Sept 26 - Yesterday's announcement by the Russian Central Bank that it will increase reserve requirements for unsecured retail lending shows the regulator is closely monitoring the country's rapid retail loan growth, Fitch Ratings says. We view the sharp rise in retail lending as one of the most significant potential risks facing the Russian banking system because of the weakening of underwriting standards at some banks, and the significant increase in household indebtedness. At Fitch Ratings' IX annual Russian conference yesterday, CBR First Deputy Chairman Alexei Simanovsky announced that reserve requirements on unsecured retail lending by Russian banks may be tightened, citing concerns that current provisioning may not adequately reflect potential losses on these portfolios. Mr. Simanovsky reportedly later clarified in separate comments that reserves on portfolios of unsecured retail loans that are performing or overdue by 30 days or less may be doubled, and provisions on loans overdue by more than a year could be increased to 100% from 75%. At present, performing loans are subject to a 1% general reserve and loans overdue by less than 30 days require a 3% provision. We believe that rapid growth, albeit from a low base, has involved higher approval rates, which at some banks have meant a weakening of underwriting standards. We estimate that the cost of servicing retail debt is currently equal to about 10% of aggregate household income, and is likely to be significantly higher for households that have actually taken out loans, potentially straining their debt servicing ability. Total retail loans increased by 26% in the eight months to end-August 2012, while growth in unsecured lending has been higher still. The aggregate portfolio of seven leading specialized consumer lenders rose by 36% in the same period. We believe that the direct impact of the measures reportedly announced by the Central Bank will be moderate, as the resultant increase in loan reserves, and hence reduction in regulatory capital ratios, will be limited. In our view, the central bank may tighten regulation if it sees a further increase in risks in the retail sector. Attempts to limit loan growth at individual banks cannot be excluded. However, we believe the authorities' ability to effectively regulate underlying retail lending risks (rather than just the reserves/capital held against these risks) is constrained by the lack of a comprehensive unified database of credit information and the still high share of unofficial personal incomes. In our view, asset quality risks at rated specialized consumer lenders - Home Credit and Finance Bank ('BB-'/Positive Watch), Russian Standard Bank ('B+'/Stable), OJSC OTP Bank ('BB'/Negative), CB Renaissance Capital ('B'/Stable) and Tinkoff Credit Systems ('B'/Positive) - should be for the most part manageable. This reflects these banks' already significant experience and track record in the sector and their generally solid loss absorption capacity. However, risks may be considerably higher at banks that have come later to the consumer lending sector with limited experience, and are targeting aggressive growth, often with weak underwriting standards. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.