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NBU Improves Its Credit Risk Assessment Methodology for Specialized Lending Types

NBU Improves Its Credit Risk Assessment Methodology for Specialized Lending Types

The NBU is taking a new approach to credit risk assessment for various specialized lending types. These include project financing, object financing, and the financing of the construction/acquisition of income-generating real estate. The updated requirements improve the current methodology for the assessment of loans for investment projects, which was established by the NBU Regulation On Measuring Credit Risk Arising from Banks’ Exposures approved by NBU Board Resolution No. 351 dated 30 June 2016 (as amended). The updated methodology meets the principles and recommendations of the Basel Committee on Banking Supervision and the requirements of EU legislation, and is based on the approaches used by international rating agencies and on the analysis of data from Ukrainian banks.

Such loans cannot be assessed using the standard model that the NBU applies to legal entities, as these loans are repaid from project cash flows that occur in the future. This means that at the time of issuance of such loans, no relevant financial data about the borrower are available that can be used to estimate the probability of default (PD) under the standard approach. 

According to the updated methodology, specialized loans will be assigned classes using a multifactor model that includes both quantitative and qualitative characteristics reflecting the financial strength of the project, risks to its implementation, the sustainability of the project’s originator, and the security package of the creditor bank. The model is balanced, meaning that it attaches certain weights to the identified indicators and characteristics, depending on the specialized lending type and the project implementation stage (pre-operational or operational). This approach takes into account the specifics of different specialized lending types and is more sensitive and accurate, making it possible to reduce the range of PD values for debtors.

The regulator is improving the methodology for evaluating specialized loans to ensure a reliable risk assessment and help expand the banking system’s capacity to promote economic growth. 

The introduction of new requirements for the assessment of specialized loans will take place in stages:

  1. by 20 September 2021, banks must develop relevant internal regulations
  2. on 1 November 2021 and 1 December 2021, banks must calculate their credit risk in test mode and inform the NBU, as per set procedure, about the results of these calculations
  3. starting 31 December 2021, banks must calculate the credit risk of their specialized loans (the ones granted after 1 October 2021), in line with the updated requirements of NBU Regulation No. 351
  4. by 31 December 2022, banks must migrate to the specialized lending assessment model for calculating the credit risk of their investment loans granted before 1 October 2021. During this transition period, banks have the right:
  • to apply the procedure for the assessment of investment projects or the Z-model procedure when determining the PD of a legal entity debtor 
  • not to apply, when determining the ratio of the project originator’s participation in project financing (financial leverage), the requirement that limits the amount by which the funds contributed by the project originator under agreements stipulating the return of these contributions after full repayment by the legal entity debtor exceed the funds contributed on a nonrefundable basis.

Amendments to the Regulation On Measuring Credit Risk Arising from Banks’ Exposures were approved by NBU Board Resolution No. 58 dated 22 June 2021.

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