The Russian banking sector, dominated by state-controlled Sberbank and VTB, has so far escaped the worst of the economic downturn but they have recently been accepting collateral at no discount to the market value.
A report from management consultancy Oliver Wyman said that the practices of issuing all home loans at fixed interest rates and most often in foreign currency exposes them to significant interest rate and forex risk.
It urged the banks to address the risks posed by home loans and lending to construction companies, small businesses and consumers.
Property prices are already inflated in large Russian cities after an unprecedented construction boom in recent years, the report said, and property price falls, which devalue loan collateral, usually coincide with recession.
'For banks which lend to those companies it is a double whammy, said Sorin Talamba, head of financial risk management Central and Eastern Europe at Oliver Wyman.
Real estate prices in Kazakhstan where foreign loans accounted for about 60% of the bank's liabilities have fallen by 40% since banks there lost easy access to international capital markets last year.
'In Kazakhstan, Spain, United Kingdom, United States, and Ireland real estate prices fell by up to 50%. They never thought the prices would go down,' said Robert Maciejko, Oliver Wyman's managing director for Central and Eastern Europe.
He said there is some speculative component in Russian real estate prices. 'People did not buy real estate for themselves and hoped the price would go up. At some point they will have to sell and often this is what triggers the crisis,' he added.
In Russia foreign loans account only for about 18% of the banks' liabilities and although there is no immediate danger of a full-scale banking crisis Maciejko added; 'Crises happen when you least expect them.'
VTB, Russia's second largest bank, said it plans to increase its loans to the construction industry by 46% in 2008 as it sees no risks in the sector.
Recent figures indicate some slowdown in construction but analysts said it was too early to tell whether this was the start of a downward trend. But distressed real estate developers already numbered hundreds, according to one report.
