Credit Risk

Credit risk is the risk of a loss resulting from the debtor's failure to meet its obligations to the Bank in full when due under the terms agreed.

Credit risk has the highest weight among risks taken by the Bank in the course of its banking activities. Credit risk management in the Bank is carried out using the following main procedures:

• putting in place limits for operations to limit credit risk;
• putting in place indicative limits for credit risk concentration and the share of unsecured loan portfolio;
• creation of security for credit operations;
• setting value conditions for operations with respect to payment for risks taken;
• permanent monitoring of risks taken and preparation of management reporting for the Credit Committee, the Bank's management and units concerned;
• evaluation of regulatory and economic capital necessary to cover the risks taken in respect of the Bank's operations and ensuring its sufficiency;
• carrying out hedging operations;
• permanent internal control over the Bank's units in respect of observing regulations on operations procedure and risk assessment and management procedures by independent units.

The Bank's risk management envisages:

1. applying systematic approach to overall Bank's loan portfolio risk management and separate operations with certain borrowers/counterparties (group of related borrowers/counterparties);
2. applying unified methodology for identification and quantitative assessment of credit risk which is adequate to the nature and scale of the Bank's operations; and
3. balanced combination of centralized and decentralized decision-making in respect of operations related to taking credit risk.

The main tool to restrict and control the credit risk taken by the Bank is the credit limit system. The following types of credit risk limits are put in place:

• counterparty limits;
• limits for independent risk-taking by the Bank's branches; and
• credit risk limits by countries/industries/regions.

Credit risk limits are determined by the Credit Committee and approved by the Bank's Management Board (in case the Credit Committee does not have the required authority). A part of authorities for putting credit limits in place is delegated to Branch Credit Committees (for standard credit operations within the special limit for independent credit risk-taking by branches), as well as to the Small Credit Committee and the Moscow Region Credit Committee (for medium-sized and small customer lending).

Along with its internal credit risk limits, the Bank observes the mandatory requirements established by the Bank of Russia in terms of risk size by borrower/group of related borrowers (N6 ratio) and size of large loans (N7).

Assessment of credit risk taken by the Bank for counterparty to determine limits is done on the basis of multifactor analysis with the use of rating system, and comprises analysis of the following aspects:

• specific risks related to the shareholder structure of the counterparty;
• market positioning of the counterparty;
• credit capacity and financial standing of the counterparty;
• possible impact of limit-setting on the financial standing and performance of the counterparty;
• economic acceptability of the proposed security to ensure proper coverage of the counterparty's obligations to the Bank;
• acceptability of value conditions;
• background of the counterparty's relations with the Bank, including operations implying credit risk-taking by the Bank;
• impact of limit-setting for the counterparty on the level of industry, region and country risks taken by the Bank; and
• impact of limit-setting on liquidity risk, market risks (interest risk, currency risk, price risk, if any), and reputation risk.

The most important tool to minimize credit risks taken by the Bank is the creation of security for credit operations. The Bank's policy in this sphere is based on the principle of forming a reliable and liquid security portfolio, sufficient to cover the credit risks taken by the Bank. At the same time, it does not lift the requirement to conduct due diligence of the borrower and does not compensate for the insufficient payment and credit capacity of the borrower or lack of information on its business.

The following items can be accepted as security:

• real estate mortgage, pledge of inventory, equipment, receivables, securities, precious metals;
• guarantees and sureties.

Property is accepted as pledge if there are no legal restrictions determined in the course of liquidity and market value assessment (as a rule, conducted by an independent assessor satisfying the Bank's requirements), as well as verification of its safety. Besides, the Bank usually demands that the items pledged should be insured.