Ukraine central bank approves new methodology on credit risk

The National Bank of Ukraine (NBU) approved a new methodology for banks to calculate their credit risk, which will be implemented in 2017, according to the regulator’s July 5 report. The new approach is aimed at a more correct calculation of credit risk (loan-loss provisioning) and will improve the banking system’s financial stability, according to the NBU. The new approach will pay more attention to the ability of borrowers to service loans based on analysis of statements, while the current methodology focuses mostly on the historical payment discipline of clients. 

Alexander Paraschiy: As was earlier reported by the NBU, the stress testing of the top 20 Ukrainian banks – which, among others, implemented a new methodology of credit risk calculation – showed that 53% of the loans of the banks are of poor quality (with probability of default of more than 50%). This contrasts with the banks’ estimates (which apply an old methodology of credit risk calculation) of 27% of poor quality loans. All this suggests that the transition to the new credit risk methodology must lead to much higher loan-loss provisioning of Ukrainian banks since 2017, which will result in a decrease in their regulatory capital. While the implementation of such an approach is a risk for the banking system in the short term, in the long term it should lead to an improvement in lending practices and provide more stability in the banking sector.