The BRSA has taken the expected step, and abolished the asset ratio criterion, which was introduced to provide credit growth for banks. According to the BRSA statement, the asset ratio will be canceled by the end of the year. In order to meet the asset ratio criterion and not to be subject for a penalty, banks tended to lend more as the easiest way to achieve the ratio and, accordingly, were forced to ease the risk criteria for lending.
The BRSA removed the ratio as a “continuation of the normalization steps”. Thus, an important step back was taken from the incentive policies that led to the boom in loan growth in 3Q20. The rapid loan growth in banks' balance sheets may cause an increase in NPLs, which is an important problem for banks. Banks now have to manage a highly problematic NPL portfolio. Banks keep their NPLs in their assets part of their balance sheets and set aside provisions for them. During the economic recovery period with rapid loan growth, banks had to give more loans by loosening the risk criteria in order to meet the ratio set by the regulators. Individuals and companies that have gone through a difficult process due to Covid-19 are experiencing difficulties due to factors such as decreasing income, collection problems, decreasing demand in the economy, and they have difficulty in paying their bank debts. Banks are currently maintaining a stable trend in non-performing loans and stage 2 loans, and these loans are still managed in bank balance sheets.
With the elimination of the asset ratio, banks will be able to manage their assets and liabilities more comfortably and take initiative according to their own risk criteria for the evaluation of deposits and loan outflows. It was an expected and demanded step for banks to manage their risks arising from loans.
