The Bank of Russia Sets Tougher Requirements to Evaluation of Credit Risk

It is to be reminded that on December 30, 2008 the Bank of Russia introduced amendments to the procedure for setting up by credit institutions of possible loan loss provisions. Under such amendments, until December 31, 2009 (on December 14, 2009 the effect of the Instructions in question was extended till June 30, 2010) credit institutions were granted the right not to deteriorate the evaluation of the debt service relative to the applicable norms in case:

• the principal debt or loan interests are overdue by more than 30 calendar days compared to their current maturities;
• restructuring of the loan (for instance, change of the currency which the loan was denominated in, maturity of the loan (the principal debt and (or) loan interests) and the interest rate) took place in the period starting fr om October 1, 2008;

• the loan was used (from October 1, 2008) for repayment of an earlier loan received by the borrower.

In accordance with the new instructions:

• if the loan is not overdue (as of the date of evaluation) evaluation of the debt service of such a loan remains unchanged as compared to that which was carried out earlier in accordance with Instructions of December 30, 2008;
• if the principal debt and (or) loan interests are overdue as of the date of evaluation of the loan and if the principal debt and (or) loan interests become overdue starting from July 1, 2010, including repaid ones as of the date of evaluation, evaluation of the debt service of such loans is carried out in accordance with the requirements which came into effect starting from December 2008;

• for the purpose of evaluation of loans which were restructured in the period wh ere less rigid norms were in effect, as well as loans which were extended within the specified period and used for repayment of the loan received earlier by the borrower, evaluation of debt service is to be proceeded from such a criteria of evaluation as was determined with regard to less rigid norms till the date of fulfillment by the borrower of its obligations or until the next loan restructuring or refinancing is carried out starting from July 1, 2010, or other factors arise to require amendment of evaluation of the debt service criteria.

Thus, the Bank of Russia is gradually returning to the pre-crisis requirements in evaluation of the credit risk. Mitigation of norms was aimed to support Russian banks during the crisis and permitted them to set up less loan loss provisions.

At present, the situation in the banking sector has improved, and it permits the regulator to toughen requirements to evaluation of the credit risk by bringing it into line with common norms.  

P.V. Trunin, PhD (Economics), Head of the Laboratory of Monetary and Credit Policy