Bank of Russia Is Planning to Limit Granting Unsecure Loans to People
According to the Deputy Chairman of the Central Bank of Russia M. Sukhov, the Bank of Russia is planning a twofold increase of the reservation rate for unsecure cash loans from March 1, 2013, and to increase the risk coefficients for cash loans while calculating the banks Cooke Ratio (Н1).
The growth rates in the retail segment of bank lending are really the highest during the post-crisis period. Over the past 12 months, the household debts under bank loans grew by 43%, including accommodation loans (the mortgages among them) which grew by 30%, the car loans (by 24%) and other unsecure loans (by 58%).
However, from the point of view of borrowers' insolvency risks and consequently, the risks for the banks' stability, it is not the loan portfolio growth rates that are the issues of the most concern, (the loans sometimes grew faster before the crisis) but the increased level of debt burden on the household incomes and assets. Thus, the cumulative loan debt / household incomes ratio has already exceeded the crisis maximum (18% in September 2008) having reached 21% in September 2012. And the debt burden on the household incomes in III quarter exceeded 10% which is comparable to the similar indicator in the USA.
The measures proposed by the Bank of Russia are aimed mainly at slowing down the growth in the unsecured lending segment with high interest rates for credits. The cash loan reserves which are not secured by the pledged housing or automobiles now are equal for such loans to 7% of the debt volume, or 280 bln rubles. However, it is necessary to increase only the reserves for immature loans or for those loans, the maturity of which does not exceed 30 days. The amount of reserves for such loans formed by the banks for all types of loans is now 43 bln rubles, about 80% of which, according to our estimation, refer to unsecure loans. In addition, the new standards of reservation are supposed to be applied only to the new loans granted from January 2013. The reservation percentage will go up by 1-3 pp., so the banks will be able to increase the rates for unsecure loans to compensate the increasing allowances for loan loss provisions. If the average annual interest rate for the short-term loans is equal to 25% it will be noticeable, but it is hardly to have critical influence upon the indebtness dynamics. Thus, this measure is unlikely to radically change the way the retail credit market looks.
Another measure is aimed at limiting the interest rates for the loans. From July, the high –interest-loans for the population will have increased coefficients when used in the formula for Cooke Ratio calculation. Thus, for the loans granted in rubles the increased rates of interest will be considered those exceeding 25% per annum. The increasing coefficient for the loans with the interest lower than 35% or equal to it will be 1.1 (i.e. the risk of that loan will be considered 10% higher than that for the "cheap" loans). For the loans with annual interest from 35 to 45% the coefficient will be equal to 1.4, from 45 to 60% – it will be 1.7 and if the interest rate exceeds 60%, the coefficient will be 2. Thus, the banks will have to account for the most expensive loans in twofold amount.
To evaluate the full effect of this measure upon the status of the bank sector it is necessary to have more detailed information about the certain banks than that disclosed by the Bank of Russia. Basing on the open format of the banks' reporting, according to the results of the III quarter, the average rate of return for the loans granted to individuals exceeded 25% per annum, i.e. these banks are sure to face either reduction of the capital adequacy or will have to review their interest policy.
In fact, there are much more banks having at least one expensive loan in their assets , so, no doubt that this measure is sure to touch upon the wide range of banks which will have to either reduce the yield from the retail lending or to look for additional sources for their capital replenishment.
M. Yu. Khromov - the leading expert of the Center of Structural Investigation
However, from the point of view of borrowers' insolvency risks and consequently, the risks for the banks' stability, it is not the loan portfolio growth rates that are the issues of the most concern, (the loans sometimes grew faster before the crisis) but the increased level of debt burden on the household incomes and assets. Thus, the cumulative loan debt / household incomes ratio has already exceeded the crisis maximum (18% in September 2008) having reached 21% in September 2012. And the debt burden on the household incomes in III quarter exceeded 10% which is comparable to the similar indicator in the USA.
The measures proposed by the Bank of Russia are aimed mainly at slowing down the growth in the unsecured lending segment with high interest rates for credits. The cash loan reserves which are not secured by the pledged housing or automobiles now are equal for such loans to 7% of the debt volume, or 280 bln rubles. However, it is necessary to increase only the reserves for immature loans or for those loans, the maturity of which does not exceed 30 days. The amount of reserves for such loans formed by the banks for all types of loans is now 43 bln rubles, about 80% of which, according to our estimation, refer to unsecure loans. In addition, the new standards of reservation are supposed to be applied only to the new loans granted from January 2013. The reservation percentage will go up by 1-3 pp., so the banks will be able to increase the rates for unsecure loans to compensate the increasing allowances for loan loss provisions. If the average annual interest rate for the short-term loans is equal to 25% it will be noticeable, but it is hardly to have critical influence upon the indebtness dynamics. Thus, this measure is unlikely to radically change the way the retail credit market looks.
Another measure is aimed at limiting the interest rates for the loans. From July, the high –interest-loans for the population will have increased coefficients when used in the formula for Cooke Ratio calculation. Thus, for the loans granted in rubles the increased rates of interest will be considered those exceeding 25% per annum. The increasing coefficient for the loans with the interest lower than 35% or equal to it will be 1.1 (i.e. the risk of that loan will be considered 10% higher than that for the "cheap" loans). For the loans with annual interest from 35 to 45% the coefficient will be equal to 1.4, from 45 to 60% – it will be 1.7 and if the interest rate exceeds 60%, the coefficient will be 2. Thus, the banks will have to account for the most expensive loans in twofold amount.
To evaluate the full effect of this measure upon the status of the bank sector it is necessary to have more detailed information about the certain banks than that disclosed by the Bank of Russia. Basing on the open format of the banks' reporting, according to the results of the III quarter, the average rate of return for the loans granted to individuals exceeded 25% per annum, i.e. these banks are sure to face either reduction of the capital adequacy or will have to review their interest policy.
In fact, there are much more banks having at least one expensive loan in their assets , so, no doubt that this measure is sure to touch upon the wide range of banks which will have to either reduce the yield from the retail lending or to look for additional sources for their capital replenishment.
M. Yu. Khromov - the leading expert of the Center of Structural Investigation