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Rules on the formation by banks of reserves to cover potential losses in loans are simplified
Practical Law Legal Update 1-385-2020 (Approx. 3 pages)
Rules on the formation by banks of reserves to cover potential losses in loans are simplified
by White & Case LLP
| Published on 05 Mar 2009 • Russian Federation |
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The Central Bank has issued directives relating to the reserves that banks must hold against losses on loans and to evaluating the credit risk for loans. Among other things, the directives amend the rules and criteria that credit organisations must apply when defining a loan's quality category for the purposes of calculating the required reserve amounts.
Central Bank amends regulations on reserves that banks must hold to cover loan losses
On 19 December 2008 the Central Bank issued Directive No. 2155-U amending its Regulation No. 254-P "On the Formation of Reserves by Credit Organisations to Cover Potential Losses in Loans, Loan Indebtedness and Other Similar Indebtedness," dated 26 March 2004. The Directive (save for a few exceptions) will enter into force on 1 July 2009.
The Central Bank Regulation No. 254-P provides that a credit organisation operating in Russia must establish reserves to cover possible losses arising from operations with financial instruments (such as from loans granted by the organisation). The amount of reserves to be established depends on a loan's quality category (or a type of portfolio of similar loans).
The new Directive amends the rules on defining a loan's quality category. In particular, it allows a credit organisation to define a loan's quality category based on "other substantial facts" than those specified in Regulation No. 254-P (for example, a loan may be assigned to a lower or higher category of quality based on the information on a borrower's defaults or due performance under similar loans granted by other credit organisations, respectively).
Further, the Directive amends the rules on assessing a borrower's financial standing, which affects the quality category of the loan granted to it. In particular, it introduces the "significance" test with respect to the borrower's indebtedness that impairs its financial standing (the criteria of such significance are to be determined in a credit organisation's internal documents).
The Directive also allows credit organisations to keep a loan that goes into default in a portfolio of similar loans, if it does not exceed RUB100,000 (about EUR2,230 (as at 1 March 2009)) (as opposed to RUB1,000 currently).
It also allows credit organisations to write-off uncollectible debts that do not exceed 0.5% of their net worth (capital) in a simplified procedure (that is, based solely on a credit organisation's professional judgement).
Central Bank issues new directive on evaluating credit risk for loans
On 23 December 2008 the Central Bank issued Directive No. 2156-U "On the Peculiarities of the Evaluation of Credit Risk for Loans, Loan and Similar Indebtedness." The Directive entered into force on 31 December 2008 and will be effective until 31 December 2009.
When evaluating credit risks for its loans, a credit organisation can use either criteria for servicing a loan defined by Central Bank Regulation No. 254-P (see above) or can evaluate the "quality of servicing its loans" as set out by this new Directive. The Directive lists additional criteria that will and will not affect the loan's quality category.
In particular, a credit organisation is allowed not to downgrade the quality of servicing its:
- Loans granted to companies overdue for up to 60 days (as opposed to 30 days under Regulation No. 254-P).
- Loans used by borrowers as of 1 October 2008 to repay loans provided to them earlier.
- Certain restructured loans after 1 October 2008.