The Bank of Russia is developing a mechanism of limiting the debt burden of companies

© RIA Novosti / Natalia to Seliverstova in fotobanka the building of the Central Bank of Russia on Neglinnaya street in Moscow. Archival photoThe Bank of Russia is developing a mechanism of limiting the debt burden of companies© RIA Novosti / Natalia to Seliverstova the image Bank

The Bank of Russia together with other agencies developing a mechanism that limits total foreign currency debt burden of nonfinancial organizations, follows from the information-analytical material CBR «financial stability Review».

In order to limit currency risks economy and financial system the Bank of Russia in 2016, has consistently implemented a number of measures aimed at encouraging banks to reduce transactions denominated in foreign currency. In April-August 2016 was increased (to 7%) required reserve ratio for Bank liabilities to institutions in foreign currency. From 1 may 2016 increased risk factors to calculate capital adequacy for corporate loans and transactions with securities in foreign currency (up to 110%, 130%).

Increasing risk factors along with the gradual reorientation of banks ‘ rouble lending to borrowers whose revenues are denominated (or linked) to a foreign currency, led to a gradual reduction of currency loan debt of legal entities to banks: from 1 may 2016 to 1 October 2017 the corporate loan portfolio in foreign currency decreased by 1.26 trillion rubles, or 21.6 billion (-12.5 percent), said the Central Bank.

Positive trend since the introduction of these measures is the reduction of foreign currency lending of the sectors oriented on domestic demand, especially in the segment of real estate transactions. Risk ratios are one of the tools of devolatization banks and non-financial organizations, and in the event of any increase of the currency risk they can be raised again by the Bank of Russia, said the regulator.

«However, the list of possible tools should not be confined to measures aimed at limiting domestic foreign currency lending, and should include measures affecting currency total debt burden of non-financial organizations. The Bank of Russia together with other agencies developing a mechanism,» the document says.

However, measures aimed exclusively at limiting domestic foreign currency lending may lead to a reorientation of the borrowers on external funding. «In this regard, the list of possible tools that can be activated in case of excessive accumulation of foreign exchange risks, shall also contain the constraints that apply directly to the companies’ balance sheets. The experience of some countries shows that requirements are imposed on foreign currency liquidity positions and foreign currency debt burden of companies», — explained in the document.

The situation with foreign exchange income in the industries

A positive trend is the reduction of debt in foreign currency in sectors where the borrowers operate in domestic markets and do not have enough foreign currency earnings, said the Central Bank.

Total decrease according to industries (operations with real estate, transport and communications, construction, production and distribution of electricity, gas and water) for the period from 1 February 2017 to 1 September 2017 amounted to 91.3 billion ($1.6 billion).

«In the oil industry with a low level of total debt load (including ruble-denominated obligations and liabilities denominated in foreign currencies) the standard monetary debt load in comparison with foreign analogues is somewhat elevated, and in some companies takes quite high values,» write the authors of the document.

However, the reduction of foreign currency lending is also observed in the manufacturing sector (-70,9 billion rubles, or $ 1.2 billion), mainly due to the fact that a number of exporters have replaced foreign currency loans to Russian banks financing (including in the form of pre-export loans) received from non-residents or from banks, which are subsidiaries of Russian credit organizations.

The growth of domestic currency lending to the wholesale and retail trade for the period amounted to 116,3 billion rubles, or $ 2 billion. More detailed analysis showed that this increase is mainly due to lending to trade companies included in the group’s export of oil and gas companies indicates the Central Bank.

As of October 1, 2017 about a quarter of the portfolio of loans to legal entities (except credit institutions) in foreign currency (2,85 trillion rubles) falls under the higher risk factors. Evaluated the impact of increasing risk weights on the actual adequacy ratio of total capital of the banking sector (H1.0) is 0.02 percentage points.

The probability of default

Loans in foreign currency to companies that do not have sufficient foreign currency revenue to ensure timely debt servicing, are characterized not only by an increased level of default probability of borrowers, but the high correlation between defaults on such loans, as they have common risk factors- exchange rate, says the report of the Central Bank.

Also, foreign currency loans, there is a significant correlation between probability of default and loss if the lender defaulted due to the fact that the debt in foreign currency is revalued, and the value of the collateral on the loan, usually changes slightly.

«Thus, changes in the exchange rate can have a negative impact on the credit quality of banks’ portfolios. In the case of potential rise of these risks, the Bank of Russia will decide on further increase in risk weights in respect of foreign exchange assets of the credit organizations», — said the Central Bank.

The ratio of foreign currency debt of non-financial companies to GDP in Russia takes one of the highest values in comparison with other countries (over 22%). The share of currency component in the total debt is at a moderately high level (44%).

Increased risk

The highest volume of foreign currency loans traditionally have the company of the traded sectors, hedging foreign currency debt due to foreign currency inflows from export activities.

The Bank of Russia is developing a mechanism of limiting the debt burden of companies© RIA Novosti / Ilya Petliurite in photobiannual said stabilization of the Russian economy»However, natural hedging can be effective only when a moderate level of foreign currency debt. Assessment of debt load of the exporting companies showed the following. In the oil and gas industry with a low level of total debt load (including ruble-denominated obligations and liabilities denominated in foreign currencies) the standard monetary debt load in comparison with foreign analogues is somewhat elevated, and in some companies takes quite high values,» says CB.

According to the regulator, the aggregate debt to revenue for the six Russian oil and gas companies according to the latest published financial statements is 0.4, which corresponds to the average level of Western counterparts. However, the average level of foreign currency debt load is 0.6, and for some companies close to unity, which corresponds to a higher level, says the regulator.

In the mining segment of the company mainly have a balanced debt burden compared with international peers, but the level of foreign exchange debt of a substantial part of the companies seems excessive (foreign currency debt/revenue equal to or greater than 1). The industry with the greatest gap between foreign currency debt and foreign exchange revenue — petrochemicals: the average level of foreign currency debt burden is 1.5.

«The high debt level of companies and separate branches is a factor in increased volatility of the ruble, which manifested itself in particular in the fourth quarter of 2014. Source volatility are both external and domestic debt denominated in foreign currency,» warns the Central Bank.

Higher risks associated with excessive amount of debt, uneven repayment schedule of debts, and could lead to potential non-residents requirements for early redemption.

«To limit the above risk measures applied to credit institutions (higher risk weights to calculate capital adequacy) should be complemented by measures to stimulate the reduction in total foreign currency debt burden (including external liabilities), which are applied directly to non-financial organizations,» said the regulator.

Source

Be the first to comment on "The Bank of Russia is developing a mechanism of limiting the debt burden of companies"

Leave a comment

Your email address will not be published.


*