Bank of Russia sets new requirements for making provisions under MFO loans

Microfinance organisations (MFOs) will be obliged to make provisions for all types of loans they issue. The provision size may exceed the established minimum. The draft ordinance has been prepared by the Bank of Russia to bring the approaches to provision formation in line with the requirements of the industry accounting standards.

It is expected that the new requirements will not only facilitate a more efficient hedging of loan default risks but will also mark a new stage in the implementation of incentive-based regulation of business financing for MFOs.

The draft ordinance, in particular, provides for lower minimum reserve rates for loans extended to small and medium-sized enterprises (SMEs) and secured by state or municipal guarantees as part of SME support.

At the same time, the draft document sets forth cases when the minimum reserve rate must be increased by at least 10 pp. of the minimum level (the borrower's licence has been cancelled; the borrower has been removed from the register; payments are overdue for over 180 days within one year; a previously assigned loan agreement has been purchased) and when the minimum reserve rate must be set at 99% (documents confirming the conclusion of a loan agreement or the acquisition of claims under a loan agreement are absent; the borrower has been recognised as insolvent (bankrupt); the borrower is subject to bankruptcy proceedings; or the borrower is a legal entity is undergoing liquidation).

The draft also sets the types of collateral that cannot be used as security, and the events that, should they arise, mean security cannot be taken into consideration when forming loan provisions.  Furthermore, the document introduces the term ‘high quality collateral’ meaning collateral whose value is greater than or equal to the value of the loan.

The draft ordinance provides for a discounted reserve rate for mortgage loans if the debt does not exceed 70% of the estimated value of the real estate (similar to credit institutions).

The ordinance will come into force six months after its adoption.