Russia's banking sector is recovering with greater access to liquidity globally and signs of an economic rebound. But industry leaders say consolidation is still needed, with Non Performing Loans still to be addressed.

Russia was quick to respond to the liquidity crunch when the crisis deepened in late 2008. The Central bank pumped money into the country's banks. But that wasn’t enough to avoid toxic loans which are expected to amount to 10% by the year end.

The President of Alfa-Bank says there are lessons to be learned from that. He advocates consolidation.

“Following the Asian crisis and the crisis in Europe in the 1990s, the number of banks was halved. There are about 1000 banks in Russia, but we don’t need that many. We have 200 banks, which cover more than 90% of all assets and deposits. But whether such consolidation actually happens depends on monetary authorities.”

Consolidation should see small and underperforming banks sell their portfolios to bigger players. At the same time, in order to absorb non-performing loans, banks will require more capital. But since foreign borrowing has been limited, banks still rely on state support.

That support grew significantly during the credit crisis, when according to Aleksey Ulyukaev, Deputy Chairman of the Central Bank, the decision was made to back the system rather than allow non performing loans bring down individual banks.

“During the crisis the Central Bank took some unprecedented measures of support – for example unsecured loans. We knew what risks we were taking, but in such situations it’s better for the Central Bank to take the challenge than to risk the whole banking system.”

The Central Bank actions have helped save the banking system, but they haven’t eliminated the problem of non performing loans. In the longer term consolidation will mean that they move towards larger banks better able to manage them or write them off. But with significant volumes of short term loans, provided early this year, and requiring renegotiation by early next year, the catalyst for that consolidation could be approaching.