Bank of Russia’s decision on regulatory easing and macroprudential measures

By the moment, the situation in the Russian financial sector has considerably improved as compared to the start of the pandemic. Specifically, financial markets have been stabilising, Russian regions have been progressively lifting their restrictions, and financial institutions have adjusted their business processes to the conditions of the pandemic.

However, the economic decline and a decrease in companies’ and households’ incomes are pushing credit risks upwards. The regulatory easing has supported loan restructuring and helped a part of borrowers restore their financial standing. This regulatory easing should be cancelled smoothly so as to enable banks and other financial institutions to adjust and avoid a reduction in lending to the economy. Nonetheless, the gradual termination of these measures is necessary since adequate risk assessment may secure long-term sustainability of the financial sector. The Bank of Russia recommends that banks and other financial institutions rely on the standard regulations in their provisioning schedules and take into account the end dates of other temporary measures when making their decisions on dividend payouts and bonuses to risk takers.

The majority of the pandemic-related measures were approved by the Bank of Russia for the period from 1 March through 30 September 2020. The Bank of Russia has made the decision to extend a number of regulatory relaxations, implement a range of new countercyclical measures to support the economy, and terminate a range of temporary measures launched due to the pandemic.

1. Measures to support households

1.1. Measures to support individuals suffering a material income decline and/or affected by COVID-19

In order to help households recover financially, the Bank of Russia gives the following recommendations:

• through 31 December 2020, credit institutions and microfinance organisations should continue to restructure loans to individuals facing a material decline in their incomes and/or affected by the coronavirus, within their in-house programmes; and through 31 December 2020, they should not charge any penalties and fines on restructured loans;
• through 31 December 2020, credit institutions should restructure loans by converting them from foreign currency to rubles if relevant applications are received from borrowers;
• through 31 December 2020, credit institutions and microfinance organisations should suspend procedures for the eviction of debtors (ex-owners and persons living together with them) from the housing which has been foreclosed by creditors;
• housing savings cooperatives (HSC) should implement measures aimed at the suspension through 31 December 2020 of the eviction of HSC members (former HSC members and persons living together with them) from their housing due to their failure to perform or improper performance of their obligations to pay contributions to HSCs;
• through 31 December 2020, credit institutions and microfinance organisations should not enforce the mortgage if an individual borrower fails on his/her obligations under the agreement after 1 March 2020 due to a material decline in his/her income (co-borrowers’ total income) and/or because the borrower and/or his/her family members living together with him/her have confirmed COVID-19;
• through 31 December 2020, insurers should approve insured persons’ applications for an extension of an insurance settlement term or for a deferral of payments under voluntary insurance agreements, and should not charge a fee (fine, penalty) or impose any other sanctions for insured persons’ failure to properly perform their voluntary insurance agreements over the period of their temporary incapacity for work;
• while using borrower assessment models, creditors and credit history bureaus should not take into account loan restructuring events associated with the coronavirus outbreak, including loan restructuring under creditors’ in-house programmes completed in 2020 Q4.

Concurrently, the Bank of Russia allows creditors to employ the following regulatory relaxations:

• Loss provisioning for loans restructured before or on 31 December 2020 (including over the period from 1 March through 30 September 2020) should be completed by 1 July 2021.
• Through 31 December 2020, for the purposes of applying add-ons to risk weights for loans restructured over the period from 1 March through 31 December 2020, credit institutions are allowed not to recognise a loan as restructured and not to calculate a debt service-to-income ratio (DSTI).
• Through 31 December 2020, credit institutions are allowed not to apply macroprudential add-ons for loans granted to borrowers with confirmed COVID-19.
• Through 31 December 2020, when calculating their capital adequacy ratios, microfinance organisations are allowed not to recognise loans as restructured and not to apply adjustment factors to loans granted to borrowers whose DSTI exceeds 50%. By 1 July 2021, such adjustment factors shall be applied in full to loans where DSTIs exceed 50%.

1.2. Measures to support consumer lending

1.2.1. Lower add-ons for newly issued unsecured consumer loans

The pandemic outbreak induced a shrinkage of the loan portfolio in unsecured consumer lending. The growth rates of receivables declined to — 1.7% in April, — 0.2% in May, and 0.4% in June. According to the preliminary findings of the survey of major banks,¹ total debt contracted by 0.3% in July. The slowdown in lending is associated with both weaker demand for loans among households (the number of loan applications decreased by 20–25% in Q2 compared to Q1) and the tightening of banks’ requirements for borrowers.

In 2020 Q2 — Q3, a part of households have been experiencing a temporary slump in their incomes amid the restrictions in place. Even if their incomes recover, this fact will entail a rise in new borrowers’ DSTIs,² and thus more loans will be subject to higher macroprudential add-ons. In addition, over the course of the loan portfolio turnover, the portion of loans, which are subject to the add-ons raised from 1 October 2019, is growing (over 2020 H1, the average add-on was up from 65 pp to 71 pp). This is increasing the requirements for banks’ capital and slowing down lending.

In order to support retail lending in this environment, the Bank of Russia has decided to reduce add-ons to risk weights for unsecured consumer loans issued beginning on 1 September 2020, in accordance with Table 1 below.

Table 1. Add-ons for ruble-denominated unsecured consumer loans granted on or after 1 September 2020

Table 2. For reference: add-ons for ruble-denominated unsecured consumer loans granted from 1 October 2019 through 31 August 2020

This reduction in add-ons will be mostly applied to lowest-risk borrowers with low DSTIs; therefore, the new structure of add-ons will be still discouraging credit growth. Moreover, the decrease in add-ons will not cause a rise in capital requirements for the loan portfolio as banks issue new loans. This will support steady lending growth rates and promote loan affordability for households.

1.2.2. Lower add-on for earlier issued unsecured consumer loans

Over 2020 H1, banks increased their loss provisions for retail loans by 102 billion rubles, year-on-year. In order to offset actual procyclical losses incurred by credit institutions due to the deteriorated quality of the unsecured consumer loan portfolio, as well as potential losses on restructured retail loans, the Bank of Russia, in line with the countercyclical macroprudential policy, has decided to cancel add-ons to risk weights for ruble-denominated unsecured consumer loans issued before or on 31 August 2019.

The cancellation of these add-ons is equivalent to an increase in banks’ capital by 168 billion rubles. This will support banks’ ratios amid growing loss provisioning expenses and improve their lending potential. Banks will still preserve the macroprudential buffer for unsecured consumer loans amounting up to 440 billion rubles that was accumulated over the past year when the add-ons were in place. In the future, the Bank of Russia will continue to pursue the countercyclical policy if banks’ losses on issued loans go up.

1.3. Measures to support individuals with expired IDs

For individuals to be able to receive financial services and with account of Order of the Russian Ministry of Internal Affairs No. 410, dated 9 June 2020, ‘On Setting the Procedures and Timeframes for Reissuing Documents Listed in Clause 1 of Russian President’s Executive Order No. 275, Dated 18 April 2020, and for Issuing Russian National Passports Identifying Russian Nationals in the Russian Federation to Russian Nationals Listed in Clause 2 of Russian President’s Executive Order No. 275, Dated 18 April 2020’ officially registered by the Ministry of Justice of the Russian Federation under No. 58802 on 30 June 2020, the Bank of Russia gives the following recommendations:

• through 31 December 2020, credit and non-bank financial institutions should continue to provide services to clients if the identification document of an individual client, a client’s representative, beneficiary, or beneficial owner expired during the period from 1 February through 15 July 2020;
• through 31 December 2020, credit and non-bank financial institutions should not reject new individual clients only because their identification documents expired during the period from 1 February through 15 July 2020;
• by 31 January 2021, credit and non-bank financial institutions should update information on identification documents that expired during the period from 1 February through 15 July 2020;
• through 30 September 2020, credit and non-bank financial institutions should continue to provide services to clients if the identification document of an individual client, a client’s representative, beneficiary, or beneficial owner expired before 1 February or after 15 July 2020;
• through 30 September 2020, credit and non-bank financial institutions should not reject new individual clients only because their identification document expired before 1 February or after 15 July 2020;
• by 30 October 2020, credit and non-bank financial institutions should update information on identification documents that expired during the period before 1 February or after 15 July 2020.

2. Measures to support SMEs

Small and medium-sized enterprises (SME) have been hardest hit by the pandemic and the related restrictions. In order to support SMEs’ capability to service their loans, the Bank of Russia gives the following recommendations:

• through 31 December 2020, credit institutions and microfinance organisations should continue to restructure loans to SMEs under creditors’ in-house programmes, and should not charge any penalties and fines on restructured loans over the period through 31 December 2020;
• through 31 December 2020, credit institutions should restructure loans by converting them from foreign currency to rubles if relevant applications are received from borrowers — SMEs;
• while using borrower assessment models, creditors and credit history bureaus should not take into account loan restructuring events associated with the coronavirus outbreak, including loan restructuring under creditors’ in-house programmes completed in 2020 Q4.

In addition, the Bank of Russia has decided to extend the regulatory relaxations related to loss provisions. Loss provisioning for loans restructured before or on 31 December 2020 (including over the period from 1 March through 30 September 2020) and for loans where microfinance organisations have exercised their right not to take into account the duration of overdue payments should be completed by 1 July 2021.

3. Measures to support lending to the economy

In addition to the range of measures supporting lending to the economy announced in the press release dated 24 July 2020, the Bank of Russia has made the decision to maintain the national countercyclical capital buffer at zero per cent, as well as to extend the following measures:

• banks may complete provisioning for loans to non-financial organisations (except SMEs) restructured before or on 30 September 2020 due to the pandemic within the Bank of Russia’s regulatory relaxations by 1 April 2021;
• through 31 December 2020, banks may rely on the valuation as of 1 January 2020 for calculating loss provisions where loans are backed by 1^st and 2^nd category collateral;
• by 31 December 2020, credit institutions should restructure corporate loans by converting them from foreign currency to rubles if relevant applications are received from borrowers, with provisioning to be completed by 1 April 2021;
• beginning on 1 March 2020 and through 31 December 2021, creditors should not apply add-ons to risk weights for foreign currency loans granted over the said period to manufacturers of medicines and medical materials and equipment, as well as for investments into foreign currency-denominated debt securities made by such organisations over the said period.

4. Other measures to support the financial sector’s potential to provide funding to the economy and to reduce regulatory burden

In order to support financial institutions and their capacity to promote economic recovery by providing financial resources to economic agents, as well as with account of the remaining restrictions affecting business processes in a range of financial institutions, the Bank of Russia has extended certain relaxations for financial institutions of the below-listed categories.

For credit institutions: the decision to waive enforcement measures against credit institutions (parent credit institutions of banking groups) pursuant to Part 4 Article 72 of Federal Law No. 86-FZ, dated 10 July 2002, ‘On the Central Bank of the Russian Federation (Bank of Russia)’ has been extended through 31 December 2020 in relation to credit institutions’ assets recognised on balance sheet accounts No. 604 ‘Fixed assets’, No. 608 ‘Lease’, No. 609 ‘Intangible assets’, and No. 619 ‘Real estate temporarily unused in operational activity’, if the above assets have not been revalued or tested for devaluation in accordance with Bank of Russia Regulation No. 448-P.³

For insurers: the decision to waive enforcement measures for the below-listed violations has been extended until 1 July 2021:

• violation of the requirement for the structure of assets insurance reserves are invested in, which is stipulated in Line 9 of the Annex to Bank of Russia Ordinance No. 4297-U, dated 22 February 2017, ‘On the Procedure for Investing Insurance Reserve Funds and the List of Assets Eligible for Investment’;
• violation of the requirement for the structure of assets an insurer’s equity (capital) is invested in, which is stipulated in Line 9 of the Annex to Bank of Russia Ordinance No. 4298-U, dated 22 February 2017, ‘On the Procedure for Investing Insurer’s Capital and the List of Assets Eligible for Investment’.

Cooperatives will not be subject to any enforcement measures through 30 June 2021 for breaching the legislative requirements for compliance with financial ratios and the size of reserve funds, if such violations were committed and not rectified over the period through 30 September 2020 as a result of satisfying cooperative members’ (unit holders’) claims by cooperatives using their reserve funds.

The Bank of Russia is currently working out proposals on legislative amendments to regulate the procedure for holding consumer credit cooperatives’ and agricultural consumer credit cooperatives’ general meetings remotely. Until the relevant amendments are introduced into laws, the Bank of Russia will not apply any enforcement measures against consumer credit cooperatives and agricultural consumer credit cooperatives for breaching the procedure and timeframe for holding their general meetings due to the impossibility to ensure the remote participation of their members in such meetings or to carry out such general meetings in the form of absentee voting.

Accounting infrastructure organisations will not be subject to enforcement measures for breaching the established regulatory requirements setting the period during which an accounting infrastructure organisation shall accept documents related to keeping the register and receiving information from the register. This period may not be shorter than four hours every business day. Furthermore, accounting infrastructure organisations, as before, are recommended to provide services to their clients through remote access systems.

5. Unwinding of regulatory relaxations

5.1. Since the majority of Russian regions have lifted their restrictions, the number of financial institutions’ employees working remotely has been decreasing, and financial institutions’ offices and governmental agencies have resumed their normal operation and are open for visiting, there is no need to extend the following measures:

• credit institutions’ right to remotely open accounts (deposits) to clients, including individual entrepreneurs or legal entities classified as SMEs;
• credit institutions’ right not to take into account the period from 30 March through 30 September 2020 when calculating the deadlines within which residents shall submit certificates of confirming documents and documents related to the conduct of foreign exchange transactions;
• the possibility to credit pension payments into bank accounts allowing transactions via payment cards, other than the national payment instrument;
• non-governmental pension funds’ right to apply a simplified procedure for approving payments from pensions savings, including to an insured person’s legal successors applying for payments upon the expiry of six months after the insured person’s death, without the possibility to subsequently seek the payment judicially;
• cooperatives’ right to make payments to their members (unit holders) and associate members using reserve funds and recognise such transactions as extraordinary expenses.

5.2. Compared to the start of the pandemic, the situation with liquidity in the banking sector has improved. Owing to a greater stability in financial markets, banks’ demand for liquidity to pay margin calls has decreased. In June—July, the growth of ruble-denominated household deposits sped up (according to the preliminary estimate, their annual growth totalled 11.6% as of 1 August against 10.0% as of 1 June). Over the period from 1 March to 1 July 2020, systemically important credit institutions (SICI) increased highly liquid assets taken into account for the liquidity coverage ratio calculation on their balance sheets by 1.3 trillion rubles, to 8.9 trillion rubles. As a result, banks do not demonstrate demand at one-month and one-year repo auctions. The Bank of Russia has switched to accommodative monetary policy, reducing the key rate to 4.25%. Therefore, banks are now able to cut their interest rates on loans, including for SMEs. In this regard, the Bank of Russia has made the decision not to extend the following measures:

• The decision not to recognise a reduction in SICIs’ actual values of the N26 (N27) ratio as a violation of the N26 (N27) ratio, if this reduction resulted from a shortage of highly liquid assets and other alternative instruments because of limited opportunities to extend or raise borrowings for more than 30 calendar days.

When needed, banks may use irrevocable credit facilities to comply with the N26 (N27) ratio since the limit for these facilities was expanded to 5 trillion rubles, with the fee cut from 0.5% to 0.15%. The Bank of Russia is going to assess whether it is reasonable to maintain or revise the parameters of irrevocable credit facilities after 1 April 2021.

• The programme for refinancing SME loans within the limit of 500 billion rubles. As was planned originally, new loans will be issued within this limit until 30 September 2020.

Nonetheless, the mechanism for refinancing guaranteed by JSC Russian Small and Medium Business Corporation, with the limit of 175 billion rubles and the preferential interest rate, will continue to be available. In order to ensure companies’ access to bank lending amid a gradual recovery of earnings, the earlier lifted sectoral restrictions on lending to SMEs, as well as the restrictions related to the ratio of loan types under the programme for encouraging loans guaranteed by JSC Russian Small and Medium Business Corporation, with the limit of 175 billion rubles and the preferential interest rate, will continue to be available through 30 June 2021.

5.3. In the context of a recovery in the stock market after the pandemic outbreak and a lower volatility of the ruble against foreign currencies, the Bank of Russia has made the decision not to extend the following measures:

• The possibility for credit institutions to include transactions in six foreign currencies (USD, EUR, GBP, CHF, JPY, and CNY) into their required ratio calculations (except the calculations of open foreign currency position amounts (limits)) at the official exchange rate of the relevant foreign currency against the ruble established by the Bank of Russia as of 1 March 2020.
• The right granted to credit and non-bank financial institutions using the Bank of Russia’s regulations on accounting to recognise equity and debt securities acquired before 1 March 2020 in their accounting records at fair value as of 1 March 2020, and to recognise debt securities purchased over the period from 1 March 2020 through 30 September 2020 at fair value as of the acquisition date (this measure will remain effective until 1 January 2021).
• The right granted to non-governmental pension funds, the Management Company of the Pension Fund of Russia, and the management companies of closed-end unit investment funds for qualified investors to make the decision on appraising the value of securities acquired before 1 March 2020 to be included into assets at their fair value established as of 1 March 2020, and on appraising the value of debt securities acquired from 1 March through 30 September 2020 to be included into assets at their fair value established as of the date of their purchase (this measure will remain effective until 1 January 2021).

5.4. As long as the majority of financial institutions have resumed their normal operation and adjusted their business processes even though a part of their employees work remotely, it is reasonable to go back to the standard supervisory procedures that are essential to support the sustainability of institutions amid growing credit risks. In this context, the Bank of Russia is not going to extend the following regulatory relaxations:

• The possibility for credit institutions to defer the submission of information on the organisation of internal capital adequacy assessment procedures and their results as of 1 January 2020 on an individual and consolidated basis.

The Bank of Russia will take into account the information on the organisation of internal capital adequacy assessment procedures and their results as of 1 January 2020 on an individual and consolidated basis submitted by credit institutions in the course of the relevant assessment as of 1 January 2021 and the assessment of the risk management system (PU4 indicator).

• The possibility for SICIs to defer the annual submission of their financial stability recovery plans to the Bank of Russia.
• The possibility for credit institutions to defer the preparation of professional judgements on corporate loans granted before 1 March 2020 according to 2020 H1 financial statements.
• The decision to waive enforcement measures if a non-governmental pension fund, the management company of investment funds, unit investments funds and non-governmental pension funds, or an insurer breaches its obligation to submit to a specialised depository copies of source documents confirming the availability of assets in special brokerage accounts, bank accounts and deposits, provided there have been no changes in the structure of the said assets, and if a specialised depository breaches its obligation to notify the Bank of Russia of any detected violations of the above obligations committed by management companies, non-governmental pensions funds, and insurers.
• The decision to waive enforcement measures against financial institutions provided for by Russian laws for the following violations:
  • violations of federal laws and related regulations and instructions issued by the Bank of Russia, if these violations were committed by a credit institution due to system-level factors associated with the coronavirus spread;
  • violations by credit institutions and non-bank financial institutions of the procedure and deadlines for the submission of information pursuant to the AML/CTF laws, and of the timeframes for the development and approval of the dedicated internal control rules;
  • violations by authorised banks of the deadlines for the submission of information to the foreign exchange control authorities;
  • violations by financial market participants of the deadlines for the submission to repositories of the information on contracts stipulated by Bank of Russia Ordinance No.4104-U;
  • acceptance of electronic payment instruments from foreign suppliers of payment services where they fail to comply with the Russian laws on the national payment system;
  • violations by payment system operators and funds transfer operators of the deadlines and methodology for the preparation of reporting, the list of reporting forms, and other information.
• The decision to waive enforcement measures against legal entities (their officials) if:
  • legal entities breach the deadlines for fulfilling their obligations to maintain their insider lists as regards their changing (updating) and to notify persons put on their insider lists;
  • legal entities disclosing a limited content and/or amount of insider information subject to disclosure violate the deadline for sending to the Bank of Russia a notification specifying the part of insider information that is not disclosed;
  • legal entities fail to comply with certain internal control rules for preventing, detecting and suppressing the misuse of insider information and/or market manipulation.

5.5. The Bank of Russia has also made the decision to terminate the restrictions on the acquiring fee established for the period of the pandemic and limiting its maximum amount for online purchases of food, medicines, other medical products, clothing, fast-moving consumer goods, as well as for payments for healthcare services. This measure was reasonable at the start of the pandemic and boosted a considerable rise in online trade. Nonetheless, it is necessary to ensure the balance between banks’ and retailers’ interests. Because the acquiring fees were limited for quite a long period of time, banks had to increase other fees or offer products that are less convenient for consumers. Moreover, as a result of the established restriction on the acquiring fee size through lower costs for bank card acceptance, trade and service enterprises are becoming less interested in launching the payment option via the Faster Payments System.

¹ The 27 banks that provided the information account for approximately 75% of the banking sector’s overall assets.

² For DSTI calculation purposes, a borrower’s average monthly income is normally measured for 12 months.

³ Bank of Russia Regulation No. 448-P, dated 22 December 2014, ‘On Credit Institutions’ Accounting of Fixed Assets, Intangible Assets, Real Estate Temporarily Unused in Operational Activity, Long-Term Assets Held for Sale, Inventories, Means and Objects of Labour of Undetermined Purpose Obtained under Compensation or Pledge Agreements’.

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