to study there he has a problem. He is
allowed to have an account abroad for a time while he is there, but
nobody can transfer any money to pay his expenses.

Payment services for companies are also not very convenient for their
users. Payment operations and all money transfers inside Russia are
going through a special branch of the central bank in the city and
everywhere where money stops it spends some time and is used. If you
give an order to the bank to transfer the money in one day, you will be
lucky if they do it two days after that, then when this special branch
of the central bank gets the money it takes it 3-5 days to record the
operation and just after that it will send the money to the next bank,
and even the bank to which you have transferred the money will keep it
for 2-3 days before they will tell you that they have already received
it. This is only if that payment operation is inside your city. If you
are transferring the money to another city then the special central bank
branch of your city transfers the money to the same branch in the town
you are transferring the money to and there the money is recorded again

the money is recorded again
and after 3-5 days the bank receives it. The shortest time in which you
can transfer money from one bank to another inside one city is 7 days,
and between two cities about 10 days. According to the law it has to
take only 3 days in local operations and 6 days in interurban operations
- the time while the special branch of the central bank keeps the
money. It is also not a very short period of time but better than 15
days - the period it takes to transfer money in reality. This has led to
an increasing number of illegal cash payments between companies.

Payment operations for companies outside Russia are more complicated
than anything else in the bank system. You must sign a contract with a
foreign company about buying goods there. Then you have to show the
contract on that bargain to the Customs with all prices and the list of
goods purchased. After they have checked everything they issue a
passport and register the number of the transaction. Only after that you
are allowed to send an exact amount of money for which you have the
passport. After this, you are allowed to give an order to the bank about
transferring the exact amount from your rouble account number to your
currency account number. In other words you are buying currency. It
takes the bank up to 5 days: it depends on availability of that
currency. After the money is exchanged you are allowed to give the
payment order to the bank to transfer the money. Than the money goes to
the special central bank branch and only after that goes to the foreign
bank. But the procedure isn’t finished yet. After getting the goods the
duty-agencies are checking everything and just after all taxes and
custom duties are paid the passport of the bargain can be closed. The
whole operation takes about 8-10 days, including all customs checks.
According to the law it has to take you only 3 days when the special
central bank branch keeps the money, plus the time needed for
custom-agencies to check and register the documents. Thus, it seems that
payment operations are set up with the aim of delaying money transfers
and of keeping money inside the country. It looks as if all clients just
interfere with the activity of the banks and they even behave as if it
would be better for everyone if clients just gave their money to the
banks for their needs and would not interrupt their work again with
their requests.

The main aim of the credit system world-wide is to raise investments for
the economy of the country. So the credit system should attract clients
to borrow money from the bank by offering low interest rates and, simple
procedures. The bank has to invent a means of doing that, because the
welfare of the bank depends on it. In our city in Russia, it looks as if
our credit system is opposed to a European-type credit system and is
created to scare off all borrowers with high interest rates and the
unwillingness of the banks to give any loans. Now I will show it with

According to the law, credit operations for the private sector exist in

the law, credit operations for the private sector exist in
our city. Banks should give credit to people to buy expensive goods. Yet
banks refuse to do that for anyone for any reason, because it does not
give them big profits and takes away a certain amount of money for up to
10 years. Thus, this operation is almost nonexistent. On the other hand
people rarely want to take such loans. First of all because the
companies where they work cannot take big loans for the replenishment of
current capital. For this reason, companies have to work on prehistoric
equipment, without having any chance to pay suppliers and to pay wages
to workers. How can people consider taking a loan for 10 years if they
have no stable income? A vicious circle persists.

The credit system for companies is developed better than that for the
private sector. But even to companies, banks do not want to issue any
loans because of the high risk of losing money. Before if a bank lost
money on loans it was compensated by high profits on the financial
market and also by inflation. ‘The less the better’ became a slogan of
the banks. Now they demand a higher security of loans and higher a
profitableness of projects. To secure their investments, banks have
begun to acquire big packages of shares of the companies into which they
invest. So the obtaining of the loans is limited now but the demand for
credit is huge. Companies are experiencing a shortage in current capital
and need money for investments; the private sector is looking for
acceptable consumer loans and mortgage loans. Thus, in this situation
even at high interest rate loans are difficult to get. Banks create
their own rules of giving loans and decide who is worth the loan and who
is not. Now it looks as if banks gave a priority to companies which are
involved in trade-intermediary activities. Under the conditions of the
currency corridor the profitableness of import trade operations is
relatively high, and the circulation of the money is quick. Therefore
these companies can take short term high interest rates loans.
‘’Incombank’’ gave about 45% of its credit resources to such companies.
Also, banks still give credits to fuel-power complexes and to
metallurgical companies. To finance these companies ‘’Incombank’’ gave
up to 30% of its resources.

While giving loans, banks take into consideration the security of the
loan as well. This is a well-established practice in all banking
systems. But in Russia banks choose to take only real estate and
property as security. The terms of loans are also peculiar in Russia.
The loan has to be not more than 70% of mortgage, and the interest rate
is floating from 25% up to 35% a year on currency loans and from 100% up
to 180% a year on rouble loans. But as the demand for loans is huge,
banks feel like kings, because whether or not a company depends on their
decision. This leads to demoralization and corruption in the banking
system, even though each banker signs the honor code of bankers in the

‘’Association of Russian bankers’’.

Cash operations in Russia also operate on a low level. In consequence of
the shortage of money, almost all deposit money is given away as loans
and investments. So it often happens that a bank does not have enough
money to pay out to clients. Even the existence of the federal bank
reserve requirement (10%) does not scare banks and they often have less
cash. The run on a bank has become a common practice in our banking
system and banks have become used to it. Nowadays people can get only up
to 1000$ on first demand, and they have to order any amount of money
higher than 1000$ in advance. They will have to wait for their turn to
get the money. The government even sets a time limit for this operation:
up to 5 days. Yet banks often break that law, excusing themselves with a
shortage of cash money. Also, the owners of credit cards have problems
with getting money from them. In spite of the fact that the banks have
signed an agreement with the European banking system about cooperation,
banks in Russia do not execute that agreement. In our banks even the
owners of gold credit cards with the limit up to 25000$ can take only
5000$ per operation on general foundations. That means that they have to
wait up to 5 days each time to get 5000$. According to the agreement and
to the law banks have to pay out the amount of money in the limit
borders immediately.

From additional operations banks commonly practice only currency
operations, because they do not have licenses for other operations. Even
currency exchange presents a lot of problems for individuals. First of
all people have to bring their passports for that operation or for
registration of any kind of exchange in tax agencies. Thus, the privacy
of that operation has disappeared, and that leads to the development of
that operation on the black market. If banks go on creating impossible
conditions for clients that will lead to the development of these
operations on the black market and, therefore criminal groups, instead
of banks, will invest the huge profits in to the industry.

Non-traditional operations in Russia do not exist at all. Or rather they
are written down in regulations for the banks but the demand for these
services in Russia is zero. This is because no one trusts the banks and
banks do not want to practice that activity either, because of small
profit. In our city not a single bank has in its staff a person who is
occupied with one of the non-traditional operations.

Having analyzed the information I can now show it in simple data-bases.
To answer the question if the Russian banking system is fully developed,
I will compare the theory of generally accepted European banking
services to the results of my essay.

The Russian banking system:

agree in: differs in:


deposit operations

credit operations for companies

non traditional operations Payment operations in private sector:

no transferring of the money allowed

2.Payment operations for companies:

s for companies:

all operations through the central bank

time delays are allowed by the law

payments abroad are through custom checks

Credit operations in private sector:

maximum term of loans is 10 years

Cash operations:

time delays are allowed by the law

Additional operations:

only the central bank has the license for operations with gold, precious
metals and ingots

tax-agencies register and check currency operations

As we can see there are a number of differences between the Russian
banking system and the European banking system. This means that the
Russian banking system has not fully developed yet.

According to my research the Russian theory of the banking system
differs from the established facts. The final results I can show on the
following data base.

The Russian banking system: theory and fact. Do they differ?

Agree in: differ in:

no points Definition of banking system:

not all services are carried out

the laws are not executed

Deposit operations:

clients are forced to keep the money on deposits

3.Payment operations in private sector:

few shops accept credit cards

4.Payment operations for companies:

take more time

5.Credit operations in private sector:

banks are unwilling to give loans

6.Credit operations for companies:

banks are not objective while choosing future clients, which leads to

7.Cash operations:

the withdrawal of money is limited

clients wait for several days to withdraw big sums

8.Additional operations:

movement of these operations to black market

9.Non-traditional operations:

do not exist

The Russian money institute is called a banking system, so it has to
conform to the standards and try to approximate the generally accepted
level. As we can see from the facts, however, Russia is yet far away
from the accepted standards and the real practice of the Russian banking
services is different from what it should be according to the Russian
law and theory of the banking system. Of course, I do not presume to
present a detailed analyses of all the problems involved. But even my
personal research can show that the Russian banking system is far from
ideal. First of all, all banks are using their superior position in the
finance market, and all their activities are boiling down to making
bigger profits with the minimum risk. Thus, banks are often breaking the
law by not conducting operations in which they could lose their money,
or operations with low profitability. The result is that not all
operations are fulfilled as they should be, because of the prepossession
of the banks to their clients. In the private sector this situation
leads to the distrust of banks by clients and, as a result, banks
receive less money for their operations. In the situation of time delays
and other difficulties with money operations, companies are losing their
money: with a healthy banking system a company can get a bigger profit.
In the situation of unstable economy banks should be the instruments of

ts of
the government and should help the industry to develop. But in Russia
everything is different: the government issues impossible laws and banks
demand impossible interest rates, delay the money and break the law. How
can it help the Russian economy? In the end, clients are afraid of using
banking services and this apprehension limits cash flows. This leads to
less investment in industry, and undeveloped industry is the main
problem of the government. On the other hand, companies are receiving
fewer loans because of the unwillingness of banks to give any. This
again leads to undeveloped industry. Therefore we may conclude that one
reason for the recession in Russia is the deficiency of the banking
system that leads to unhealthy money circulation. The government should
review its banking laws if it really wants to see a stable economy in
Russia. Source of the information:


personal interview with a bank official

Nina Myakshun,

General Manager


Kalininsky branch,

Russia, Chelyabinsk,

Kaslinskaya 25,


tel. (8-3512) 35-85-52

personal interview with a duty agency official

Svetlana Savosina

Director of Aeroflot Duty Agency,

Ekaterinburg Branch

tel. (8-3432) 61-76-97



The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996).

Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993).

Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997).

Bank Operations (Moscow: Infra-M, 1995).

5. Lipsits, Economy without Mystery (Moscow: Delo, 1993).

6. Commersant, N6(165) (February, 1996).

7. Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).

broadcast TV news:

1. NTV evening broadcast news

ORT evening broadcast news

ORT 6 o’clock broadcast news




PAGE \# "'Стр: '#'

Bank Operations (Moscow: Infra-M, 1995) 17.

Bank Operations (Moscow: Infra-M, 1995) 17-18.

Bank Operations (Moscow: Infra-M, 1995) 19.

Bank Operations (Moscow: Infra-M, 1995) 19.

Bank Operations (Moscow: Infra-M, 1995) 21.

Commersant, N6(165) (February, 1996) 29

Commersant, N6(165) (February, 1996) 24.

Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).

Interview with a bank official. (24.08.97)

Media information.

Media information.

Interview with a bank official. (24.08.97)

Interview with a bank official. (24.08.97)

Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).

The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996) 43.

Interview with a bank official. (24.08.97)

Interview with a duty agency official. (27.09.97)

Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997) 28.

Bank Operations (Moscow: Infra-M, 1995) 68-74.

The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996) 86-89.

Interview with a bank official. (24.08.97)

Interview with a duty agency official. (27.09.97)

The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:

aw Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996) 128-130.

Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993) 7.

Commersant, N6(165) (February, 1996) 28-29.

Bank Operations (Moscow: Infra-M, 1995) 76.

Commersant, N6(165) (February, 1996) 26.

Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).

Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993) 26.

Lipsits, Economy without Mystery (Moscow: Delo, 1993) 271.

Interview with a bank official. (24.08.97)

Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997) 33.

Commersant, N6(165) (February, 1996) 27.

Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997) 43.

Interview with a bank official. (24.08.97)

Interview with a bank official. (24.08.97)

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