The Bank of Russia modified the procedure of formation of reserves to cover possible losses by loans

On December 30, the Bank of Russia informed of introduction of modifications of the procedure of formation by credit institutions of reserves to cover possible losses by loans.

In compliance with the effective law, credit institutions are bound to form reserves to cover possible losses by loans, due to the appraisal of a credit risk. Presently, they are required to form reserves by loans granted to corporations with a robust financial standing as follows: 0% if the loan is services well, 1-20% if it is serviced on an average level, and 21-50% -if badly. As concerns loans to companies with an average standing, financial institutions have to form reserves accounting 1–20%, 21–50%, 50–100% respectively, due to the quality of debt servicing. Finally, for companies with a poor standing these indicators account for 21–50%, 50–100%, 100% respectively. Reserving funds diminishes the volume of resources available to commercial banks to carry out current operations.

In compliance with the novelties, credit institutions are granted the right until December 31, 2009, not to downgrade the appraisal of the quality of debt servicing by loans relative in the event the length of the overdue indebtedness by the body of the debt or interest grows up to 30 calendar days vis-à-vis the effective deadline; loan restructuring (for instance in the event of a change of the currency in which the loan was denominated, change of the deadline of the debt (its principal body and/or interest) repayment, or in an interest rate) in the period since October 1, 2008; use of the loan since October 1, 2008, to repay a debt by a loan earlier granted to the borrower.

This move is aimed at supporting national banks in the crisis situation. We believe it is rational in the current economic conditions. Meanwhile, it is necessary to understand that an overly liberal treatment of credit risks appraisal may derail the financial stability. In other words, this move should be considered exclusively as a temporary aid to the national financial system.

P. Trounin, Head of the Department of Monetary and Credit Policy