Page 75 - RusRPTMar19

9.66%. There are two ways the government can lower mortgage rates. The first is through non-market measures: issuing subsidies or creating a special mortgage bank among those sanitized in the sector’s cleanup. However, mortgages have grown well (by 25% in 2018) without these incentives, so experts worry that subsidies will lead to a rise in unqualified lending and thus an increase in banks’ credit risk. The second method is much slower: enacting structural reforms that within a couple of years will trickle into the banking sector. The CBR is already taking the necessary steps—reducing inflation and stabilizing the exchange rate—but geopolitical risk continues to interfere with the creation of a low-rate economy.
CBR looks to amend lending requirements. The Bank of Russia is developing a new approach to risk assessment that will free up capital and stimulate lending to the economy. Per new guidelines, banks will be able to reduce risk ratios for sovereign and corporate borrowers. There are two things going on here. First, the CBR is looking to expand the money supply domestically as Russian entities struggle to access Western financing. Banks will be able to borrow and lend at lower rates, and thereby stimulate the economy after the 2014-16 credit crunch. Second, this proposal is part of a broader CBR effort to create a more developed financial system. It is notable that the new guidelines comply with Basel III. While current Russian-Western relations mean that it is not terribly important for the Russian banking system to match European standards right now, this is important institutionally in the longer-term.
· The reform will comprise two stages. In 1Q19, the CBR will change the risk assessment for sovereign borrowers, and in 4Q19, it will do the same for corporate borrowers.
· Currently, sovereign credit risk is determined by the rating of Russia’s domestic credit agency (EXIAR). This rating requires banks use a risk ratio of 100%.
· In 1Q19, banks will transition to using the ratings of international credit agencies. Per Basel III standards, Russia’s sovereign rating of BBB- only requires a 50% risk ratio for borrowing.
· Banks will have two options for assessing corporate borrowers risk profile: use ratings from international credit agencies, or develop an independent assessment based on the borrower’s solvency, financial position, and other factors dictated by the CBR.
· The CBR developed the alternative approach in coordination with the Basel Committee.
· This method should bring the risk ratio for corporate borrowers down to roughly 65%.
The recent growth of banking rates including rates for mortgage lending following a hike in value added tax (VAT) to 20% from 18% could be expected, but it is short-term, the rates will decrease in the future, Russian President Vladimir Putin said on February 10. “The situation is predictable, the government assumed, and so do I, that the event is one-time and short-term, and the rates will return to previous figures and then decrease,” he said. He also said that DOM.RF, previously known as the Agency for Housing Mortgage Lending, used to suspend mortgage payments for people in challenging situations, and may resume the practice.
The number of banks has also continued to fall. The CBR is in the midst of a banking sector clean up that is coming into its end game as the number of banks in Russia fell below 500 in November. This year Russia has started
75 RUSSIA Country Report March 2019 www.intellinews.com