Bank of Russia raises macroprudential requirements for unsecured consumer loans and sets requirements for car loans

Effective from 1 July 2024, the Bank of Russia raises risk-weight add-ons for unsecured consumer loans and sets add-ons for car loans. The measure aims to limit individuals’ debt burdens, build up the macroprudential capital buffer, and enhance banks’ resilience against higher losses on consumer loans.

In making this decision, the Bank of Russia Board of Directors was guided by the following.

Outstanding unsecured consumer loans were increasing at an accelerating rate (by 1.8% in March and by 0.9% in February and January).¹ 2024 Q1 saw a 1.5% decline in outstanding cash loans and an 11% rise in outstanding credit card balances.² The major part of the latter (74%)³ was attributed to credit cards issued to borrowers after the introduction of macroprudential limits (MPLs).

MPLs have been gradually improving the lending structure. The percentage of loans granted by banks to over-indebted borrowers (DSTI⁴ exceeds 50%) decreased from 64% in 2022 Q4, when MPLs were introduced, to 34% in 2024 Q1. The percentages of cash loans and credit cards issued to these borrowers declined from 67% to 25% and from 59% to 43%, respectively. The effect of MPLs on credit cards is lagged, as their application is triggered by an increase in a credit limit or an issue of a new credit card. However, MPLs do not limit provision of funds within earlier approved limits.

Banks are gradually raising interest rates on new loans, as market rates are rising and the Bank of Russia has suspended the TCC⁵ cap until 1 July 2024. The weighted average TCC for issued cash loans increased from 20.3% in 2023 Q3 to 26.4% in 2024 Q1. The increase was mainly driven by a rise in the percentage of loans with the TCC above 25%, namely from 16% in 2023 Q3 to 50% in 2024 Q1. Although the increased TCC reflects a higher cost of market borrowings (the key rate was up 7.5 pp over this period), the early warning indicators of credit quality show that the loans that have been issued since 2023 Q3 have a noticeably higher risk level. The proportion of loans that became 30-day delinquent three months after their disbursement rose from 0.4% for loans issued in July 2023 to 1.2% for those provided in January 2024 (0.7% for loans granted in October 2023).⁶ Higher-risk borrowers⁷ tend to take out loans at a higher interest rate, whereas solvent individuals prefer to postpone their credit decisions. Banks relax their requirements. They lend to more risky borrowers and set high levels of TCC to cover higher risks.

There is no deterioration in the debt service quality of credit cards, since the major part of outstanding balances is attributed to credit cards issued before 2023. However, credit cards have a higher risk level than cash loans overall. The proportion of outstanding credit card balances that became 30-day delinquent three months after their issue was 2.0% in January 2024. Given that outstanding credit card balances are rising at a faster rate, this also leads to the accumulation of more risky loans in banks’ loan portfolios.

Car lending grows at a high pace, with a yearly increase of 53% in outstanding car loans as of 1 April 2024. This is driven by relaxed bank lending standards, among other things. The percentage of new loans with the DSTI above 50% was 61% in 2024 Q1 (vs 50% and 44% in 2023 Q1 and 2022 Q1, respectively).

Given that banks are accumulating risky loans in their portfolios, to enhance the resilience of the banking sector against stress and to limit individuals’ debt burdens under car loans, the Bank of Russia raises risk-weight add-ons for unsecured consumer loans with the TCC of 25–40% (Tables 1 and 2) and sets risk-weight add-ons for car loans with the DSTI of over 50% (Table 3).

The add-ons for unsecured consumer loans will mainly impact cash loans with high levels of TCC where borrower exposures are greater and credit cards.

Table 1. Risk-weight add-ons for consumer loans issued after 1 April 2024

Table 2. Risk-weight add-ons for consumer loans issued after 1 July 2024

Table 3. Risk-weight add-ons for car loans issued after 1 July 2024

The new risk-weight add-ons will make it possible to build up the capital buffer of around 7% of the unsecured consumer loan portfolio (4% as of 1 April 2024)¹⁰ and of nearly 3% of the car loan portfolio by the end of 2024. The higher add-ons will help reduce the percentage of risky loans and enhance banks’ resilience against higher losses on these loans.