CBR to differentiate loan provisions, lowering for manufacturing, raising for M&A
ROSTOV. Feb 2 (Interfax) - A significant portion of corporate lending goes toward financing mergers and acquisitions, with just the four biggest banks loaning 2.5 trillion rubles for this purpose, so the Central Bank of Russia (CBR) will limit these risks by raising provisions for such transactions, while simultaneously encouraging more lending for the development of production capacity, CBR chief Elvira Nabiullina said.
At the end of 2017 the CBR published draft changes to Regulation No. 590-P, which governs banks' provisioning for possible loan losses. The changes prohibit banks from placing loans used by borrowers directly or through third parties to make investments in the equity of other legal entities, in other words M&A deals, in a quality category higher than category III.
"We saw that a significant share of banks give a significant portion of loans to companies to finance M&A deals. For example, just four banks gave almost 2.5 trillion rubles in loans to companies, but actually they went toward the purchase-sale of companies rather than into the development of production. Essentially, this means high risks, because the company has to not only service interest on loans taken for development of production from its profit, but also service the loan that the owners of the company give for the purchase of some sort of assets," Nabiullina said at a State Council meeting on Thursday.
"We will introduce differentiated requirements, different provisions. If a bank lends to an operating company for development of production, provisions will be lower, [but] if this is lending for financial deals, M&A deals, there will be higher requirements for provisions," Nabiullina said.
"Higher requirements for provisions, in other words are you going to further raise requirements or are you going to lower for the first category," President Vladimir Putin asked.
"We will differentiate. For the second category we will raise, and for the first category we will lower, in the sense that we will allow them to make lower provisions if they will analyse the financial condition of the company. On one hand the stick, on the other a carrot," Nabiullina said.
The issue of differentiating provisions is now being discussed with banks, she said. "Of course, they're not very happy, but we, nonetheless, believe it's important to do this," Nabiullina said.