The Bank of Russia changes approach to payment to income ratio to hold banks back from downplaying risk-weighted assets

On August 26, 2019, the Bank of Russia amended its Ordinance No.4892-U, setting the maximum 60-month duration for unsecured consumer loans used in the calculations of the payment to income ratio. PTI is used by banks to estimate the risk-weighted assets and the capital adequacy ratio. In such a way, the regulator aims to restrict the banks' practice of elongation the loan maturities to push down the current PTI and ease the pressure on the capital adequacy ratios.

The above amendments, as well as the requirements to include PTI in the calculations of increments applicable to risk coefficients on consumer loans, will come into force on October 01, 2019. Until then, the increment will be calculated based on the full value of a consumer loan.

The payment to income ratio has been growing since 2017, which, combined with the accelerated rates of unsecured consumer lending, pushes up risks for the banks with a substantial share of such loans in their portfolios. In addition, the average amount of such loans has also been growing, which is connected with changes in their purpose, including car loans, mortgage repayments, loan refinancing. Moreover, since late 2018, the volume of loans issued for five years and more has increased, as well as the loan duration in general.

In ACRA's opinion, elongation of loan duration postpones the effects of loan "maturing" and may result in accumulation of potentially non-performing loans and, consequently, affect capital adequacy ratios.

Figure 1. PTI / 5+ year loans issued

Source: Bank of Russia

Thus, the measures taken by the Bank of Russia to increase increments to risk factors (in 2018–2019, the Bank of Russia increased their value four times), including loans issued to borrowers with high PTIs, are designed to reduce the growth rate of lending and medium-term risks associated with a potential decrease in the quality of consumer loans. At the same time, the fundamental prerequisites for potential problems in the consumer lending sector are mainly due to macroeconomic trends, in particular the low growth rate of household disposable income.

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