Current Problems in Functioning of Russian Federation Banking

Institutions during the Pandemic Period and Ways of their Solution

Elena A. Posnaya

, Natalya V. Alesina

and Artyom O. Shevtsov

Institute of Finance, Economics and Management, Sevastopol State University, Sevastopol, Russian Federation

Keywords: Bank, Online Service, Digitalization, Innovation, Pandemic, Financial System.

Abstract: The situation associated with the Coronavirus pandemic has accelerated the digitalization process, and all

areas, including banking, must support the new trend and reorganize in a short time. The banking sector will

face the problems of under-profit, as the business sector is being rebuilt, there is no adequate demand,

therefore, loans may not be paid on time or, even worse, not returned to bank institutions. Parallel to this,

there is a need to move almost entirely to a digital customer service environment. This is the primary condition

for functioning in the modern business space. Currently, due to the existing global problem, the Coronavirus

pandemic, banking institutions of the Russian Federation need to reorganize to a new format of work, which

in the future is likely to dominate the format that was present in the work of banking institutions earlier. We

are talking about the global digitalization of the banking system. There will be a need to train employees in

new digital technologies, and citizens will need to implement and improve existing financial literacy courses.

In connection with these circumstances, many problems arise, the solutions to which must be identified and

implemented. The presented study focuses on the problems of the functioning of banking institutions during

a pandemic and determines the vector of their solution.

1 INTRODUCTION

The country's economy is currently closely related to

the state of the epidemiological situation not only in

the country, but also in the world. The pandemic has

forced a balance between measures to protect human

health, overcome recession and maintain financial

stability in the face of global instability.

In the financial sector, the course has been taken

towards the digitalization of the economy. Online

banking services are gaining in popularity and

development. Online purchases, remote loans and

online deposits, without which we can no longer

imagine our life. To pay bills or open a bank account,

you only need to have a phone or a device with

Internet access. The pandemic has accelerated the

digitalization process and all areas, including

banking, must support the new trend and reorganize

in a short time.

The banking sector is one of the most volatile. At

the moment, the safety margin for the capital of

banking institutions is at a sufficient level, and there

https://orcid.org/0000-0002-7716-9117

https://orcid.org/0000-0001-5822-9877

is a surplus in terms of liquidity. A significant number

of problems affected the banking sector, starting in

March 2020, that is, from the period of the beginning

of the pandemic.

The monetary system of the Russian Federation is

built in such a way that the national currency, the

ruble, depends on the foreign currency, the dollar.

This dependence negatively affects the monetary

system within the country, and the period of the

pandemic exacerbated this once again.

2 MATERIALS AND METHODS

The Russia banking system is faced with systemic

problems. The banking sector is going through a

serious crisis and is undergoing a period of growth of

distressed assets, like the entire national economy. At

present, both the Russian economy and the banking

system, as one of the connecting links of the national

economic system, are in need of rapid adaptation to

changing conditions (Aleksandrova, 2020).

Posnaya, E., Alesina, N. and Shevtsov, A.

Current Problems in Functioning of Russian Federation Banking Institutions during the Pandemic Period and Ways of their Solution.

DOI: 10.5220/0011118300003439

In Proceedings of the 2nd International Scientiﬁc and Practical Conference "COVID-19: Implementation of the Sustainable Development Goals" (RTCOV 2021), pages 227-231

ISBN: 978-989-758-617-0

 2023 by SCITEPRESS – Science and Technology Publications, Lda. All r ights reserved

227

After the onset of the Coronavirus crisis and the

transfer of employees to remote work, individuals and

legal entities began to actively withdraw their funds

from bank accounts, close deposits, the purchase of

securities and investment of funds decreased.

Compared to 2019, the indicators for consumer loans

issued in 2020 decreased by 1.5 million rubles

(Sofiychuk and Odinokova, 2020). In the spring of

2020, the number of issued credit cards also

decreased, due to the instability of the situation during

the pandemic. Falling income, uncertainty ahead of

tomorrow had a negative impact on the banking

system. Small and medium-sized businesses, unable

to withstand the financial burden, asked banks for

deferred payments, paid only interest or took "credit

holidays". All this led to a sharp decrease in deposit

rates, which led to a decrease in clients of banking

institutions.

After the active phase of the pandemic in the

banking sector, there is a problem of an outflow of

funds, which may turn into a problem of maintaining

marginality. Banks that increase their loan portfolios

are forced to offer depositors more favorable

conditions, which, given low interest rates on loans,

negatively affects profitability.

So in the new conditions, success in the

competition depends on whether the bank is able to

constantly expand the range of services provided,

reduce their cost, improve the quality of banking

services to customers (Selifonov and Chistyakova,

2019).

Due to the pandemic, the digitalization of the

banking system has accelerated significantly, since it

was necessary to ensure the operation of institutions

remotely. Banks in the conditions of telecommuting

have come to the online lending system. Another

service is also gaining popularity: it is the opening of

accounts for new customers online. These remote

operations are based on close cooperation with the

state and the use of digital portals such as Public

Services and a unified biometric system. Programs

for the delivery of credit and debit cards to the

customer are accelerating and expanding, and the

demand for this service is also growing due to

personal security measures (Khokhlov et al., 2020).

3 RESULTS

In connection with the developing digital system in

banking institutions, it became necessary to

supplement and change the provisions in the

regulatory framework that relate to the regulation of

the banking institutions activities. The Bank of

Russia, together with the ministries and departments

of the Russian Federation, carried out work and

analysis on the implementation of the legal

framework using non-cash payments and the

implementation of the process of functioning of the

financial system in a remote format.

With the transition to online banking services, the

bank financial security has become especially

important. The creation of a financial security system,

ensuring the protection of financial resources,

information and property of the bank is one of the

urgent problems of protecting the bank's activities

from external and internal threats. Financial security

is a consequence of information, managerial,

organizational and technical, which are aimed at

effectively ensuring a stable and sustainable regime

of bank management, taking into account the

interests, as well as the safety of financial and

material values.

Due to the pandemic and the popularization of

online activities, the Internet fraud activity has

increased. Criminals have stepped up in the online

banking industries. The number of fraudulent

transactions recorded by banks is growing in

proportion to the increase in the number of client

transactions serviced, but the amount of damage

remains at about the same level as before. Attempts

to hack online banks are less and less likely to lead to

serious consequences, since modern security systems

are able to prevent damage to both banks and the

customer base. "Otkritie Bank" uses a fraud

monitoring system to protect customers, "VTB Bank"

is introducing voice anti-fraud. This system will

allow you to recognize fraudulent calls to customers

and to the bank. A system of operations performed

notification, informing the population about the rules

for the safe use of banking services is widely used

(Posnaya et al., 2017, 2018, 2019, 2020).

After the past year, which was recognized as the

year of the pandemic, experts assumed that many

banks in the Russian Federation would default.

Banking institutions have massive profitability

problems. Thus, 9% of banking institutions in Russia

are at increased risk. Since the pandemic is not over

yet, banks need to create reserves to deal with the

problem of volatility of deposits. The number of

banking institutions whose licenses have been

revoked by the regulator is increasing. Currently, the

health index of the banking sector is 91%. This index

corresponds to the share of banks that will remain

financially sound over the next year. 9% of existing

market participants or 33 credit institutions can

default. Their list has not been disclosed, but the

calculation base of the index includes 366 banking

RTCOV 2021 - II International Scientiﬁc and Practical Conference " COVID-19: Implementation of the Sustainable Development Goals

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institutions. The pandemic also directed the banking

sector to address new challenges, scaling remote

technologies, rethinking the previous work format

and product range.

These circumstances will help banking

institutions to rapidly digitalize their services and

expand investments in fin-tech products. Managers of

banking institutions have already made certain

conclusions, based on observations in self-isolation,

on the positive and negative aspects of remote work.

Based on the findings, plans were outlined to revise

the traditional mode of operation of the branches and

their very format in the future. A trend may be the

introduction of a paid service for high-quality

banking services, that is, consumers of banking

services will get used to the fact that services, like any

service, must be paid for, and there will be much less

free services. During the transition to a new format of

work, banking institutions lost part of their profits,

since they faced absolutely the same problems as the

entire business world. Banking institutions had to

transfer tens of thousands of employees to a remote

mode on a large scale, scale up remote banking

services for clients, and at the same time manage

emerging risks. According to representatives of the

largest banks, certain financial costs were required to

"reconfigure" the banking system to operate in the

new regime. Therefore, the increase in the volume of

transactions in the new format should contribute to

making profits at a faster pace than in previous

periods. Also, banking institutions had to bear

unforeseen expenses to ensure the protection of the

health of both customers and employees. Banks have

purchased and are purchasing medical masks, gloves

and other personal protective equipment,

disinfectants, protective glasses for service windows,

strengthened software and strengthened IT

capabilities. Along with a decrease in customer flow

in bank branches, the load on contact centres (hotline

phones, chat bots and mobile applications) has

increased.

Even before the start of the pandemic, most of the

players in the banking market included in the

development strategy the procedure for improving

digital infrastructures and digital services, as well as

various IT services. The digitalization trend entered

an active phase about five years ago, so the situation

with the virus did not completely shock the daily

business life of the banking sector, experts say. For

example, by this time already nine out of ten service

operations are performed by clients of the leading

banking institution in Russia, Sberbank, in the digital

environment. At the same time, bankers began to

expand the functionality of mobile applications,

adding a list of new, more relevant products that were

previously only offline, and, most importantly,

information on support measures during the

quarantine period and subsequent lockdowns.

The problems associated with the functioning of

banking institutions during the pandemic were

resolved almost instantly. For example, banking

institutions added the option “take a credit vacation”

(State Program for the Support of Borrowers) to

mobile applications and chat bots, introduced remote

account closure and resolving the issue of funds

erroneous transfer. A new trend was the expansion of

the mobile applications functionality and their

transformation from a set of productive proposals into

a full-fledged digital office. So, the Sberbank of the

Russian Federation indicates that one of the most

important services that customers used during the

crisis was the online activation of debit cards through

a mobile application. Also, the Russian Federation

Central Bank gave permission in certain cases to

remotely open accounts for new customers without

visiting a branch of a banking institution for

identification. In connection with the emergence of

this situation, members of the banking community

have repeatedly applied to the Central Bank with a

proposal to revise the identification procedure.

According to the expert opinion, the banks of the

Russian Federation entered the pandemic crisis more

prepared than the crisis of 2008 and 2014.

Accumulated capital and liquidity reserves played an

important role. This is the assessment given by the

Central Bank of the Russian Federation (Moroz and

Nityago, 2013).

To address emerging issues, the Central Bank of

the Russian Federation has a developed strategy and

pursues a certain policy.

The key rate plays a major role in setting interest

rates on bank loans and has a significant impact on

inflation and the cost of funding banks. In view of

this, the change in the size of the key rate is largely

due to market instability and increased volatility,

which is the most important statistical financial

indicator that characterizes price changes

(Manuylenko et al., 2018, 2020).

Thanks to the increase in the key rate, the Central

Bank of Russia manages to significantly limit

inflation and devaluation risks, to contain the

depreciation of the national currency, thereby

maintaining financial stability in the state. Thus, by

raising the key rate, the Bank of Russia is pursuing

the following goals:

- limiting the speculations of banks that have a

negative impact on the exchange rate of the national

currency. With a low key rate and a rapid weakening

Current Problems in Functioning of Russian Federation Banking Institutions during the Pandemic Period and Ways of their Solution

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of the ruble, banks begin to take funds from the

Central Bank of the Russian Federation, convert them

into foreign currency, thereby making money; in the

case of a high key rate, these operations become

unprofitable for financial institutions;

- the policy of "appreciation" of funds as a result

of growth in interest on loans to businesses.

Entrepreneurs with a high key rate turn to commercial

banks for money less often, as a result of which the

flow of funds to the economy decreases, which leads

to their rise in price, but not to depreciation.

At the same time, the consequence of the rate

increase is the slowdown in economic growth, since

entrepreneurs are deprived of the opportunity to take

out “cheap” loans, and therefore are forced to curtail

production and reduce the number of jobs.

The key rate undoubtedly affects the rates on bank

deposits and loans, but their rates do not change

linearly. If we consider the cost of deposits, it should

be noted that the change in the key rate to a greater

extent affects the level of rates on medium-term

deposits. The increased rate is attractive for

depositors, and in this case, banks are able to increase

the volume of deposit portfolios. But there is a

downside to this process, an increase in excess

liquidity, which manifests itself individually in each

specific bank, therefore, the upward trend in deposit

rates following the key rate of the Bank of Russia is

ambiguous in different banks. It should be noted that

the growth of interest rates on loans with an increase

in the key rate, as a rule, outstrips the growth of rates

on deposits. Since the beginning of 2021, there has

been an increase in the loan rate by an average of 1.5-

2 percentage points, which indicates forced measures

in terms of its increase and a balanced, effective

policy of the Central Bank.

4 DISCUSSION

At the time of the start of the pandemic, the Central

Bank estimated the capital stock of banks at 5 trillion

rubles. At present, representatives of the banking

sector prefer to speak with caution even about the

near future, since the situation with the incidence of

Covid19 is not declining. The demand for lending to

individuals is gradually returning to pre-crisis values.

The abrupt and large-scale transfer of bank

employees to a remote mode of operation led to the

fact that bankers began to think about organizing a

hybrid mode of work, evaluating the pros and cons of

working in this mode. Banks are considering options

for giving up some jobs and switching to Outstaff

mode (re-registering staff outside the official state),

coworking or working in an office three to four times

a week. This is how the office of the future will

function, based on digitalization. Even those banking

institutions that were previously rather skeptical

about investments in digital are now changing their

development program. This circumstance will entail

optimization and reduction of the branch network,

cost reduction programs, changes in business

processes and the transfer of part of the staff to remote

work. It is an unconditional fact that those credit

organizations, whose clients could apply for services

without visiting the bank, won the competition. This

trend and this effect of the pandemic on the sector are

positive for clients who will have access to the

services of different banks, regardless of their

residence region.

5 CONCLUSIONS

Thus, the Covid19 pandemic has identified a number

of problems, but it has been proven by theory and

practice that their competent solution will lead to an

increase in the services efficiency, an increase in

profits, and a high-quality resources distribution. The

pandemic, together with the macroeconomic

landscape, intensifies the financial institutions

competition for clients and shifts the focus towards

transactional income. Over the next several years, the

concept of paying for high-quality banking services

will strengthen on the market. The segmentation of

the customer base will begin to develop, and

differentiated tariffs will be introduced more actively.

Consumers will gradually become accustomed to the

fact that banking services, like any service, must be

paid for, and free services will become less and less.

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