Credit risk

Credit risk is defined by the Bank as a risk of losses as the result of non-fulfillment, delayed or incomplete fulfillment of debtor’s liabilities to the Bank under the agreement.

Such financial liabilities include borrower’s liabilities under:

• Loans including interbank loans (deposits, borrowings), other placements including claim for receipt (return) of debt securities, shares and bills of exchange issued under the loan agreement;
• Bills of exchange discounted by the Bank;
• Bank guarantees where the funds paid by the Bank were not reimbursed by the principal;
• Transactions of financing under cessation of monetary claim (factoring);
• Rights (claims) acquired by the Bank under transactions (cessations);
• Sale (purchase) of financial assets with delay of payment (delivery of financial assets);
• Letters of credit paid by the Bank (including uncovered letters of credit);
• Repayment of funds (assets) under transaction of acquisition of financial assets with the obligation of their back transfer.

The Bank has developed and applies policies and procedures aimed at prevention and mitigation of the damage that the Bank might incur as a result of exposure to credit risk:

• obligatory regularassesment of the borrowers’ financial status, economic efficiency of credited delas and projects;
• estimation of liquidity and sufficiency of offered security, its objective estimation and insurance in appraising and insurance companies accredited by the Bank;
• method of rating estimation of financial status of insurance companies participating in insurance of property to be transferred to the Bank as a security under loans granted by the Bank;
• continuous monitoring of borrowers’ fulfillment of their obligations to the Bank and actual availability of security;
• estimation of quality category and degree of risk under the granted loans;
• procedure of creating provisions for possible losses on loans, provisions for possible losses on other operations;
• procedure of transferring problem credits to the Department of credit monitoring and subsequent work therewith;
• procedure of determination and control of powers of the Bank’s branches and relevant managing bodies of the Head office to approve loans depending on amount thereof;
• procedure of granting guarantees carried out on the basis of Regulations “On the procedure of granting the Bank’s guarantees“.

Within the Bank there is a Credit and Investments Committee (CIC) with a system of subcommittees which execute following functions and objectives:

• review and development of the credit policy of the Bank within the approved development strategy;
• operational decisions on the diversification of credit risks;
• within the authority set by the Management Board, decisions on the following issues:
• delivery of Russian Rouble or US Dollars denominated products with inherent credit risk to the Bank’s borrowers;
• purchasing or acceptance of external issuers’ promissory;
• setting limits for counterparty banks.
• taking decisions focused at strengthening and modernizing the methodological basis of the Bank;
• taking decisions on developing and implementing new types of lending and services in order to expand capabilities and enhance the competitive advantages of the Bank on the credit market;
• reviewing and approving new products and services;
• issues relating to writing off uncollectible loans and interest thereon against loan loss provision, overdue loans and debt equivalent to overdue loans, subject to approval by the relevant authorized body of the Bank;
• identifying the level of authority of CIC subcommittees, structural business units of the Central Office of the Bank (hereafter — “CO”), managers and individual specialists in business units of the CO, and independent crediting by branches with subsequent approval by the Management Board;
• approving the total number of members and membership in the branch credit committees; and
• setting limits for the CIC subcommittees, structural business units of the CO, heads and individual specialists from CO business units on implementing credit programs with subsequent approval by the Management Board.

Credit risk management techniques (beside the system of authority and decision taking) also include:

• a centralized system for applying and adjusting interest rates and tariffs (approved quarterly by the Management Board in accordance with the Regulations on Major Principles of the Bank’s Rouble and Currency Resource Management which establish underlying interest rates by loan types and borrowers’ categories);
• a system of credit risk limits. General limits-restrictions aimed at reducing the concentration risk and the related parties risk applied to all loans (irrespective of the client sector to which the borrower belongs) are approved annually by the Management Board in accordance with the Credit Policy of the Bank.

Bank sets annually the overall limits by the borrowers categories, industries, terms, currencies and regions. The credit risk limits within the authority to take decisions on loan issuance by authorized bodies and structural units responsible for providing the Bank’s clients with its products exposed to credit risk are quarterly updated and approved by the Bank’s Management Board taking into consideration the changes in the economic situation and the working practice of the credit institution.

The responsible units of the Head Office monitor the actual compliance with limits relating to accepted risk as a whole and by each branch.

The Bank also manages credit risk through establishing and fixing requirements to the borrower on securing its credit obligation, pledge assessment, insurance of pledge or the borrower, levy of execution upon pledge in normative, instructive and functional-technological documents approved by the Management Board of the Bank.