FAS PREVENTED A BARRIER ON THE MARKET OF BANK GUARANTEES

Efforts of FAS Department for Control over Financial Markets are recognized as some of the best FAS achievements in 2018. The Department prevented quadruple reduction of the number of banks that can issue bank guarantees to secure applications and execute contracts by suppressing unreasonable requirements for financial organizations.

At the end of 2017, FAS received for approval a draft Decree of the Government of the Russian Federation “On requirements for banks that can issue bank guarantees to secure applications and execute contracts”, which sets the following requirements for credit organizations that can issue bank guarantees to secure applications and execute contracts:

- at least 1 billion RUB own funds (capital);

- at least BBB- credit ranking from ACRA” (JSC) or “Expert RA” JSC accordingly.

On 1 January 2018, the minimum size of own funds (capital) for banks possessing a universal license is set at 1 billion RUB, and for banks with a basic license - 300 million RUB.

Although both types of banks can issue bank guarantees to Russian legal entities, a draft Decree intended to limit this operations for the banks with a basic license, which would form an obstacle for intensifying competition on the market of bank guarantees, improving the quality of the services for bank guarantee provision and reducing their costs. Banks with a basic license account for at least half of the total number of banks in Russia, so such a restriction is a considerable artificial decrease of entities that can offer these services.

Also, the size of bank own funds is not indicative of its financial standing, solvency, or good business practices; therefore, setting such requirements does not protect from failures by banks to honour their obligations on bank guarantees.

In this context, FAS Department for Control over Financial Markets in view of theLaw on contractual system [1] made sure that the draft Decree outlines the right of the banks that have no less than 300 million RUB own funds (capital) to issue the relevant bank guarantees.

It enables equal access to banks with both universal and basic licenses to carrying such operations.

According to the classification of “ACRA” (JSC) or “Expert RA” JSC, рейтинга “ВВВ” category means moderate creditworthiness compared to other rated persons, securities issues or financial obligations.

Since ranking in general is designed to evaluate кредитоспособности of a credit organization, the requirement of a certain ranking level, in view of the ranking reform, is the only criterion to be used in order to select entities that can carry out operations on providing bank guarantees.

Since a short period of time has passed after all amendments to the law on ranking operations came into effect, a limited number of credit organizations were able to obtain the necessary ranking [2].

If the Decree were adopted in its original version, the number of banks that met the then requirements would reduce nearly fourfold reaching around 70 banks, which, in its turn would increase the costs for the services for issuing bank guarantees due to a decreased supply on the market. As a consequence, possibility of obtaining such guarantees by procurement participants, for example, small and medium companies, could decrease. It would have an adverse effect upon achieving the key targets [3] for increasing the share and scope of procurement, where only small and medium business participates, as well as upon the state of competition on the market of issuing bank guarantees in general.

To ensure bank guarantees for procurement participants, FAS Department for Control over Financial Markets pushed amendments to the draft Decree that  till the end of 2019 bank guarantees for the above purposes can be issued by credit organizations with no lower than “B-“ credit ranking [4].  From 2020, credit organization with no less than “BB-“credit rating will be able to perform such operations.

Deputy Head of FAS Andrey Kashevarov pointed out: “The Government of the Russian Federation passed the Decree “On the requirements to the banks that can issue bank guarantees to secure applications and fulfill contracts” [5], that took into account proposals made by FAS Department for Control over Financial Markets, and as a result 203 banks [6] entered the market of bank guarantees. It also helped avoid reducing the number of banks that enjoy the right to issue such guarantees, which, in its turn, would otherwise create a shortage of such guarantees in public and municipal procurement”.

“The achievement in question is a significant example of the efforts of FAS Department for Control over Financial Markets to suppress the practice of setting unreasonable  requirements in different spheres to financial  organizations”, said Deputy Head of FAS Department for Control over Financial Markets, Alexandra Nesterova. “Department’s involvement in the work on the Governmental Decree –preventing an unreasonable barrier for operations on issuing bank guarantees for the purposes of securing applications and executing contracts”.

Background:

According to the classification of “ACRA” (JSC) or “Expert RA” JSC, “ВВВ” ranking means moderate creditworthiness, compared to other ranked persons, issues of securities or financial liabilities; with higher sensitivity to unfavourable changes in commercial, financial and economic conditions.

A lower ranking – “ВВ” indicates medium low creditworthiness, compared to other ranked persons, issues of securities or financial liabilities; creditworthiness of a ranked person is sustainable in the short-run, in spite of being highly sensitive to an impact of unfavourable changes in commercial, financial and economic conditions.

[1] Article 45 of No.44-FZ Federal Law “On contractual system in public and municipal procurement of goods, works, and services” of 05.04.2013

[2] As of 01.03.2018, 155 operating credit organizations out of 540 were assigned accredit rankings.

[3] Sub-Clause “c” Clause 1 of 2018 - 2020 National Plan for Developing Competition in the Russian Federation, approved by No. 618 Order of the President of the Russian Federation of 21.12.2017.

[4] According to the classification of “ACRA” (JSC) or “Expert RA” JSC.

[5] No. 440 of 12.04.2018

[6] According to the Ministry of Finances as of 11.01.2019 (https://www.minfin.ru/ru/perfomance/contracts/list_banks/#).