The NBU is increasing risk weights for unsecured consumer loans issued by the banks.
This decision was approved by NBU Board Resolution No. 1 On Amendments to the Guidelines on the Procedure for the Regulation of Bank Activities in Ukraine dated 11 January 2021. This decision is effective from 30 June 2021.
The risk weights will be raised in two stages:
- to 125% on 1 July 2021
- to 150% on 1 January 2022.
This change will oblige the banks to hold a sufficient amount of capital to cover possible losses if the quality of the unsecured consumer loan portfolio deteriorates. The quality of this portfolio depends heavily on changes in macroeconomic conditions, and the banks may underestimate this relationship when calculating their expected losses on these loans.
The higher risk weights will increase the banks’ resilience to potential crisis episodes, safeguard the sector from the accumulation of systemic risks, and help maintain financial stability (the increase in the risk weights is covered in detail in the December 2019 Financial Stability Report). The consumer lending segment will continue to be profitable and attractive to the banks, but they will pursue more prudent loan policies.
The current consumer loan risk weights of 100% and the minimum regulatory capital adequacy requirements of 10% imply that for every UAH 10 in loans, a bank must hold UAH 1 in regulatory capital. The two-stage increase in the risk weights to 150% will raise the capital requirements for consumer loans by 1.5 times, to UAH 1.5, creating an additional margin of UAH 0.5 against adverse conditions.
This will expand the share of unsecured consumer loans that the banks finance with equity rather than deposits.