Bank of Russia raises macroprudential requirements for unsecured consumer loans

Effective from 1 September 2023, the Bank of Russia is raising risk-weight add-ons for unsecured consumer loans. The measure aims at accumulating macroprudential capital buffers and strengthening the resilience of banks in case of rising losses on consumer loans.

In making this decision, the Bank of Russia Board of Directors was guided by the following.

Currently, the banks’ macroprudential capital buffer for unsecured loans totals ₽132 billion, with the loan portfolio standing at ₽12.4 trillion¹ (1.2% of the portfolio net of loan loss provisions). In 2022, the entire accumulated macroprudential capital buffer for unsecured loans of ₽617 billion (5.8% of the portfolio net of loan loss provisions) was released to support banks and help them restructure the loans of borrowers hit by sanctions.

At present, outstanding amounts under unsecured consumer loans are rising rapidly. In May 2023, they grew by 1.7%² (vs 1.2% in April and 1.4% in March).

To ensure the balanced credit mix and prevent the accumulation of excessive debt burdens of individuals, the Bank of Russia is going to tighten macroprudential limits on new loans with maturities over five years⁴ to borrowers with DSTI³ over 80%, with an effect from 2023 Q3. This measure made it possible to reduce the share of loans issued to borrowers with DSTI over 80% from 36% in 2022 Q4 to 29% in 2023 Q1. The impact of macroprudential limits on credit cards is lagged, however, because of the portfolio renewal process. That said, growth in lending is accelerating due in part to an increase in new credit card loans accounting for over 40% of all new loans since mid-2022 compared to 25% in 2021. Despite macroprudential limits, the acceleration in lending is also associated with a higher demand for loans among households, including those with low debt burdens.

In this situation, in order to improve the resilience of banks in case of rising losses on consumer loans, the Bank of Russia applies add-ons to risk weights, which help accumulate additional capital buffers to be used by banks in the future. At present, only the most risky loans with high EIR⁵ and DSTI values are subject to the risk-weight add-ons (Table 1).

Table 1. Risk-weight add-ons for consumer loans issued after 1 March 2022

Given the high profitability of the banking sector (29% in 2023 Q1) and the accelerating recovery of consumer lending, the Bank of Russia deems it reasonable to resume the accumulation of macroprudential capital buffers by banks. Due to the above, new add-ons for the most risky consumer loans will be effective starting 1 September as set forth by Table 2.

Table 2. Risk-weight add-ons for consumer loans issued after 1 September 2023

The add-ons will produce a stronger effect on credit cards, as their EIR is higher than that on cash loans. The new add-ons will cover 82% of new credit card loans and 66% of new cash loans. The average add-on on new loans will increase from 0.21 to 0.89 (vs 1.23 in early 2022).⁸ As the add-ons will apply to new loans, the capital buffer will accumulate gradually. In one-year time, it will stand at 6.5% of the consumer loan portfolio net of loan loss provisions thanks to the add-ons. This figure may be lower if the credit mix shifts towards less risky loans, in part as a result of the effect of the macroprudential limits.

Higher add-ons may lead to a certain slowdown in the further growth of consumer lending and a concurrent improvement in banks’ resilience in case of rising losses on consumer loans.

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