Expert RA

New CBR requirements for bank reserves might leave retail banks decapitalized

June 29, 2007

The Expert RA rating agency has put together an overview of the current state of play in the consumer lending market and of the pending shifts in the rules to regulate this segment.

"Entry into force of CBR Regulation #254-P is likely to be apocalyptic for some retail banks", says P. Samiev, director of the Expert RA rating agency's department for financial institution ratings. — "The need to be at par with the new standards for bank reserves might leave local retail banks heavily decapitalized.

Notably, the document's new language relating to the rules for shaping consumer loan loss provisions actually boils down to the following. While in the past each bank would proceed on its own to define the pertinent loan uniformity attributes, now consumer loans are supposed to be categorized into separate portfolios depending upon the presence and gravity of delinquencies, with each type of portfolio being appropriately tied to the minimal CBR-fixed loan loss provision value. Importantly, this novelty might trigger meaningful implications not only for certain banks but also for the entire banking system.

Banks with a low level of retail portfolio delinquencies accounted for more than 70% of the entire value of consumer loans provided by the top-30 retail banks in the course of 2006, according to an Expert RA research study recently completed . However, mention ought to be made of the higher-risk-group of banks including market players whose capital holdings are dwarfed by the value of their assets but whose loan delinquency levels are in excess of the market average. To point out, some of those banks include consumer lending leaders . Since a meaningful portion of their uniform portfolios would be featuring delinquencies, they would have to be passed as lower-quality-category consumer loan portfolios. Following the entry into force of updated Regulation #254-P governing that kind of portfolios, relevant banks would be compelled to build up 5%-75% reserves (depending upon the stretch of delinquencies), the measure requiring a diversion of relevant amounts from the uncommitted capital. With the augmented prudential provisioning requirements (another CBR novelty) being put into effect, one can likewise see a tightening of policies elsewhere: contraction of liquidity capacities along with decapitalization through loan loss provisions being raised.

"Today, apart from the aforementioned big-foot consumer lending market players , the higher-risk group might feature a large number of smaller banks, regional ones included, having difficulties in building up the requisite capital stocks and, concurrently, lacking the right resources needed to assure quality management of the applicable lending risks", specified P. Samiev. – "Notably, unlike with the larger players (Russky Standart, Citibank and other banks), the entry into force of updated Regulation #254-P might have lethal consequences for smaller banking institutions: from the complete closure of consumer lending business all the way through the license revocation on account of the fixed capital adequacy standards failing to be honored".

Importantly, the situation at hand is unlikely to produce a major banking crisis . The more likely scenario would include major players adjusting their aggressive policies (featuring low requirements for borrowers to secure solid gains through high rates), just as mid- and smaller-sized banks (that entered the race belatedly) encountering problems as they try to catch up with the market leaders.

Discuss in the forum