Analysis of the reserve for possible loan losses. Internal reserves for possible loan losses For possible loan losses
In modern theory and practice of banking, the issues of formation by banks of reserves for possible loan losses occupy a special place.
According to current legislation, to ensure their financial reliability, credit institutions are required to create reserves for possible loan losses. Thus, according to Article 71 of the Federal Law of the Russian Federation “On the Central Bank of the Russian Federation (Bank of Russia)”, as well as Article 24 of the new edition of the Federal Law “On Banks and Banking Activities in the Russian Federation”, banking organizations are required to create reserves to cover credit risks. In this case, the procedure for the formation and use of these reserves is established by the Bank of Russia. The Central Bank also sets the amount of reserves created by banks.
According to the temporary instruction of the Bank of Russia dated October 1, 1997 No. 17 “On the preparation of financial statements,” when commercial banks create a reserve for possible loan losses, they should adhere to the principle of caution. The principle is that when managing credit risks, as well as when identifying doubtful debts, decisions should be avoided that could lead to a situation where risks threatening the financial position of the bank would exist for a long time.
The application of this principle by banks in practice means that, firstly, the financial statements provide a real assessment of the loans of a commercial bank and, secondly, the further distribution of part of the gross profit to cover losses on loans issued is eliminated. As noted above, assessing credit risk is important to the lending process. This allows you to determine in the future what the probability of repaying the loan is.
By issuing Instruction No. 299-U dated July 24, 1998, the Bank of Russia thereby supplemented the methodological recommendations for assessing credit risks set out earlier in Appendix No. 7 to Instruction No. 17 dated October 1, 1997 “On the preparation of financial statements.” Together with Instruction No. 62a dated June 30, 1997, these documents form the basis of methodological recommendations for assessing credit risks. The reserve for possible loan losses is funds, the accumulation of which is due to credit risks in the activities of banks. The presence of such a reserve provides the bank with more stable conditions for financial activity and allows it to avoid fluctuations in profit due to the write-off of loan losses. The reserve for possible loan losses is formed through deductions attributed to bank expenses. The reserve created in this way is used only to cover the principal amount outstanding by the borrower.
Classification of issued loans and assessment of credit risks is carried out comprehensively: both the financial condition of the borrower and the borrower’s ability to repay the principal amount of the debt and pay contractually agreed interest, commissions and other payments to the bank are assessed.
The first, fundamental criterion in the classification of loans is the quality of the collateral.
The quality of collateral is determined by the real (market) value of the collateral and the degree of their liquidity. When determining the market value of collateral, the actual and future state of market conditions by type of property pledged is taken into account.
Bank of Russia Instruction No. 62a provides the following explanations for the classification of loans taking into account the quality of collateral.
A secured loan is a loan that is secured in the form of collateral in cases where the collateral simultaneously meets the following requirements:
- · its real (market) value is sufficient to compensate the bank for the principal. the amount of debt on the loan, all interest in accordance with the agreement, as well as possible costs associated with the implementation of collateral rights;
- · all legal documentation regarding the bank's collateral rights is drawn up in such a way that the time required to sell the collateral does not exceed 150 days.
The need to exercise security rights arises no later than on the 30th day of the borrower’s delay in regular payments on the principal or interest. The category of secured loans also includes loans issued under the guarantee of the Government of the Russian Federation, constituent entities of the Russian Federation or under the guarantee of the Bank of Russia, guarantees of governments and guarantees of central banks of countries of the Organization for Economic Cooperation and Development (OECD), as well as bills of exchange endorsed by these entities.
An undersecured loan is a loan that is secured in the form of collateral that does not meet any of the requirements for collateral for a secured loan in accordance with the Instructions.
An unsecured loan is a loan that is unsecured or has security in the form of collateral that does not meet the requirements for secured and “undersecured” loans.
Thus, when determining the degree of security of a loan, not only the presence of the fact of security itself is taken into account, but also the real possibility of the lender, in the event of non-repayment, to repay the losses as much as possible at the expense of the borrower’s security.
The second criterion in evaluating issued loans is the level of credit risk for each specific loan.
Depending on the amount of credit risk, all loans are divided into four groups:
standard (virtually risk-free loans);
non-standard loans (moderate level of risk of non-repayment);
doubtful loans (high level of risk);
bad loans (there is virtually no chance of repayment).
A specifically classified loan may be assigned to one of the higher risk groups than is implied by the formal criteria. Attribution of a loan to a lower risk group than follows from the criteria defined by the Instructions is not permitted. The criteria for assessing credit risk are presented in table. 3 (Appendix 3).
When a borrower repays a loan to a bank or pays interest on a loan using a new loan provided by the bank, the newly issued loan is classified as bad.
Banks must create a reserve for possible losses in the amount of the principal debt for all loans in accordance with the standards given in the table:
Table Amount of contributions to the reserve for classified loans
Thus, the more risky the bank’s credit policy, the larger the reserve it must create, using funds from profits for this. Currently, foreign banks create reserves to cover loan losses in the amount of 2-3% of the amount of loans provided. In Russian practice, these reserves should be significantly larger due to the instability of the economic situation in the country.
Along with the mandatory ones, foreign banks also use the so-called additional reserves for possible loan losses. This is due to the relatively small size (as noted above) of mandatory contributions. However, additional reserves for Russia are a matter of the future, as long as the amount of necessarily created reserves is so high that it does not encourage banks to carry out additional “death” of funds.
Using the reserve for possible loan losses, it is possible to write off from the balance sheet only loan debts that are classified in the prescribed manner as bad and/or recognized as unrealistic for collection.
Loan debt that is bad and/or recognized as unrealistic for collection by decision of the Board of Directors or the Supervisory Board of the bank is written off from the balance sheet at the expense of the reserve for possible loan losses, and if there is a shortage of it, it is included in the losses of the reporting year. Loan debt is considered unrealistic for collection, for the repayment of which all possible collection measures have been taken (including the sale of collateral), and further actions to repay the loan are impossible.
In accordance with the requirements of the Central Bank, OJSC AKB Svyaz-Bank creates a reserve for possible loan losses. The amount of the reserve is determined based on an assessment of the loan quality category, as well as on the basis of an assessment of the collateral accepted under the credit transaction.
Table 2.9
Provision for possible losses on loans of the Chita branch of OJSC AKB Svyaz-Bank for 2008-2010
Table 2.9 shows that the amount of the reserve for possible loan losses throughout the analyzed period tended to increase. Taking into account the fact that lending volumes were declining during the period under study, one would expect an adequate reduction in the provision for possible loan losses. However, this did not happen; on the contrary, the bank’s loan portfolio became increasingly risky, as a result of which the bank was forced to increase its reserves in order to protect itself from risks. According to assessments carried out by employees of the lending department, the quality category of loans for many borrowers was deteriorating, which was caused by the deterioration of the financial condition of the borrowers and could not but affect the quality of debt servicing.
The loan quality category is determined by bank employees on a monthly basis for each client, however, for analysis purposes, in order to see the general trend, it is enough to take the indicators at the end of each analyzed year. The final indicator of the loan quality category is assigned based on two classification indicators: the financial situation of the borrower and the quality of debt servicing by the borrower.
In order to assess the financial position of the borrower, bank employees analyze the borrower for financial risk, business risk, as well as for the presence of objective circumstances that could negatively affect financial and economic activities. In accordance with the results obtained, the borrower is assigned a financial and business risk rating, which forms the final indicator of the borrower’s financial condition.
To determine the borrower's financial risk rating, the economic indicators of the borrower's activities are studied (his creditworthiness is assessed), and his cash flow is also studied, and a cash flow rating is assigned.
The borrower's creditworthiness class is determined in accordance with the bank's internal regulatory documents, including in accordance with the "Methodological recommendations for the analysis of economic and financial activities and the procedure for determining the creditworthiness class of a legal entity in OJSC AKB Svyaz-Bank", which defines the lists of indicators used for determining economic indicators of the borrower's activities.
There are five classes of creditworthiness depending on the quality of the borrower’s economic indicators:
H Very good - 1st class of creditworthiness;
H Good - 2nd class of creditworthiness;
H Average - 3rd class of creditworthiness;
H Satisfactory - 4th class of creditworthiness;
H Weak - 5th grade of creditworthiness.
The cash flow rating is determined based on an analysis of the business plan, feasibility study, and the state of the borrower’s accounts for previous periods in all servicing banks. A business plan and feasibility study are provided for the duration of the requested loan. Credit receipts for all settlement and current accounts in all servicing banks are analyzed for a period of at least 3 previous months prior to the month in which the assessment is made, with the calculation of average monthly receipts and net average monthly receipts. If there are several loans from different banks, the debt on all loans is taken into account.
Determining the quality rating of an organization's management is most subjective. According to the internal methodology for determining the category of loan quality, the quality of management of the borrowing enterprise should be assessed in three areas:
C Knowledge, experience, level of professionalism of management;
H Business reputation of management;
Ch Efficiency and flexibility of the enterprise management system;
The sources of information here are data provided by the borrower himself, as well as publications in the media (if any). The internal methodology includes questions divided into blocks, the answers to which will help the bank employee more objectively assess the experience and position of management; management structure of the borrower enterprise; organization of financial control at the enterprise; adequacy of decisions made by management regarding the fulfillment of their obligations to the bank.
Credit history refers to the history of the borrower’s relationship with the bank and other creditors regarding the execution of payments under concluded agreements. Credit history can be assessed as: fair, acceptable and negative, and takes into account the presence of facts of non-payment of obligations, facts of delay in payments, as well as the duration of this delay. In addition, a potential borrower may not have a credit history, which is also assessed as a certain number of points.
The financial position of a legal entity is assessed by the combination of the borrower's business risk rating and the borrower's financial risk rating as good, average or poor.
There are three categories of debt service quality: good debt service, average debt service, unsatisfactory debt service. When determining the loan quality category, the following are taken into account: frequency, timeliness and completeness of payments on obligations; presence of delay, its duration; the presence of changes in the terms of the loan agreement, including loan restructuring.
In order to determine the amount of the estimated reserve due to credit risk factors, loans are classified based on professional judgment into one of five quality categories:
Part 2 quality category (non-standard loans) - moderate credit risk, the likelihood of financial losses due to non-fulfillment or improper fulfillment of loan obligations by the borrower causes its depreciation in the amount of 1% to 20%;
Part 3 quality category (doubtful loans) - significant credit risk, the likelihood of financial losses due to non-fulfillment or improper fulfillment of loan obligations by the borrower causes its depreciation in the amount of 21% to 50%.
Part 4 quality category (problem loans) - high credit risk, the likelihood of financial losses due to non-fulfillment or improper fulfillment of loan obligations by the borrower causes its depreciation in the amount of 51% to 99%.
Part 5 (lowest) quality category (bad loans) - there is no probability of loan repayment due to the borrower’s inability or refusal to fulfill loan obligations, which leads to complete (100%) impairment of the loan.
When determining the loan quality category, significant factors are also taken into account, the presence of one of which allows the loan quality category to be adjusted (but not more than by 1 category), based on a combination of two criteria:
P Availability of collateral covering the loan debt, not related to quality categories 1 and 2, with the financial position of the mortgagor not lower than average;
P Availability of a guarantee, guarantee of a legal entity with a financial position of at least average;
P The presence of a lessee under the financed transaction with a financial position of at least average;
H Quality of debt servicing - positive credit history (under all valid agreements) with the bank and other credit institutions.
In order to track how the quality of the loan portfolio has changed, the following tables present data on the number of loans with assigned quality categories.
Table 2.11
Financial situation of borrowers - legal entities of the Chita branch of OJSC AKB "Svyaz-Bank" for 2008-2010
Table 2.12
Debt servicing by borrowers - legal entities of the Chita branch of OJSC AKB "Svyaz-Bank" for 2008-2010
Table 2.14
Financial situation of borrowers - individuals of the Chita branch of OJSC AKB "Svyaz-Bank" for 2008-2010
Table 2.15
Debt servicing by borrowers - individuals of the Chita branch of OJSC AKB "Svyaz-Bank" for 2008-2010
In accordance with the data presented in the tables, we can conclude that the number of borrowers with a poor financial situation, as well as the number of loans with poor quality of service, has increased. This was a factor in the increase in the number of loans with the lowest quality category. It is also necessary to note, in the bank for both individuals and legal entities, that in 2009 and 2010 there were no loans assigned to the first (highest) quality category that did not require the creation of a reserve. Based on the above facts, the deterioration in the quality of the bank’s loan portfolio becomes obvious. Therefore, increasing the reserve for possible loan losses is an adequate and justified measure aimed at reducing credit risk.
SAOU SPO Kamyshin Polytechnic College
MK "Professional Technologies, Economics and Law"
Specialty 080108 Banking
Course work
by discipline:
"Banking operations" and "Accounting in banks"
"FORMATION AND USE OF RESERVES FOR POSSIBLE LOAN LOSSES, THEIR ACCOUNTING"
The work was completed by: student of group B-31.10
Bulakh L.V.
Head of work: teacher Nazarova O.V.
teacher Lvova G.I.
Introduction
Conclusion
Applications
Introduction
The reserve for possible loan losses is a special reserve, the need for the formation of which is due to credit risks in the activities of banks. This reserve ensures the creation of more stable conditions for banks' financial activities and allows them to avoid fluctuations in banks' profits due to the write-off of loan losses. The reserve for possible loan losses is formed through deductions attributed to bank expenses.
The relevance of this work lies in the fact that the lending activity of a bank is one of the fundamental criteria that distinguishes it from non-banking institutions. In world practice, a significant part of a bank’s profit is associated with lending. At the same time, non-repayment of loans, especially large ones, can lead the bank to bankruptcy, and due to its position in the economy, to a number of bankruptcies of related enterprises, banks and individuals. Therefore, managing credit risk and reducing it with the help of reserves for possible loan losses is a necessary part of the strategy and tactics for the survival and development of any commercial bank.
The objects of study of this course work are the organization and modern technologies for creating reserves for possible losses on loans in banks.
The subject of the study is the activities of Russian banks in creating reserves for possible loan losses, their features and trends.
The purpose of this work is to study the procedure for forming a reserve for possible loan losses.
To achieve this goal, the following tasks are set:
1.Determine the procedure for forming reserves for possible loan losses; reserve loan loss bank 2.Study the procedure for using reserves for possible loan losses; Find out what is the organization of accounting for the formation of reserves for possible loan losses; Determine through which accounts reserves for possible losses are formed; Familiarize yourself with the peculiarities of forming reserves for possible loan losses at the bank OJSC Petrocommerce; To study the problems of forming reserves for possible loan losses by Russian banks and find possible ways to solve them. The structure of the course work reflects the goals and objectives of the study of operations to create reserves for possible loan losses using the example of the bank OJSC Petrocommerce in the city of Kamyshin. The volume of this course work is 34 pages, 15 sources used, 6 appendices and 4 tables. 1. The essence of reserves for possible loan losses
1.1 The procedure for creating reserves for possible loan losses
The reserve is formed by a credit institution in the event of depreciation of a loan (loans), that is, in the event of a loss of loan value due to non-fulfillment or improper fulfillment by the borrower of loan obligations to the credit institution or the existence of a real threat of such non-fulfillment (improper fulfillment) (hereinafter referred to as credit risk for the loan). When issuing a loan, there is always the possibility of non-payment, that is, the bank cannot unambiguously determine at the time of conclusion of the transaction and during loan support the fact of repayment of the debt on time and in full. Therefore, by creating a reserve, the bank introduces the risk of non-repayment (the so-called “credit risk”). Thus, this reserve ensures the creation of more stable conditions for the bank’s financial activities, allowing it to avoid fluctuations in the amount of profit associated with the write-off of loan losses. The source of the reserve is deductions attributed to bank expenses. That is, in accounting, the creation of reserves is reflected as bank expenses, and recovery, due to the repayment of loans or due to a decrease in the reserve rate, is reflected as bank income. The reserve is formed: -for each loan if the loan has individual signs of impairment; -for a portfolio of homogeneous loans (hereinafter referred to as PLO), that is, for a group of loans that are insignificant in amount and have common characteristics. Qualitative and quantitative assessment of credit portfolio risk is carried out simultaneously using the following methods for assessing credit portfolio risk: -analytical; -statistical; -coefficient The analytical method is an assessment of the possible losses (risk level) of the bank and is carried out in accordance with the Regulation of the Bank of Russia dated March 26, 2004 No. 254-P “On the procedure for the formation by credit institutions of reserves for possible losses on loans, on loan and equivalent debt " ed. dated December 24, 2012 No. 2948-U. This Regulation provides that the classification of loans issued and assessment of credit risks must be carried out by banks on an integrated basis depending on the following criteria: -the financial condition of the borrower, assessed using approaches used in domestic and international banking practice; -the borrower’s ability to repay the principal amount of the debt with interest, commissions and other payments due to the bank under the loan agreement, characterizing the quality of debt servicing; -the borrower has high-quality and highly liquid collateral in an amount sufficient to compensate the bank for the principal amount of the loan, all interest in accordance with the agreement, as well as possible costs associated with the implementation of collateral rights; -the presence and duration of overdue payments on the principal debt and interest thereon; -the number of re-issuances of loan debt during the validity of the loan agreement. To determine the size of the estimated reserve in accordance with the regulations of the Central Bank of the Russian Federation, loans are divided into quality categories, based on professional judgment using a combination of two criteria, “financial position” and “quality of debt service.” According to the table, all loans are divided into five quality categories: Quality category Name Amount of estimated reserve as a percentage of the principal amount of the loan I quality category (highest) Standard 0% II quality category Non-standard from 1% to 20% III quality category Doubtful from 21% to 50% IV quality category Problematic from 51% to 100% V quality category Hopeless 100% The reserve is formed within the amount of the principal debt (the book value of the loan). The reserve is formed in the currency of the Russian Federation, regardless of the currency of the loan. The amount of the reserve may be less than calculated depending on the availability of quality category I and II provision (see Appendix 1). The assessment of credit risk for each loan issued (professional judgment) must be carried out by the bank on an ongoing basis. Professional judgment is made based on the results of a comprehensive and objective analysis of the borrower’s activities, taking into account its financial situation, the quality of the borrower’s debt service on the loan, as well as all information about the borrower available to the bank, including any risks of the borrower, including information about the borrower’s external obligations, about the functioning of the market in which the borrower operates. The bank's professional judgment must contain: -information about the analysis, based on the results of which a professional judgment was made; -conclusion on the results of assessing the financial position of the borrower; -conclusion on the results of assessing the quality of debt service on the loan; -information about the presence of other significant factors taken into account when classifying the loan or not taken into account, indicating the reasons why they were not taken into account by the bank; -reserve calculation; -other essential information. All information about the borrower, including information about the borrower’s risks, is recorded in the borrower’s file. Information used by the bank to assess the quality of the loan, including the assessment of the borrower's financial position, should be available to management bodies, internal control units, auditors and banking supervisors. The bank shall document and include in the borrower's file its professional judgment. Professional judgment is formed and documented at the time the loan is issued and subsequently compiled within a month after the end of the period established for reporting to the tax authorities as of the quarterly (annual) reporting date. The formation of a reserve for possible loan losses is made at the time of issuance of loans. Every month, on the last working day, the bank makes adjustments depending on the balance of the loan debt and changes in the estimated parameters of the loan quality. The amount of the reserve for possible loan losses is adjusted by the bank daily in accordance with changes in the size and quality of the loan portfolio, that is, in connection with the issuance (repayment) of loans, the transition from one quality category to another, and changes in the risk rate for individual loans. The reserve rate is determined by the bank at least once a quarter based on professional judgment on individual loans and portfolios of similar loans. The essence of the statistical method is as follows: .analysis of credit risk statistics regarding agreements that make up the bank’s loan portfolio; 2.characterization of the measure of dispersion of credit risks across the loan portfolio; .establishing the magnitude and frequency of credit risk. The main tools of the statistical method for calculating and assessing the risk of a bank's loan portfolio are: dispersion, variation, standard deviation, coefficient of variation and asymmetry. The essence of the coefficient method for assessing credit risk is to calculate relative indicators that allow one to assess the credit risks included in the bank’s loan portfolio, the calculated values of which are compared with standard assessment criteria, and on this basis the level of the bank’s total credit risk is determined qualitatively and quantitatively. 1.2 Procedure for using reserves for possible loan losses
If the borrower fails to fulfill his loan obligations, the bank can compensate for the loss by selling the pledged property. If money is pledged to the bank, the bank covers the outstanding portion of the loan with these funds. If the pledged amount is not enough to repay the loan, then the bank has the right to receive the missing amount from other property of the debtor, without taking advantage of the pledge. If there is other property as collateral, then by law it must be put up for public auction (see Appendix 2), and the proceeds must be used to repay the loan. The remainder of the proceeds after the loan is covered is returned to the borrower. In case of hopelessness and/or impossibility of debt collection, the previously created reserve for possible loan losses is used, and the principal debt is written off from the balance sheet. This is carried out by decision of the Board of Directors or the Supervisory Board of the bank. The decision made to write off loan debt from the balance sheet of a credit institution at the expense of the reserve for possible loan losses must be confirmed by a procedural document of the judicial or notary authorities, indicating that at the time of the decision, repayment (partial repayment) of the debt at the expense of the debtor is impossible . Loans recognized as bad and/or unrealistic for collection, which are not classified as large, preferential, unsecured loans to insiders, can be written off against the reserve for possible loan losses without mandatory confirmation by procedural documents. In case of existing enforcement proceedings, the grounds for writing off loan debt are: -a people's judge's ruling on the termination of enforcement proceedings to collect a debt from a debtor (guarantor or guarantor) in favor of the creditor for the following reasons: the death of the debtor-collector or a debtor-citizen, declaring him dead, declaring him missing; insufficiency of the property of the liquidated organization to satisfy the claims of the claimant; expiration of the period established by law for this type of recovery; cancellation of the judicial act on the basis of which the executive document was issued; -decree of the bailiff on the return of the writ of execution due to the debtor’s lack of property or income that can be foreclosed on; or if it is impossible to establish the address of the debtor, the location of his property. Determinations to terminate enforcement proceedings are made by a court of general jurisdiction or an arbitration court. After the court ruling on termination of enforcement proceedings enters into legal force, the bailiff cancels all assigned enforcement measures. The specified determination and the writ of execution, in which the bailiff must make the appropriate notes, are returned to the court or other body that issued the document. The decision to return the writ of execution is made by the bailiff - the executor and approved by the senior bailiff. The enforcement documents, the impossibility of execution of some of which is the basis for the execution of a petition by the bailiffs, or the issuance by the courts of the above-mentioned determinations, include: -Writs of execution issued on the basis of decisions, rulings, decrees and sentences of judicial authorities; -Writs of execution issued by the arbitration court. -Bills of exchange protested by notarial authorities and accepted by the payer. Loan debt can also be written off if the debtor, together with creditors, makes a decision on voluntary liquidation, from the moment of liquidation of the debtor enterprise. In any case, it is mandatory for creditor banks to confirm their participation in bankruptcy proceedings, as well as the impossibility of satisfying their claims at the expense of the debtor’s bankruptcy estate. -A court decision recognizing a debtor citizen as missing. -A court decision to declare a citizen dead. If the amount of the created reserve is insufficient to cover all debt that is unrealistic for collection and must be written off from the balance sheet, then the difference between the amount of loan debt subject to write-off and the reserve created for the specified loan is attributed to the bank's losses. Writing off loan debt from the bank's balance sheet due to the debtor's insolvency does not constitute cancellation of the loan debt. Debt written off from the bank's balance sheet is reflected on the balance sheet for at least five years from the date of its write-off in order to monitor the possibility of its recovery in the event of a change in the debtor's property status, cancellation of previously made decisions of judicial authorities, discovery of the place of residence of a citizen recognized as missing or deceased. The bank regularly, at least once a quarter, sends statements to the creditor-debtor confirming the presence of overdue debt on the principal debt and accrued and not received interest on time. These statements are the basis for collecting overdue debt from the client (within the limitation period). 2. Organization of accounting for the formation of reserves for possible loan losses
2.1 Features of the organization of accounting for the formation of reserves for possible loan losses
Accounting for the reserve for possible loan losses is carried out in accordance with Bank of Russia Regulation No. 385-P dated March 26, 2007 “On the Rules for Maintaining Accounting in Credit Institutions Located on the Territory of the Russian Federation” (as amended by Bank of Russia Directives dated April 4, 2012 N 2800-U) (hereinafter referred to as Regulation N 385-P). The formation of a reserve for possible loan losses and its reflection in accounting is carried out at the time of issuing loans. The formation of a reserve for loan losses and subsequent adjustments in the event of a deterioration in the loan rating are reflected in the accounting records as follows: D-t - balance sheet account 70606 "Expenses" (under the article "Deductions to funds and reserves for possible loan losses, attributable to cost") or under the article "Deductions to funds and reserves for possible loan losses, not attributable to cost" ; Set of accounts for accounting for the reserve for possible loan losses (separate personal accounts for each loan debt). In the event of repayment of the principal debt, or part of it, the reserve must be restored to the income in the part corresponding to the repaid debt. D-accounts for accounting for the reserve for possible losses on loans (separate personal accounts for each loan debt); K-t - balance sheet account 70601 "Income" (under the article "Restoration of amounts from the accounts of funds and reserves for possible losses on loans (previously attributed to cost"); or under the article "Restoration of amounts from the accounts of funds and reserves for possible losses on loans (without attribution to cost)". The use of the created reserve for possible loan losses is made when writing off the principal debt from the balance sheet in the event of its hopelessness and/or impossibility of collection. It is carried out by decision of the Board of Directors or the Supervisory Board of the bank. The decision taken to write off loan debt from the balance sheet of a credit institution at the expense of the reserve for possible loan losses without fail for all large loans, preferential loans, loans to insiders, all unsecured loans must be confirmed by a procedural document (definition, resolution) of judicial, notarial authorities, certifying that at the time the decision is made, repayment (partial repayment) of the debt at the expense of the debtor is impossible. Write-off of the principal debt of a loan that is uncollectible is reflected in accounting as follows: D-accounts for accounting for the reserve for possible losses on loans (separate personal accounts for each loan); K-t - overdue debt on loan and equivalent accounts of clients and banks; K-t - loan accounts of bank clients, accounts for the accounting of bills purchased by the bank, other accounts for the accounting of debt equated to a loan (in the case of writing off client loan debt that is unrealistic for collection, if the debt is not overdue). At the same time, a transfer is made to off-balance sheet accounts for accounting over the next five years of loan debts written off the balance sheet and unearned interest, respectively, from accounts 918 (01-03) and 917 (03-04). D-t of accounts 91801 “Debt of credit institutions on interbank loans, written off from reserves for possible loan losses”; 91802 “Customer debt (except credit institutions), written off from reserves for possible loan losses”; 91803 “Debts written off at a loss” (separate personal accounts); Set count 99999; If the amount created is insufficient to cover all the debt that is unrealistic for collection and subject to write-off from the balance sheet, then the difference between the amount of loan debt subject to write-off and the reserve created for the specified loan is attributed to the bank's losses. If funds are not received from the debtor over the next 5 years, the specified overdue loan debt is written off from off-balance sheet accounts of a commercial bank 918 (01-03) and 917 (03-04) in correspondence with account 99999. In clause 1.15 of Part I of Regulation N 385-P it is stated that the accounts “Reserves for possible losses” (including for possible losses on loans) are intended to account for the movement (formation (additional accrual), restoration (reduction)) of reserves for possible losses. Accounts are passive. The formation (additional accrual) of reserves is reflected in the credit of the “Provisions for possible losses” accounts in correspondence with the expense account. The restoration (decrease) of reserves is reflected in the debit of the “Provisions for possible losses” accounts in correspondence with the income account. In addition, the debit of the accounts for accounting for reserves for possible losses reflects the write-off (partial or complete) of the book value of unrecoverable assets. Analytical accounting of reserve accounts for possible losses is carried out in the currency of the Russian Federation in the manner determined by the bank’s accounting policy. At the same time, analytical accounting should provide information in the context of concluded agreements with borrowers and other counterparties, the formation of reserves for which is carried out on an individual basis, and portfolios of homogeneous loans (claims). Typically, each account opened to record loan debt corresponds to one reserve account. “Provisions for possible losses” accounts are opened on the same balance sheet account of the second order for all active accounts related to the corresponding account of the first order. Therefore, if the portfolio of homogeneous loans includes loans reflected on different balance sheet accounts of the first order (for example, loans issued to small businesses of various forms of ownership), then for each balance sheet account of the first order it is necessary to open a personal account to reflect the amount of the reserve formed for homogeneous loans the corresponding portfolio. Thus, it is still advisable to form portfolios of homogeneous loans within one first-order account. A credit institution has the right, based on the materiality criteria approved in the accounting policy, to open a personal account on a balance sheet account of the first order, which contains a significant volume of homogeneous loans included in the corresponding portfolio. 2.2 The main accounts used and accounting entries for the formation and use of reserves for possible losses
Accounts: No. 441, No. 460 "Loans and funds provided to the Ministry of Finance of Russia" No. 442, No. 461 "Loans and funds provided to financial authorities of constituent entities of the Russian Federation and local governments" No. 443, No. 462 "Loans and funds provided to state extra-budgetary funds of the Russian Federation" No. 445, No. 464 "Loans and funds provided to financial organizations under federal ownership" No. 446, No. 465 "Loans and funds provided to commercial organizations under federal ownership" No. 447, No. 466 "Loans and funds provided to non-profit organizations under federal ownership" No. 448, No. 467 "Loans and funds provided to financial organizations owned by the state (except federal)" No. 449, No. 468 "Loans and funds provided to commercial organizations that are state (except federal) property" No. 450, No. 469 "Loans and funds provided to non-profit organizations that are state (except federal) property" No. 451, No. 470 "Loans and funds provided to non-state financial organizations" No. 452, No. 471 "Loans and funds provided to non-state commercial organizations" No. 453, No. 472 "Loans and funds provided to non-governmental non-profit organizations" No. 454 "Loans and other funds provided to individuals - individual entrepreneurs" No. 455 "Loans and other funds provided to individuals" No. 456, No. 473 "Loans and funds provided to non-resident legal entities" No. 457 "Loans and other funds provided to non-resident individuals" The purpose of the accounts is to record loans and other allocated funds provided to organizations of various organizational and legal forms of all forms of ownership, including: -Ministry of Finance of Russia; -financial authorities of the constituent entities of the Russian Federation and local governments; -state extra-budgetary funds of the Russian Federation; -extra-budgetary funds of constituent entities of the Russian Federation and local governments; -federally owned financial organizations; -commercial organizations under federal ownership; -non-profit organizations under federal ownership; -financial organizations that are state (except federal) property; -commercial organizations that are state (except federal) property; -non-profit organizations that are state (except federal) property; -non-governmental financial organizations; -non-governmental commercial organizations; -non-governmental non-profit organizations; -individuals - individual entrepreneurs; -individuals; -non-resident legal entities; -to non-resident individuals. Second-order active accounts have been opened to record debt on loans and other allocated funds by maturity, to account for debt on other funds. The debit of the accounts reflects: -the amounts of loans granted and other funds placed in correspondence with clients’ bank accounts, cash account (for individuals), accounts for deposits of individuals, correspondent accounts, the amount of accrued interest in correspondence with the account for accounting claims for interest receipt ; -the amounts of restored loans and other funds placed in correspondence with accounts for accounting for overdue debts of clients, deferred in the manner established by the credit institution. The credit accounts reflect: -the amount of repaid debt on loans provided to clients and other placed funds in correspondence with clients’ bank accounts, cash register accounts (for individuals), deposit accounts (for individuals), accounts for accounting settlements with employees for wages and other payments , correspondent accounts; -amounts of debt written off to accounts for accounting for overdue debts of clients; -amounts in payment for property charged to accounts for accounting offsetting transactions, if, in accordance with the agreement, the credit institution in the prescribed manner purchases property from a client who has arrears on a loan or other allocated funds. Transactions are carried out in correspondence with the corresponding accounts. Analytical accounting is carried out in the context of borrowers for each agreement. To record reserves for possible loan losses, the following accounts are used: Account 45415 “Reserves for possible losses” (Loans and other funds provided to individuals - individual entrepreneurs). Account 45515 “Reserves for possible losses” (Loans and other funds provided to individuals). Account 45715 “Reserves for possible losses” (Loans and other funds provided to non-resident individuals). Account No. 458 "Overdue for loans granted and other allocated funds." The purpose of the account is to record overdue debt on loans provided to clients and other funds placed. For second-order accounts, overdue debt is accounted for by groups of borrowers. Accounts are active. Accounting for reserves for possible losses on overdue loans and other placed funds is carried out on account No. 45818. Analytical accounting is carried out in the context of borrowers for each concluded agreement. Account 45918 “Provisions for possible losses” (Overdue interest on loans provided and other placed funds). table 2 Entries for accounting for reserves created for possible loan losses. Contents of the transaction DebitCredit A reserve was created (additionally accrued) for interbank loans provided 70606 (A) 32015 (P) 32115 (P) The accounting reflects the creation (additional accrual of a reserve for loans granted to legal entities 70606 (A) 45215 (P) 45615 (P) A reserve was created (additionally accrued) for loans granted to individuals 70606 (A) 45415 (P) 45515 (P) 45715 (P) The records reflect a write-off (reduction of the previously created reserve upon repayment of an interbank loan 32015 (P) 32115 (P) 70107 (P) Written off (reduced) previously created reserve when repaying a loan by a legal entity 45215 (P) 45615 (P) 70107 (P) The accounting reflects the write-off (reduction) of the previously created reserve when repaying a loan by an individual 45415 (P) 45515 (P) 45715 (P) 70107 (P) Written off from the balance sheet of the bank, an overdue debt on the principal debt is recognized as bad or unrealistic for collection, with the amount of the previously created reserve sufficient to repay the loan 32015 (P) 32115 (P) 45215 (P) 45415 (P) 45515 (P) 45615 (P) 45715 (P ) 32401 (A) 32402 (A) 45812 (A) 458.14-17 (A) The accounting reflects the write-off from the bank’s balance sheet as recognized as bad or unrealistic for collection of the current (not overdue) debt on the principal debt with the amount of the previously created reserve sufficient to repay the loan 32015 (P) 32115 (P) 45215 (P) 45415 (P) 45515 (P) 45615 (P) 45715 (P) 320.02-10 (A) 321.02-10 (A) 452.03-08 (A) The recognized the overdue debt on the principal debt is hopeless or unrealistic for collection when the amount of the previously created reserve is insufficient to repay the loan: For the remaining actual amount of the previously created reserve for this loan 32015 (P) 32115 (P) 45215 (P) 45415 (P) 45515 (P) 45615 (P) 45715 (P) 32401 (A) 32402 (A) 45812 (A) 458.14-17 (A) For the amount in excess of the reserve 70606 (A) 32401 (A) 32402 (A) 45812 (A) 458.14-17 (A ) The current (not overdue) debt on the principal debt, recognized as bad or unrealistic for collection, was written off from the bank's balance sheet when the amount of the previously created reserve was insufficient to repay the loan: For the remaining actual amount of the previously created reserve for this loan 32015 (P) 32115 (P) 45215 (P ) 45415 (P) 45515 (P) 45615 (P) 45715 (P) 320.02-10 (A) 321.02-10 (A) 452.03-08 (A) For the amount in excess of the reserve 70606 (A) 320.02-10 (A) 321.02- 10 (A) 452.03-09 (A) 3. Current trends in the formation of reserves for possible loan losses
3.1 Features of the formation of reserves for possible losses on loans in the bank OJSC Petrocommerce
At the bank OJSC Petrocommerce, risk assessment for loans, classification of loans into appropriate quality categories and the formation of a reserve for possible loan losses is carried out in accordance with Regulations of the Central Bank of the Russian Federation No. 254-P. The reserve is formed for a specific loan or for a portfolio of similar loans. The formation of a professional judgment on the level of credit risk for a loan and the reserve rate is carried out by Authorized Departments. The authorized division collects information from responsible departments about the financial condition of the counterparty, the quality of debt servicing and the analysis of collateral. Based on the information received, the Authorized Division makes a professional judgment (see Appendix 3) about the level of credit risk for the loan and the reserve rate, assigns a quality category to the loan and determines the reserve rate for it (see Table 3). Financial condition Debt servicing Good Average Unsatisfactory Good Standard (I quality category) base reserve rate 0% Non-standard (II quality category) base reserve rate 1% Doubtful (III quality category) base reserve rate 21% Average Non-standard (II quality category) base reserve rate 1% Doubtful (III category quality) base reserve rate 21% Problematic (IV quality category) base reserve rate 51% Poor Doubtful (III quality category) base reserve rate 21% Problematic (IV quality category) base reserve rate 51% Hopeless (V quality category) base reserve rate 100 % If for a borrower for a period of more than one quarter there is no information specified in the Methodology for assessing financial condition, including financial information, the loan is classified no higher than quality category II with the formation of a reserve in the amount of 20 percent. If the specified information is not available for the borrower for a period of more than two quarters, the loan is classified no higher than quality category III with the formation of a reserve in the amount of 50 percent. If the bank establishes that the borrower has submitted, for the purpose of assessing the financial situation and determining the quality category of the loan provided to him and the size of the reserve, reporting and (or) information that is unreliable and (or) different from the reporting and (or) information provided by the borrower to government authorities , to the Bank of Russia and (or) published by the borrower and (or) located in the credit history bureau, the bank classifies the loan provided to such a borrower no higher than quality category III with the formation of a reserve of at least 50 percent from the date the bank establishes the above fact. Portfolios of homogeneous loans can be formed by the following groups of borrowers: .Individuals, including individuals who are business owners within the framework of small business lending. 2.Legal entities receiving factoring services; .Legal entities and individual entrepreneurs within the framework of small business lending. The calculation of the reserve rate for portfolios of homogeneous loans is carried out by the Portfolio Analysis of Credit Risks of the Risk Control Department. The rate approved by the Credit Committee is communicated to the branches by the Secretary of the Credit Committee. At the time of the emergence of a new loan and equivalent debt on a loan, which, by its characteristics, is included in the portfolio of homogeneous loans, the Authorized Division determines whether the specified loan belongs to the portfolio of homogeneous loans. Loans from borrowers who provided inaccurate reports to the Bank cannot be included in portfolios of homogeneous loans. A loan may be classified into a different quality category than that provided in Table 3 if information about other significant factors is available. In this case, the authorized unit may decide to classify the loan into a lower or higher quality category (see Appendix 4). The assessment of the financial condition of legal entities is carried out in accordance with the Methodology for analyzing the financial condition of legal entities. (see Appendix 5) -documents confirming the income of an individual; -documents confirming the monetary assets an individual has in the Bank or other credit institutions. Depending on the quality of debt servicing by the borrower, loans are classified into one of three categories: good, average, and unsatisfactory debt servicing (see Table 4). Table 4 Quality of debt servicing by the borrower Good Average Unsatisfactory Current debt There is a case (cases) of late payments on the principal debt and (or) interest during the last 180 calendar days with a duration (total duration): Legal entities from 1 to 5 calendar days inclusive From 6 to 30 calendar days inclusive More than 30 calendar days Individuals persons from 1 to 30 calendar days inclusiveFrom 31 to 60 calendar days inclusiveMore than 60 calendar days The reserve for possible losses on loans and similar debts is formed in the balance sheet of the bank divisions carrying out the operation, i.e. in the balance sheets of the head office and branches separately. The size of the loan reserve is updated daily in connection with changes in the level of credit risk and changes in the quality of loan collateral. The bank, in accordance with the procedure established by the authorized body of the credit institution (the corresponding credit committee), documents and includes in the borrower’s file a professional judgment. Professional judgment is exercised and documented at the time the loan is issued. At the end of 2012, the quality of the loan portfolio in the studied bank Petrocommerce improved: in 2012, the volume of problem debt decreased by 9%, and its share in the total loan portfolio decreased from 11.7% to 9.2%. At the same time, the bank adheres to a conservative policy in terms of reserves, and, as a result, the coverage of problem debt with reserves amounted to 127% (108% a year earlier). The share of unsecured corporate loans decreased from 17% to 12%. 3.2 Problems of forming reserves for possible loan losses by Russian banks, and possible ways to solve them
The volume of overdue credit debt and unrecovered debts - the so-called “bad” loans, currently amounts to about 10% of the total loan portfolio of Russian banks. This is about 2 trillion. rubles, including overdue debt, as well as restructured and extended loans. At the same time, according to the latest data from the Central Bank, the overdue debt of individuals to banks exceeded 144 billion rubles, and the total volume of problem loans reaches almost 300 billion rubles. Russians are the worst at repaying consumer loans: the share of outstanding debt in this segment as of December 1, 2012 was 10.3%. The share of arrears on car loans was 7.8%, on mortgages - 7%. Therefore, in modern economic conditions, the issues of improving the methodology for forming reserves for possible loan losses are becoming increasingly important. Reserves must compensate for losses that banks may incur in the event of non-repayment of the credit resources they placed, i.e. minimize credit risk. Reserves are formed through deductions that are expensed before tax and are not included in the equity capital of credit institutions. The amount of created reserves depends on the financial position of the bank and the quality of debt servicing by the borrower. The loan loss reserve is not an effective reserve because no resources of value are used to create it. In Russia, as part of the upcoming reform of the banking supervision system, it is planned to “further liberalize approaches to the formation of all types of reserves, linking them with the introduction of International Accounting Standards into the practice of credit organizations and the modernization of the taxation system. Credit organizations will be given greater opportunities to make judgments on the amount of accepted risk when forming reserves with subsequent control by supervisory authorities and audit organizations. The methods of credit institutions often do not allow identifying all the risks of borrowers and forming an adequate reserve. They include factors for assessing risk that create conditions for possible manipulation of the amount of reserves and, consequently, the amounts of expenses and profits. Thus, the impossibility of returning part of the assets is associated primarily with the provision of commercial banks with the right to independently develop methods for assessing credit risk and forming reserves in accordance with them, as well as with the lack of operational control on the part of the Central Bank of the Russian Federation over the quality of internal documents of credit institutions. It would be advisable to provide for a procedure for approval by territorial departments of the Central Bank of the Russian Federation of methods for their compliance with the requirements, which will help reduce credit risk. It is also necessary to create adequate reserves for loans. The emergence of the problem of creating such reserves is due to the fact that Regulation No. 254-P “On the procedure for the formation by credit institutions of reserves for possible losses on loans, on loan and equivalent debt” applies to all types of credit institutions (both specialized and universal). This approach does not seem entirely correct. Credit institutions do not sufficiently take into account industry and other concentration risks. Lending to enterprises in only one sector of the economy or only one geographic region makes the credit institution vulnerable. There is a high probability that a significant number of clients may go bankrupt at the same time for the same reasons. This problem is typical for specialized banks. In the context of political and financial turmoil, the analysis and consideration of bank credit risk factors should be approached more comprehensively. Credit risk factors are divided into individual risks and the total risk of the loan portfolio. The total risk of the loan portfolio is affected by external factors such as unfavorable changes in financial markets, the financial crisis, the underdevelopment of the information market, the general state of the region’s industry, etc. The existing approach to assessing credit risk and creating appropriate reserves for possible loan losses in Russia relatively fully takes into account the individual risks of borrowers and does not adequately take into account the overall risk of the loan portfolio, i.e. influence of external factors on the portfolio. In addition, there are no reliable sources for timely assessment of external risks affecting the activities of borrowers. One possible way to solve this problem may be to create an additional specialized reserve. The most universal indicator characterizing the state of the industry is the volume of revenue received. Since the source of loan repayment in most cases is the borrower’s revenue, the criterion for assessing credit risk can be the overall change in the volume of this indicator. The amount of borrowers' revenue is indicated in the reports they submit to credit institutions quarterly. A decrease in the total revenue compared to the base indicator may become the basis for creating an additional reserve, covering, for example, industry risk. Thus, the solution to the listed problems is possible by introducing the proposed additions to Regulation No. 254-P “On the procedure for credit institutions to form reserves for possible losses on loans, on loan and equivalent debt.” These additions will allow for better and more timely analysis of loan portfolios and more effectively manage credit risk. Conclusion
As a result of writing this course work, it was found that reserves for possible loan losses are formed by a credit institution in the event of possible loan impairment due to non-fulfillment or improper fulfillment by the borrower of its obligations. By creating a reserve, the bank introduces the risk of non-repayment. The reserve provides the credit organization with more stable conditions for financial activity and allows it to avoid fluctuations in the amount of profit associated with the write-off of loan losses. Reserves are formed from deductions that the bank applies to expenses. In accounting, the creation of reserves is reflected as bank expenses. To determine the size of the estimated reserve in accordance with the regulations of the Central Bank of the Russian Federation, loans are divided into quality categories, based on professional judgment using a combination of two criteria, “financial position” and “quality of debt service.” In case of hopelessness and/or impossibility of debt collection, the previously created reserve for possible loan losses is used, and the principal debt is written off from the balance sheet. A credit institution deposits required reserves with the Bank of Russia in cash in the currency of the Russian Federation by transferring them to an account for storing required reserves opened with the Bank of Russia in a non-cash manner. The amount of required reserves to be deposited in accounts for required reserves is calculated as the difference between the standard and average amounts of required reserves. In this work, the following issues were considered: .The procedure for forming reserves for possible loan losses; 2.The procedure for using reserves for possible loan losses; .Features of the organization of accounting for the formation of reserves for possible loan losses; .The main accounts used and accounting entries for the formation and use of reserves for possible losses; .Features of the formation of reserves for possible losses on loans in the bank OJSC Petrocommerce; .Problems of forming reserves for possible loan losses by Russian banks, and possible ways to solve them. When writing the course work, the works of such scientists as economists were used: T.A. Frolova, G.P. Nizhnikova, V.V. Ushakov and others, as well as economic journals such as "Bulletin of the Bank of Russia", "Questions of Economics". The study examined the procedure for forming reserves for possible loan losses in all Russian banks in general, and also took the Petrocommerce OJSC bank, using which as an example, methods for calculating and forming reserves for possible losses on various loans were considered. As a result of the study, modern problems of forming reserves for possible loan losses in Russia were identified and possible ways to solve them were proposed. Thus, the set goals and objectives of the work have been achieved. List of sources used
1.Regulation of the Bank of Russia N 254-P dated 03/26/2004 “On the procedure for the formation by credit institutions of reserves for possible losses on loans, on loan and equivalent debt” (as amended on 01/01/2013) // [el. resource] 2.Regulation N 342-P dated 08/07/2009 “Regulations on required reserves of credit institutions” (as amended on 09/14/2011) // [el. resource] .Order No. 16/548 of 08/02/2004 (amended 08/27/2013) // [el. resource] .Frolova T.A. "Banking"; [text]: lecture notes / T.A. Frolova - Taganrog: "TTI SFU" 2010, 270 pp. .Kapaeva T.I. "Accounting in banks"; [text]: textbook/ T.I. Kapaeva - Moscow: "INFRA-M" 2008, 576 pp. .Methodological journal "Taxation, accounting and reporting in a commercial bank"; [text] 2010 96 pp. .#"justify">. #"justify">. #"justify">. #"justify">. #"justify">. #"justify">. #"justify">. #"justify">. #"center"> Applications
Annex 1
.pledge, if the subject of pledge is: -quoted securities of countries with an investment rating of at least "BBB"; -bonds of the Bank of Russia; -securities issued by the Ministry of Finance of the Russian Federation; -bills of the Ministry of Finance of the Russian Federation; -quoted securities issued by legal entities with an investment rating not lower than "BBB"; -own debt securities of a credit institution; -bills of exchange, avalized and (or) accepted; -refined precious metals in bars (gold, silver, platinum and palladium); -securities issued by constituent entities of the Russian Federation with an investment rating not lower than "BBB"; -real estate that serves as security for the fulfillment of the borrower’s obligations under a residential mortgage loan agreement. 2.guarantee deposit (deposit) - placed with a credit institution; 3.guarantee of the Russian Federation, bank guarantee of the Bank of Russia, guarantees (guarantees) of governments and bank guarantees of central banks of countries with standard ratings of “0”, “1”; .guarantees (guarantees) of legal entities, if these legal entities have an investment rating of at least “BBB”; .sureties (guarantees) of constituent entities of the Russian Federation with an investment rating not lower than "BBB"; .compensation deposit of the Bank of Russia - funds provided by the Bank; .obligations of the state corporation "Deposit Insurance Agency" to repurchase loans from credit institutions; .insurance contracts for export loans and investments, secured by government guarantees. .liquid collateral not related to quality category I security; 2.guarantees (bank guarantees) and guarantees (in relation to bills - avali and (or) acceptances; .sureties (guarantees) of constituent entities of the Russian Federation with a rating not lower than "CCC"; .guarantees of business support funds established by constituent entities of the Russian Federation and funds to promote lending to small and medium-sized businesses; .guarantees of the Agency for Housing Mortgage Lending for mortgages accepted as security for those provided. Appendix 2
Sale of collateral .The bank's authorized representative draws up a notice of failure to fulfill the main obligation; 2.If the requirements arising from the notice of failure to fulfill the main obligation have not been satisfied, no earlier than 30 days from the date of delivery or sending of the specified notice to the pledgor, the bank’s authorized representative draws up a notice of bidding for the pledged property; .At least 10 days must pass from the first publication of the tender announcement until the tender is held. The auction is also conducted by the bank's authorized representative. Appendix 3
Professional judgment on the level of credit risk on the loan and the reserve rate "___"_________________20...g.
. General information about the loan and its quality Type of loan (loan, deposit, debt securities, bill, guarantee, letter of credit, financial lease (leasing), assignment, REPO, interbank lending, factoring, requirements for the return of securities provided under the loan agreement) Name (full name) of the Borrower No. of the contract (other document) Currency of the contract Limit under the contract, in the currency of the contract Balance of debt at the time of drawing up a professional judgment, in the currency of the contract Financial condition (good, average, bad)Average rating of financial condition, points (not applicable for loans to individuals) Presence of additional factors indicating a deterioration in financial condition in accordance with Table 7, clause 2.2.7, list 2. Information about the quality of debt servicing. Number of days of delay over the last 180 days Number of facts of late payments over the last 180 days Information on restructuring Information on improper fulfillment of obligations under other agreements with the Bank or other credit institutions, if any Debt servicing quality (good, average, unsatisfactory) 3. Information about collateral (if collateral is included in the calculation of the reserve) Name of pledgors Types of collateral (real estate, equipment, securities, goods in circulation, motor vehicles, etc.), list Amount of collateral of the first quality category, in the currency of the collateral agreement Amount of collateral of the 2nd quality category, in the currency of the collateral agreement Financial condition of the mortgagor (good, average, bad) 4. Calculation of the reserve as of the date of professional judgment. Amount of collateral of quality category I, in the currency of the agreement Amount of collateral of category II quality, in the currency of the agreement Amount of reserve, in the currency of the agreement Quality category (I-V) Calculated reserve, in % Percentage of reserve, in % of the principal amount of the loan. Percentage of reserve on accrued interest If there is a decision to clarify the classification of the loan in accordance with clause 3.10 254-P and (or) Directive 2156-U, indicate the Protocol No. of the authorized body. Additional Information If there are written recommendations from the Bank of Russia with instructions to classify a loan into a quality category other than that provided for in the Regulations, the recommended values are indicated in the relevant sections of professional judgment (financial condition / quality of debt service / quality category / estimated reserve), while in the column “Additional information “The basis for such classification is indicated (No. and date of the letter from the Bank of Russia). 5. This professional judgment is simultaneously an order to create a reserve, as well as an order to adjust the reserve based on changes in exchange rates and changes in the balance under the contract. Appendix: 1 sheet - scoring result in the form of an EXCEL table (not applicable for personal loans). Head of the Authorized Unit ___________/____________/ Responsible employee of the DKR ___________/____________/ Appendix 4
Factors influencing the classification of loans into a lower quality category These include: -providing the borrower with a loan on preferential terms; -economic relationship of borrowers; -information about the poor financial situation of the borrower’s founders; -information about the borrower’s failure to fulfill obligations on loans provided by other credit institutions - lenders; -use of the loan by the borrower for purposes other than its intended purpose. Significant factors that may influence a credit institution’s decision to classify loans into a higher quality category include: -real prospects for making payments on principal and interest on time and in full. Appendix 5
Analysis of the financial condition of legal entities The methodology for analyzing the financial condition of legal entities is based on a quantitative assessment of 4 main groups of financial ratios (liquidity, financial stability, profitability and business activity). Acceptable standard values of coefficients and the weight of influence on the final assessment for the group depend on the industry in which the borrower operates. Standard ratios by industry are calculated based on statistical information and approved by the Credit Committee. The result of the analysis of the enterprise is the assignment of a rating in points (from 0 to 100). For the purposes of these Regulations, the financial condition of the borrower is assessed in accordance with the scale below. Financial condition Score (average for the last 4 quarters) Good More than 30 Average From 10 to 30 Poor Less than 10 Appendix 6
Assessment of the financial condition of individuals Financial situation Good P >= F Average 0.5F=< P where P is the amount of the borrower's solvency; = D * T + B,
where D is the borrower’s average monthly income, determined by summing the average monthly income of an individual subject to personal income tax, the average monthly credit turnover of funds on bank card accounts; B - cash balances on current accounts, deposits (deposits), brokerage accounts, OFBU as of the date of settlement; T - loan term (in months); - amount of principal debt on the loan There are five different categories of bank loans, varying in quality. And not all of them are returned on time for a variety of reasons. Therefore, reserves are needed for possible loan losses. If the loans are not repaid, the bank needs to continue making payments. This is exactly why a reserve is needed. However, how is it formed and what is it regulated by? Creating reserves for possible loan losses is a mandatory action for all banks and organizations that carry out such operations. The main regulatory document for such work is Regulation No. 254-P of the Bank of Russia of 2004. There is a mandatory addition to this document. This is Bank of Russia Directive No. 2459-U of 2010, which concerns risk assessment of debts. In order to determine the required amount of reserves for possible loan losses, it is necessary to analyze the existing portfolio, and then classify already issued loans according to the quality criteria specified by the Bank of Russia. Of the five categories in this classification, depending on the criteria, there is its own level of risk. The first category is standard risks, there is no danger of non-return, and therefore the value of the reserve is zero in calculations. In the second category, risk situations are already non-standard, because the calculated risks of non-return range from 0.01 to 0.2. Therefore, reserves will have to be created up to 20% of the amount. The third category is doubtful operations, the risk is 0.21-0.5, and the reserve should also be greater - from 21 to 50 percent. The fourth category includes problem loans, with a risk of non-repayment from 0.51 to 0.99, and reserves increase up to one hundred percent. In the last, fifth category, the operations were literally hopeless; most likely, the amount will not be returned. Therefore, reserves for possible loan losses must be 100%. The assessment is made by banking specialists based on professional analysis. First of all, experts analyze all changes in the financial situation of the person who received the loan, as well as his conscientiousness or lack thereof in servicing this debt. If the recipient of the loan is in good financial position and with debt servicing, then the risks of non-repayment are standard, and one can only fear force majeure. If, despite a good financial situation, a bank client experiences interruptions in the return of money, that is, debt servicing is average, then the risks become non-standard. And it is already necessary to create reserves for possible loan losses. If a financially successful person has a very bad attitude towards debt repayments, then the operation is considered doubtful. The risks increase proportionally: with an average financial situation and good debt servicing, the situation is still non-standard, and if this person also makes payments late, his credit history becomes questionable. It also happens that a person with average income stops repaying the debt, then the operation on his issue becomes problematic. The formation of reserves for possible losses on loans of such a plan should be in full swing. Well, the last option: the person to whom the bank issued a loan has a bad financial situation, but he is trying with all his might to pay his bills. All the same, the operation of his loan is considered dubious. Who knows how soon he won’t be able to pay at all? A reserve for possible loan losses is required. If this loser does not pay the planned installments and interest on the amount for a long time, this is a problematic operation. But when the client stops paying altogether and there is no sign of an improvement in his financial situation, there is nothing to expect; this operation is hopeless. In order for the analysis and formation of RLP (reserves for possible loan losses) to be successful, similar criteria (mostly insignificant) are combined into a single portfolio. Its name is not difficult to guess. We are talking about a group of homogeneous loans. In these cases, all calculations can be easily carried out depending on the contents of the portfolio. Many note that the process of creating a reserve for possible loan losses is very similar in terms of risk assessment criteria to the procedure for creating insurance reserves. The values of risks and reserves recommended by the Bank of Russia are determined by the method of mathematical statistics. The reserve for possible loan losses is created in accordance with the documents provided by the Bank of Russia, and there is also a uniform procedure for this purpose. This is a permanent process, and we should never forget about it. Even yesterday’s reserve value indicators must be clarified and adjusted today. This is because the main criteria that are taken into account are constantly changing. Firstly, old loans are repaid and new ones are issued, and secondly, the situation of borrowers changes, so transactions with their loans can freely move across categories - from one to another. For the same reason, the reserve rate is subject to adjustment, although it is updated less frequently - quarterly. There are several rules for the process of creating and clarifying the reserve rate, but one of them is the main one, set out in Regulation No. 254-P (fourth chapter). If one borrower has several loans that accumulate debts with different quality ratings, then all debts are assessed at the lowest value. Accordingly, the reserve for possible loan losses is calculated. For example, a borrower was issued two loans, which he repays on time, and they fell into the category where both the financial situation and the client’s attitude towards obligations are in good faith, that is, both are “good.” However, the borrower burdened himself with another loan taken out. And it became clear from the information provided that the financial situation had worsened. This means that the new loan is rated “good-average” in the “non-standard” risk category, and the probability of non-repayment requires the creation of a reserve for loan losses. Next step: two existing loans are moved to the same category. And a reserve is created for them. Although the borrower repaid the first two loans without problems and on time. If there are amounts not collected from the debtor, bank guarantees are provided, but the same rules apply to the assessment of this operation as for other, ordinary borrowers, that is, it is necessary to create reserves for loan losses when risks arise. Amounts that are secured by mortgages are assessed according to additional criteria, since an analysis of changes in the value of the property that is pledged is necessary. Financial transactions for which deferred payments are granted or transfers of assets are permitted must be accompanied by the formation of additional reserves that will cover one hundred percent of the cost of the financial asset. A syndicated loan (where there are several borrowers) requires the calculation of a reserve in relation to each participant in this syndicate. These rules were enshrined in 2012 by the Bank of Russia (Instruction No. 139-I). Whether the client has insurance (loss of ability to work, health, life, etc.) is sometimes considered as a fact that influences the assessment of the reserve, and sometimes is not taken into account. This is because the criterion here is only the amount of compensation in case of an insured event that will be due to the bank, as well as the level of coverage of the amount that the borrower needs in order for him to continue to properly service his debt. If the amount due to the bank in the event of an insured event does not cover the client's debt, the bank does not consider the presence of insurance at all as a factor helping to reduce the reserve for possible loan losses. Thus, the worst (fifth) category by default includes exactly those amounts that were issued to credit institutions that were subsequently deprived of their license. And also those for which there are no documents confirming the relationship with this loan. And in the fifth category, reserves for possible loan losses are formed from capital. It's simple. There are quite a lot of unpleasant nuances in these operations that need to be kept in mind, and most often they are associated specifically with borrowers who are individuals. Correctly form reserves for loans to individuals based on two divisions. The first portfolio is for ordinary individuals, and the second is for entrepreneurs. Further, issued loans are classified into secured and unsecured loans. Collateral can be different: a car, real estate, any valuable property. Any loans can be repaid in good faith, that is, on time, without delays, and in bad faith, with delays. It is the criteria listed above that influence the formation of a portfolio of homogeneous loans. This is very convenient to use: the reserve is calculated entirely based on the contents of the portfolio, rather than analyzing each loan separately. Regulation No. 254-P establishes the amount of reserve contributions to choose from: an option for ordinary individuals and two options for entrepreneurs. You can choose a standard for creating a reserve for possible loan losses based on the criterion. Which is used by the bank to classify mortgage loans. For example, during the formation of portfolios, allocate low-risk loans into separate ones. But it depends on the bank's policy - some do not allocate. The second criterion that is also not always used is when a whole group of loans with small overdue payments, for example, up to thirty days, is placed in one portfolio. Some banks include them in the group of loans without any overdue payments. The most important thing is that any applied procedure for creating a reserve must be fixed by local regulations. The bank also provides, upon the first request of the Bank of Russia, all reporting on these issues, where the methods of forming a reserve fund for expected loan losses must be disclosed. Credit institutions create reserves based on the chart of accounts approved by Regulation No. 385-P of the Bank of Russia in 2012. Thus, in accordance with this plan, the bank reserves expected losses on the loan of a sub-account, which is opened to the same account and in which the loan itself is accounted for. At the same time, analysis by type of loan can be achieved by using an account from the plan, plus a debit to the bank's expense account. Purely technically, it turns out that by creating a reserve on the balance sheet, the amount of debt of dubious nature is reduced. And the difference is applied evenly over time to the financial result. The bank must also make provisions for expected loan losses in order to evenly attribute loan losses to expenses directly during the risk assessment procedure. In this way, the risk of loan non-repayment can be managed. Credit risk assessment is carried out in qualitative and quantitative terms; at the same time, analytical, statistical and coefficient methods of assessment are used. The use of these methods helps to reduce and avoid risks in the loan portfolio. The bank's risk level is assessed using an analytical method. This work is regulated by Regulation No. 254-P of the Bank of Russia of 2004, which talks about the formation of reserves and provides for the classification of issued loans. The credit risk of each loan portfolio is assessed directly by the bank according to approved criteria. The financial condition of the borrower is assessed using approaches that are used in practice both in the international and Russian banking systems. The client’s ability to repay not only the principal debt, but also the interest due to this amount in favor of the bank, as specified in the loan agreement, as well as all commissions and other payments, is assessed, which characterizes the quality of the borrower’s servicing of his own debt. The client is checked to ensure that the client has highly liquid and high-quality debt security in an amount sufficient to compensate for the principal amount of the loan, the interest specified in the agreement, as well as the costs of realizing the collateral rights. An analysis is carried out of the presence of overdue payments and their duration for the principal debt and interest on this amount. The number of debt renewals during the contract period is established. In answering this question, we will consider the features of the formation and use of this type of reserves, their role in the bank’s activities and in taxation, and what you should pay attention to when carrying out transactions with residents of offshore zones. Reserves for possible losses for transactions with offshore companies are formally ordinary reserves for possible losses, however, there are some features in their reflection in accounting, so let’s look at the procedure for calculating them using specific examples. Reserves for possible losses for transactions of credit institutions with residents of offshore zones are fundamentally different from reserves for loans, other assets, contingent credit obligations, forward transactions and other losses. The procedure for forming reserves for transactions with offshore companies is determined by Bank of Russia Directive No. 1584-U dated June 22, 2005 “On the formation and amount of reserves for possible losses for transactions of credit institutions with residents of offshore zones” (hereinafter referred to as Directive No. 1584-U). In accordance with this regulatory document, credit institutions are required to create reserves: — for loans provided to residents of offshore zones, as well as loan and equivalent debt, determined in accordance with the requirements of Bank of Russia Regulation No. 254-P dated March 26, 2004 “On the procedure for credit institutions to form reserves for possible losses on loans, loan and debt equivalent to it" (hereinafter referred to as Regulation No. 254-P), which is registered with residents of offshore zones (hereinafter referred to as loans); — financial instruments that are elements of the settlement base in accordance with Bank of Russia Regulation No. 283-P dated March 20, 2006 “On the procedure for the formation of reserves for possible losses by credit institutions” (hereinafter referred to as Regulation No. 283-P), the counterparties for which are residents of offshore zones (hereinafter referred to as financial instruments). In fact, the text of Directive No. 1584-U contains a reference not to Regulation No. 283-P, but to the Bank of Russia Regulation No. 232-P dated July 9, 2003, which was in force until June 1, 2006, “On the procedure for the formation by credit institutions of reserves for possible losses " Moreover, further in the text of the Directive there is a reference to Bank of Russia Regulation No. 205-P dated December 5, 2002, which became invalid on January 1, 2008. Unfortunately, to date the regulator has not made appropriate changes to its regulations. An offshore zone is understood as a foreign state that provides preferential tax treatment and (or) does not provide for the disclosure and provision of information when conducting financial transactions. The list of offshore zones is established by Appendix 1 to the Directive of the Bank of Russia dated August 17, 2003 No. 1317-U “On the procedure for authorized banks to establish correspondent relations with non-resident banks registered in states and territories that provide preferential tax treatment and (or) do not provide for disclosure and provision of information when conducting financial transactions (offshore zones)” (hereinafter referred to as Directive No. 1317-U). Residents of offshore zones in respect of whom reserves are formed include: — individuals who have a permanent place of residence in the offshore zone, including those temporarily located outside the offshore zone; — legal entities established in offshore zones; — separate divisions of legal entities located in offshore zones that do not have the status of a legal entity; — branches and representative offices of residents of offshore zones located outside offshore zones. Reservation requirements in accordance with Directive No. 1584-U do not apply to: - for transactions carried out through correspondent or other accounts opened in international settlement and clearing centers that are located in the European Union and in their activities use the standards established by the regulatory documents of the European Union Commission; — investments in the authorized capitals of subsidiaries and dependent legal entities - residents of offshore zones, reducing the amount of equity (capital) of a credit institution in accordance with Bank of Russia Regulation No. 215-P dated February 10, 2003 “On the methodology for determining equity (capital) of credit institutions" (hereinafter referred to as Regulation No. 215-P); — loans and financial instruments, the counterparties of which are: banks that are residents of offshore zones if the latter are subsidiaries of credit institutions and the transfer of funds to the authorized capital of banks that are residents of offshore zones was carried out on the basis of permission from the Bank of Russia; main companies - residents of the Russian Federation with subsidiaries - residents of offshore zones that are not banks, provided that the transfer of funds to the authorized capital of subsidiaries - residents of offshore zones was carried out on the basis of permission from the Bank of Russia; banks represented by structural divisions (branches) of banks registered in offshore zones - residents of states, members of the Organization for Economic Cooperation and Development (OECD) and (or) the Special Financial Commission on Capital Laundering (FATF), if, in accordance with the conclusion banking supervisory authority of the country where the bank's head office is located, from among those indicated, the level of procedures used in the banking group to prevent money laundering and terrorist financing, as well as procedures to prevent dubious transactions, is sufficient (documentary evidence of such a conclusion of the banking supervisory authority is provided credit institution to the Bank of Russia). The specified reserve is formed in the same way as other types of reserves for possible losses, in the currency of the Russian Federation. It is formed from the moment of reflection of reserved loans and (or) financial instruments on balance sheet and off-balance sheet accounts and is regulated at the moment of changes in calculated values, as well as balances on the corresponding accounts, except for cases when, due to the revaluation of currency items of the balance sheet, the balances on the corresponding accounts in foreign currency. When balances on the relevant accounts in foreign currency change due to the revaluation of foreign currency items on the balance sheet, the reserve is adjusted at least once a month on the reporting date. Write-off from the balance sheet of a credit institution of debt that is unrealistic for collection (more precisely, bad debt - that is how it is called in the current version of Regulation No. 254-P) at the expense of the reserve formed in accordance with Directive No. 1584-U is not allowed. The calculation base of the reserve is determined differently for loans and financial instruments subject to reserve in accordance with Directive No. 1584-U. For financial instruments (with the exception of elements of the calculation base, the reserve for which is formed in accordance with the requirements of clause 2.2 of Regulation No. 283-P), the reserve is formed for balances on individual personal accounts opened on balance sheet and off-balance sheet accounts included in the calculation base of the reserve, on which financial instruments are accounted for, taking into account the following. The object of reservation under a guarantee (bank guarantee) is considered to be both a guarantee (bank guarantee), under which the resident of the offshore zone acts as a principal (debtor), and a guarantee (bank guarantee), under which he acts as a beneficiary (creditor). The object of reservation under a guarantee is considered to be both a guarantee under which a resident of an offshore zone acts as a debtor, and a guarantee under which he acts as a creditor. If a credit institution is a guarantor (guarantor) for a transaction in which both the principal (debtor) and the beneficiary (creditor) are residents of offshore zones, the reserve is formed in relation to that resident of the offshore zone (principal (debtor) or beneficiary (creditor)) , the risk for which is assessed as the highest. For balances on separate personal accounts opened on balance sheet accounts that account for purchased securities issued by residents of offshore zones, regardless of whether they are in the investment or trading portfolio and whether or not they relate to quoted securities, a reserve is formed in relation to the maximum within the last 30 calendar days of the balance on the specified accounts. Thus, for this group of assets the rule “the reserve is formed from the balance” does not work. In relation to loans, the reserve for possible losses for which is formed in accordance with Regulation No. 254-P, as well as financial instruments, the reserve for possible losses for which is formed in accordance with the requirements of clause 2.2 of Regulation No. 283-P (the latter include the requirements for credit institutions and counterparties recorded on balance sheet accounts; section 3 of the Chart of Accounts), the reserve is calculated taking into account the following. For individual personal accounts opened on balance sheet accounts in which loans and (or) financial instruments are accounted for, the reserve is formed in relation to the greater of the two values. This: — balance on the personal account on the date of formation of the reserve; — average daily estimated debit turnover on the account (Act), calculated using the formula: where Ob is the amount of debit turnover on the account for the last 30 calendar days in rubles at the exchange rate on the date of reflection of loans and (or) financial instruments in the accounting accounts, including debit turnover on this account due to the revaluation of the relevant assets due to changes in the ruble exchange rate, established by the Bank of Russia in relation to foreign currencies. In this case, the procedure for creating a reserve departs even further from the general principle: using the average daily turnover as the calculation base for the reserve makes it possible for a situation where the asset as of the reporting date is no longer on the balance sheet (i.e., there are no potential losses), but the reserve remains the same is being formed. Depending on the group of offshore zones defined by Directive No. 1317-U, the reserve is formed as a percentage of the value of the reserve calculation base (see table). Group of offshore zones Reserve amount, % 1st group 2nd group 3rd group Since reserves for possible losses for transactions with residents of offshore zones are formed independently of the reserves created in accordance with Regulations No. 254-P and No. 283-P, it is quite possible that the total amount of reserves for an asset will be more than 100% of the value of the asset itself. The bank has a loan issued to an organization resident in the Marshall Islands (3rd group of offshore zones), classified as quality category IV in accordance with Regulation No. 254-P. If the balance on the personal account for credit accounting on the date of formation of the reserve is greater than the average daily settlement debit turnover on the account, then the reserve in accordance with Directive No. 1584-U will be 50% of this balance. The reserve for possible loan losses, formed in accordance with Regulation No. 254-P and the bank’s methodology, will amount to 70% of the book value of the loan. Thus, the total amount of reserves will reach 120% of the book value of the loan! If it turns out that the average daily calculated debit turnover exceeds the account balance on the date the reserve was formed, then the result may be even more impressive. Since reserves for possible losses for transactions with residents of offshore zones are formally ordinary reserves for possible losses, they are accounted for in the same accounts as ordinary reserves and are formed (regulated) by the same transactions. The only difference is that they cannot be used to repay an asset that has become uncollectible. Thus, in order not to get confused with two types of reserves for the same asset, it is advisable to define different (but uniform for all) numbering of personal accounts for them: for example, select the 14th character to indicate the type of reserve in the number of a twenty-digit account. Let us assume that it is necessary to create a reserve for possible losses for transactions with residents of offshore zones on investments in shares of a leading steel mill in the state of Barbados, the current (fair) value of which cannot be reliably determined. In accordance with Bank of Russia Regulation No. 302-P dated March 26, 2007 “On the Rules for Maintaining Accounting in Credit Institutions Located on the Territory of the Russian Federation”, such shares must be accounted for on balance sheet account 50708 “Equity securities of other non-residents available for sale” " For securities issued by residents of offshore zones, the calculation base is the maximum balance on the balance sheet account during the last 30 calendar days. This means that even after the sale of shares, the reserve will remain on the bank’s balance sheet for another whole month. If the maximum balance over the last 30 calendar days was $50,000, and the dollar exchange rate on the date of formation of the reserve was 29.00 rubles, then taking into account the size of the reserve for the 2nd group of offshore zones (25%), the value of the reserve will be 362,500 rubles. A posting is made for this amount: Dt 70606 “Expenses” symbol 25302 “Deductions to reserves for possible losses” Kt 50719 “Reserves for possible losses.” At the same time, we must not forget that a reserve for possible losses in accordance with Regulation No. 283-P for the same shares must be created separately (unless, of course, there is no possibility of reliably determining their current (fair) value and there are signs of impairment). If securities are sold or written off from the balance sheet at the expense of the reserve for possible losses formed in accordance with Regulation No. 283-P, then the reserve for possible losses for transactions with residents of offshore zones is restored to income (but, as noted above, this is not done immediately after writing off the securities from the balance sheet, but only after 30 days): Dt 50719 “Provisions for possible losses” Kt 70601 “Income” symbol 16305 “From the restoration of reserve amounts for possible losses.” An accounting mishap of sorts may arise if a provision needs to be made for securities in a portfolio that used to be called “trading” and is now called “securities measured at fair value through profit or loss.” The fact is that account 506 “Equity securities assessed at fair value through profit or loss” does not provide for second-order accounts for accounting for reserves, since in accordance with Regulation No. 283-P reserves are not formed for such securities. This means that the reserve for such shares will have to be reflected in some other account in accordance with Directive No. 1584-U. And here, apart from the “long-suffering” account 47425, nothing else can be offered. Expenses for the formation of reserves for possible losses for transactions with residents of offshore zones are not taken into account as expenses for income tax purposes. Accordingly, income from the restoration of such reserves is not taken into account as income for tax purposes, because the Tax Code of the Russian Federation simply does not recognize such reserves. In reporting forms 0409115 “Information on the quality of assets of a credit organization” and 0409155 “Information on financial instruments reflected in off-balance sheet accounts”, which shows reserves for possible losses in accordance with Regulation No. 254-P and Regulation No. 283-P, reserves for operations with residents of offshore zones are not reflected. But their value should be indicated in line 4.4 of form 0409808 “Report on the level of capital adequacy, the amount of reserves for doubtful loans and other assets.” The need to form a reserve for transactions with residents of offshore zones is explained, according to some authors1, by the presence in the actions of banks of country risk and the risk of non-transfer of funds. According to Letter of the Bank of Russia dated June 23, 2004 No. 70-T “On typical banking risks,” country risk (including the risk of non-transfer of funds) is the risk of a credit institution incurring losses as a result of failure by foreign counterparties (legal entities, individuals) to fulfill obligations due to economic , political, social changes, and also due to the fact that the currency of the monetary obligation may not be available to the counterparty due to the peculiarities of national legislation (regardless of the financial situation of the counterparty itself). Indeed, the size of the reserve in this case does not depend on the financial position of the counterparty or even on the quality of its debt service, but only on the country of which this counterparty is a resident. Therefore, there is a great temptation to declare these reserves a measure of country risk. On the other hand, what relation may the preferential tax regime of the state have to the likelihood of economic, political or social changes that could lead to the failure of the bank's counterparties to fulfill their obligations? In our opinion, very remote. The second group of offshore zones includes, for example, some US states (Virgin Islands, Wyoming, Delaware), and the third, with a 50% reserve, includes the European principalities of Andorra and Liechtenstein. It would be difficult to find any countries more tranquil than these in terms of the likelihood of economic, political and social change. But maybe it’s not a matter of country risk at all? And not even a risk at all? After all, as we have seen, a reserve can also occur in the case when there are no longer any assets or even contingent credit obligations on the balance sheet that could carry at least some risk of losses. And it is impossible to write off a bad debt using such a reserve. Then what is the meaning and purpose of these reserves? It remains to be assumed that the reserves created for transactions with offshore residents are purely administrative in nature and the purpose of their creation is to limit the bank’s transactions with dubious clients, a kind of fine for working with them. Since the Bank of Russia cannot prohibit these operations, as well as impose a real fine, it has to operate with the only available tool (by the way, very convenient, almost universal) - reserves, in order to make such operations economically unprofitable. At the same time, banks do not have to actually pay for unwanted transactions (as they pay, for example, insurance premiums to the deposit insurance system) and even temporarily transfer money to the Bank of Russia, worsening liquidity indicators (as with contributions to mandatory reserves), but the amount of created reserves reduces capital, which means it limits the ability to carry out active operations. In principle, banks themselves do exactly the same thing, introducing increased and sometimes even prohibitive tariffs on unwanted customer transactions, which are not possible to stop legally. So the Bank of Russia, in a similar unobtrusive way, shows banks that it generally does not approve of their “inappropriate acquaintances.” Actually, he does not hide this: as a representative of the Bank of Russia said at one of the seminars, this type of reserves is not an assessment of risks, but represents an administrative burden. At the same time, the regulator, presumably, achieves its goals in many cases. Even if bank managers from time to time have a desire to work with offshore residents, usually after realizing the size of the reserves that will have to be created in this case, this desire usually decreases sharply, if not goes away completely. But in this case the question of terminology arises. Why call “reserves for possible losses” something that, in fact, is not reserves? However, this is a well-known problem arising from the translation from English and interpretation of the terms allowance, provision and reserve in domestic accounting. All three words in Russian turn into “reserves”. In fact, the meaning is different for everyone. Allowance refers to a reserve as a contractual account to account for impairment or possible losses. In Russian accounting, these are reserves for possible loan losses (RPL), reserves for securities, and for other balance sheet assets. That is, this is the amount that reduces the value of the asset on the balance sheet. Perhaps it would be better to call it "impairment allowance" or "loss allowance" or something like that. You can read about provision in IAS 37. Now this term in IFRS 37 has received the correct translation - “estimated liabilities”, although previously translators of standards also used the word “provision”. In Russian accounting, it corresponds to reserves for possible losses for elements of the calculation base reflected in off-balance sheet accounts - contingent credit obligations (issued guarantees, unused credit lines and unused limits on overdraft loans). These reserves (okay, let there be reserves) do not reduce assets, since no assets exist in this case. In fact, this is a type of obligation that the bank assumes may have to be fulfilled in the future. Therefore, the term “estimated liabilities” is much more suitable in meaning than “reserves for possible losses.” And finally, reserves, or real reserves, are all items of capital, except for the authorized capital. Actually, only they have the right to be called reserves, that is, stocks, funds of the company. These articles show how the owners' capital has changed since the creation of the organization. In Russian accounting, an echo of this translation was heard in the name “reserve fund”. There is also a fourth type of “reserves”, which traditionally confuses students and journalists - mandatory reserves transferred by banks to accounts with the Bank of Russia, the size of which is determined by the amount of funds attracted by the bank (see Bank of Russia Regulations dated 08/07/2009 No. 342-P “On required reserves of credit institutions”). These, unlike other “reserves”, are taken into account in the balance of active accounts. Now let's return to our offshores. As you can easily see, the reserves discussed in this article do not fit any of the four cases described above. It turns out that our regulator has invented another, already fifth, type of reserves, which has no analogues in world practice.Similar work to - Formation and use of reserves for possible loan losses, their accounting
Size standards
Criteria for evaluation
When a person has problems
Grouping
Standards and their application
Example of reserve formation
Other rules
About insurance
Formation of reserves for portfolios
Criteria for choosing a standard
How to create loan reserves: types
Portfolio risk
Criteria for evaluation
Normative base
The procedure for determining the reserve calculation base
Reserve size
Table 1. Amount of reserve for possible losses on transactions with offshore companies
Example 1
Accounting
Example 2
Taxation
Reporting
Purpose of the reserve
Pun