Bank of Russia releases banks’ macroprudential capital cushion on consumer loans and returns to pre-pandemic macroprudential requirements

The Bank of Russia’s Board of Directors decided to cancel from 30 June 2021 add-ons on unsecured consumer loans issued before 1 April 2020 and raise risk-weight add-ons on unsecured consumer loans issued from 1 July 2021.

Making its decision on risk-weight add-ons, the Bank of Russia Board of Directors was guided by the following.

In 2021, the quality of the retail loan portfolio will largely depend on the ability of borrowers whose loans have been restructured to regain their solvency. Analysis of data received from the largest credit history bureaus suggests that the restructuring period had been completed by 1 January 2021 for the majority of consumer loans restructured during the pandemic (about 75%). Given the credit quality of loans that were restructured in 2020, it can be expected that losses on restructured loans will not exceed 70–90 billion rubles in 2021. This estimate is below Bank of Russia previous estimates, which is explained by a faster economic recovery. In this context, the Bank of Russia is winding up the earlier introduced regulatory easing as planned and resumes the application of the previously existing macroprudential requirements for new loans.

By 1 July 2021, banks are to set up loan loss provisions in full amount for household and SME loans which have been restructured because of the pandemic. Due to the above, the Bank of Russia decided to cancel from 30 June 2021 risk-weight add-ons on unsecured consumer loans issued before 1 April 2020. This measure will help free up banks’ capital worth 124 billion rubles¹ on a permanent basis. This will support their capital adequacy ratios given the potential need to set up additional provisions for bad restructured loans after the termination of the regulatory easing. Moreover, banks will be able to use this capital cushion to cover losses on other loans, specifically SME loans.

Amid the active rebound of the Russian economy after the pandemic, there is a pick-up in growth in the segment of unsecured consumer lending. In March 2021, outstanding loans increased by 1.9%. In 2021 Q1, the average growth of outstanding amounts exceeds 15% YoY (seasonally adjusted). Amid the faster growth of consumer lending, households’ debt burden is also rising. The ratio of scheduled loan repayments to household disposable income over 2020 has already picked up from 10.7% to 11.7%. Due to the above, starting 1 July 2021, the Bank of Russia has decided to raise add-ons on unsecured consumer loans up to the values that were in effect before the start of the pandemic (according to Table 1).

Table 1. Add-ons to risk weights on unsecured consumer loans issued from 1 July 2021

Table 2. Add-ons to risk weights on unsecured consumer loans issued from 1 September 2020 to 1 July 2021

*n/a — no add-on is applied to the risk weight.

The increase in add-ons will help reduce the incentives for banks to expand lending by issuing loans to borrowers with high debt-to-income (DTI) ratios, as well as gradually restore the value of the capital cushion and insure banks’ resilience to potential stress scenarios.

¹ Based on the estimate as of 1 April 2021.

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