PLC Global Finance update for February 2009: Russian Federation

Practical Law UK Articles 6-385-2008 (Approx. 4 pages)

PLC Global Finance update for February 2009: Russian Federation

by White & Case LLP

Financial institutions

Central Bank issues new directive on the mandatory reserves of credit organisations

On 19 January 2009 the Central Bank issued Directive No. 2170-U regarding the mandatory reserves for various obligations of credit organisations. The Directive entered into force on 19 January 2009.

Russian credit organisations are required to deposit certain reserve funds on non-interest bearing accounts with the Central Bank. Currently, such mandatory reserves for a credit organisation's obligations of each category (that is, those to non-resident banks in rubles or foreign currency; those to individuals in rubles; and other obligations in rubles or foreign currency) are set at 0.5%.

The Directive provides that these mandatory reserves will be gradually increased and will be:

1.5% as of 1 May 2009.
2.5% as of 1 June 2009.

Central Bank directives are amended to facilitate mergers and accessions of Russian banks

On 30 December 2008, the Law "On Banks and Banking Activity" and certain other laws were amended. The amendments seek to:

Improve the legal framework for the reorganisation (by merger, accession, division, spin-off or transformation) of Russian companies, including credit organisations.
Expand the disclosure requirements.
Limit creditors' rights to accelerate their claims in connection with the reorganisation.

Also on 30 December 2008, the Central Bank issued Directives Nos. 2162-U, 2163 U and 2164-U simplifying the procedures for reorganising credit organisations by merger and accession. The Directives entered into force on 20 February 2009 and are a further step forward in improving the legal framework for reorganisation of Russian credit organisations.

The Directives amend, among other things, the June 2003 Central Bank Regulation No. 230-P, and the January 2004 Central Bank Instruction No. 109-I, to simplify procedures for mergers and accessions of credit organizations.

Under the amendments, the documents required for the state registration of a credit organisation established as a result of merger, or amendments to constituent documents of an acceding credit organisation, must be submitted to the Central Bank head office. The term for considering the documents is one month.

Further, the required documents (or their drafts) may be submitted to the Central Bank head office early in the reorganisation process (including before the corporate resolutions on the reorganisation are adopted) so that the Central Bank can confirm their compliance with the law.

Rules on the formation by banks of reserves to cover potential losses in loans are simplified

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.

PLC Global Finance update for February 2009: Russian Federation | Practical Law