Community Banking in Russia

The analysis of banks referred to as community banks in the international literature is a widespread application problem within the scope of regulators’ concerns. Such banks are characterised by closer relationships with borrowers (relationship banking), as opposed to a formalised and automated approach (transactional banking). There is no consensus on the method for defining community banks. We presented an algorithm for determining community banks, taking into account the specifics of the Russian banking sector and revealed the following. A community bank is a profitable bank, in the funding structure of which half of the funds are funds from individuals, and in the allocated funds the share of the corporate loan portfolio predominates. Community banks have a balanced funding structure. Profitability of placement is consistently higher than the cost of funding for funds from legal entities, but has a very small differential for funds from individuals. The main factor in the growth of ROA for a community bank will most likely be an increase in net interest income, the main factor in decreasing ROA is the additional formation of reserves for corporate loans (at the same time, the loan portfolio of the community bank is of relatively high quality). Although the total loan portfolio of community banks is relatively small, their operations are deemed crucial in certain segments of the economy. The reason is that such banks possess a number of important features. The main purpose of our study is to explore and outline the differences between community banks and other (larger) banks. Identifying such differences is essential to understand the degree of heterogeneity in the banking sector. First, community banks are ready to deal with small borrowers and specialise in niche markets and industries. Approximately one third of the volume of corporate loans issued by a community bank are loans to small borrowers. Second, they are open to working with financial instruments of limited demand and/or customising products to meet the needs of a small group of clients. In addition, community banks are willing to handle loans that are limited in size and are not massmarket, and to take non-standard approaches to setting interest rates. The bulk of corporate loans issued by community banks will most likely go to companies that also have loans from other banks that are not classified as community. In addition, community banks are ready to work with medium-sized (and not massive) loans and approach setting rates in a customised manner. The community bank is active in the short-term corporate lending segment. At the same time, in lending to both medium/large and small borrowers, loans at a fixed rate and issuance under credit line agreements (CL) are more likely to prevail. In general, community banks show similar results relative to other groups. The findings rather indicate the stable position of community banks in the corporate lending market.