What is a subordinated loan?

Definition : A subordinated loan is a special type of lending, in which a banking organization that opened in Russia no later than five years ago will be able to attract the Central Bank's cash resources to carry out its own activities for a period exceeding five years. The peculiarity of such a loan is fixed interest that does not change during the validity of the concluded contract and does not exceed the established refinancing rate.

As a rule, a subordinated loan is paid in a single payment after the full expiration of the loan term set out in the contract, except for the situation when the borrowing bank is forced to completely cease its activities, starting the liquidation procedure. In this case, the creditor issuing subordinated loans can not demand its own funds from the insolvent borrowing bank until the financial claims of all other creditors are fully satisfied.

Features : A domestic bank that receives a subordinated loan can fully include credit resources on its additional capital over a five-year period if the contract with the Central Bank is concluded for a longer period. If before the final payment of such a loan remains less than five years, the borrower will be able to use the funds received to increase equity only with restrictions. And in the event that the loan amount is more than 50% of the fixed capital of a financial institution, such a loan should be considered as borrowed funds.

Conditions : Currently, a subordinated loan is issued on the basis of an individual contract, the main feature of which is the availability of a special clause that a loan-borrower can not return a loan and accrued interest early without prior approval from the Central Bank. Only acting as a lender of the CBR can terminate the concluded loan agreement after agreeing such actions with the borrower, or make any changes to the current contract.

According to the current legislation, a borrowing bank can receive a subordinated loan if the following conditions are met at the same time. Thus, the term of debt repayment must exceed five-year period, the conditions for issue of debt bonds can not be changed without preliminary agreement with the Central Bank of the Russian Federation, and neither part of the loan received nor the full body of the loan or interest accrued on it are allowed ahead of schedule. And the interest rate itself is prescribed in the conditions of the loan, and the contracts between the creditor and the borrowing bank indicate the impossibility of its revision until the loan expires.

Usually a subordinated loan is issued approximately on the same terms as other loans, and the rates for this type of loan are almost equal to the average interest rate for similar credit programs. And if the borrowing bank is in a state of bankruptcy, the borrower will be able to receive its funds after the bankrupt has satisfied the claims of the remaining creditors.

History : In 2008-2009, during the acute phase of the financial crisis, subordinated loans were used to maintain the stability of the Russian banking system. The role of the regulator was then performed not by the Central Bank of the Russian Federation, but by Vnesheconombank, which provided ruble loans to some Russian credit institutions. The first such loan was given to Rosselkhozbank and VTB, as the level of their activity was in line with the minimum rating requirements, and the capital of these banks increased due to contributions from third parties and shareholders.