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NBU Plans to Increase Flexibility of Credit Risk Assessment by Banks and, Next Year, to Enlarge Risk Weights for Consumer Loans

NBU Plans to Increase Flexibility of Credit Risk Assessment by Banks and, Next Year, to Enlarge Risk Weights for Consumer Loans

The NBU intends to increase the risk weights for consumer loans to 150% in H2 2021. This decision was discussed during the last meeting of the Financial Stability Committee. Overall, the NBU has informed the public of these plans since December 2019 and provided a detailed justification in the Financial Stability Report. The planned changes will apply to unsecured hryvnia loans to individuals.

While discussing this decision, the NBU took into consideration the effects of the crisis caused by the COVID-19 pandemic and related quarantine measures, which resulted in higher nonrepayment of loans and thus poorer consumer loan portfolio quality.

The current risk weights have been set at 100%. It means that for every UAH 10 of loans, the banks should hold UAH 1 of capital. The enlargement of risk weights to 150% will require the banks that are active in the consumer finance segment to hold UAH 1.5 of capital. In other words, the banks will have to finance more of these loans with their capital base rather than with deposits.

At the same time, thanks to the general reduction in interest rates in the economy and intense competition between the banks in the consumer finance segment, the increase in risk weights will not affect interest rates on these loans.

The NBU expects that as a result of the changes noted above, the segment will remain attractive to the banks, but that they will pursue more prudent credit policies, thus reducing risks and maintaining financial stability.

Meanwhile, in the near future, the NBU intends to introduce more flexible rules for credit risk assessment by banks. In particular, it is planned to expand the list of customers that can be assessed on a group (simplified) basis, and to introduce a more detailed approach to the assessment of specialized lending. All of this will ease the regulatory burden on the banks, taking into account the principle of proportionality, and enable a more accurate assessment of credit risks. The banking community will be informed on these changes in more detail.

In addition, the NBU has prepared and submitted for the consideration of government its proposals concerning potential measures to stimulate mortgage lending.

The NBU is ready to discuss the planned changes with market participants in order to make their introduction consistent and understandable for everyone.

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