Russian banks will be able to account for state support to reduce reserves on loans to state companies only if certain conditions are met - CBR

MOSCOW. July 10 (Interfax) - Russian banks will be able to consider state support when assessing the financial condition of state-owned companies only if a number of conditions are met, First Deputy Director of the Central Bank of Russia's Department of Banking Regulation and Analytics Anton Naberukhin said in an interview with Interfax.

The Central Bank has prepared a draft of a new version of the instruction on mandatory ratios, which will replace instruction 199-I and receive a new number, 220-I, after registration with the Justice Ministry. It includes changes related to risk weights applied to state companies.

"Currently, the risk weight for investment-grade borrowers is 65%, and to obtain it, no rating is required - the fact of listing securities on the stock exchange is sufficient. In the future, to receive this 65% risk weight, not only a long-term creditworthiness rating will be required, but also a so-called internal credit assessment (ICA). In this assessment, support is taken into account only if the bank has what is called 'ordinary support', which includes guarantees, sureties direct budget obligations to pay on behalf of the borrower, and so on," Naberukhin said.

There is a similar issue with reserves, he said. Currently, support is considered as an expert factor. For example, a bank says that the company is state-owned, and it believes the state considers the company important and will support it, thus minimizing the reserve. The regulator has prepared amendments to regulation 590-P on the procedure for forming reserves, which introduce additional requirements for considering the factor of state support.

"We plan to allow the use of the expert factor only if specific conditions are met," he said.

In particular, the bank must take into account the history of the company's support over the past three years.

"If there was real recapitalization, subsidies or other forms of support from the state that are significant relative to the company's total budget. A lot can happen or not happen in a single year, and support may not be required, but a three-year horizon allows for meaningful conclusions. And we're not going to impose strict limits on support instruments. We're open to various forms - subsidized financing programs, perpetual bonds guaranteed by the Finance Ministry, direct recapitalization and so on. So we will leave some flexibility for banks, but our main requirement is that over the past three years, the company must have received funds from the state that strengthened its financial position," he said.

The second condition is the existence of legal obligations, which include either a guarantee, a direct agreement mechanism under PPP, a reserved budget line for support, or a support mechanism enshrined at the level of federal law or a government directive.

"That is, things that may not yet have worked in practice but contain a degree of obligation. If the requirements are met, the bank will have the opportunity to account for such support when assessing the financial condition and, accordingly, reduce the size of the reserve," Naberukhin said.