Dead­beat debtors sicken bank­ing sys­tem

Kyiv Post Legal Quarterly - - Contents - BY ILYA TIMTCHENKO AND JOSH KOVENSKY TIMTCHENKO@KYIVPOST.COM AND KOVENSKY@KYIVPOST.COM

While the gen­eral health of Ukraine’s bank­ing sys­tem is im­prov­ing, one ail­ment is still get­ting worse - non-per­form­ing loans and the in­abil­ity of banks to col­lect on them.

Non-per­form­ing loans have roughly dou­bled in the last two years, from 12.9 per­cent in 2013 to 24.3 per­cent in 2015 of to­tal lend­ing, ac­cord­ing to data from the World Bank. Many of those bad loans are more bills com­ing due from the era of Pres­i­dent Vik­tor Yanukovch. To re­im­burse de­pos­i­tors who lost their sav­ings in banks, partly be­cause of loans gone bad

or fraud, tax­pay­ers have paid out Hr 70 bil­lion ($2.8 bil­lion) from a de­posit in­sur­ance fund.

Be­fore Yanukovych was over­thrown in 2014 by the Euro­maidan Rev­o­lu­tion, not even the Na­tional Bank of Ukraine knew who owned most of the na­tion's 180 banks. Con­se­quently, reg­u­la­tion was non-ex­is­tent. The par­a­sitic "pocket own­ers" hid be­hind shell com­pa­nies, us­ing banks to ei­ther laun­der money or lend to in­sid­ers (such as them­selves) with no hope of re­pay­ment.

While Ukraine's cen­tral bank has got­ten rid of about a third of the banks from that era – leav­ing 120 fi­nan­cial in­sti­tu­tions left – that money may be gone for good. There is sim­ply no en­force­ment of ma­jor fi­nan­cial crimes hap­pen­ing among po­lice, pros­e­cu­tors or the courts.

The gov­ern­ment, cit­ing bank se­crecy laws, won't even iden­tify the dead­beats that costs tax­pay­ers so much.

Mauro Ma­chio, the CEO of Ital­ian bank Unicredit in Ukraine, says that “the level of non-per­form­ing loans as a per­cent­age of the to­tal vol­ume of loans in the bank­ing in­dus­try is much big­ger” than in other Euro­pean coun­tries.

The dead­beats, cou­pled with a lack of strong cred­i­tor rights, have de­terred banks from lend­ing de­spite record-high liq­uid­ity. Many banks have sim­ply parked their as­sets with the cen­tral bank and earned the go­ing in­ter­est rate at no risk.

Against Ukraine’s 24.3 per­cent of loans hit­ting non-per­form­ing stat­ues in 2015, Poland had 4.7 per­cent, Swe­den 1.1 per­cent and Moldova 14.4 per­cent. In Ukraine “it’s ex­tremely dif­fi­cult for a cred­i­tor to have their rights rec­og­nized and pro­tected,” Ma­chio said. “Even when you’re right… a lot of the times you face a sys­tem that’s act­ing, be­hav­ing in a way that you wouldn’t ex­pect in any other mar­ket.”

Unicredit an­nounced it was leav­ing the Ukrainian mar­ket in Fe­bru­ary. It plans to sell its un­prof­itable Ukrainian Ukr­sots­bank chain to Rus­sia’s Alfa-bank, which is owned by Rus­sian bil­lion­aire Mikhail Frid­man.

Alfa-bank ad­vi­sor and for­mer Econ­omy Min­is­ter Ro­man Sh­pek told the Kyiv Post that Ukraine was one of the eas­i­est coun­tries in the world in which to ob­tain credit, but that it was among the most dif­fi­cult for cred­i­tors to col­lect.

“These con­di­tions af­fect the daily work of the banks,” Sh­pek said. “For those that try not to re­pay the loans, we take them to court, but it’s a long process – four to five years.”

Unicredit, Italy’s largest bank by as­sets and the big­gest for­eign bank ac­tive in East­ern Europe, has in­deed been in­volved in a years-long case in Ukraine to de­fend its own­er­ship of an as­set it ac­quired as col­lat­eral on a non-per­form­ing loan.

“The cus­tomer wasn’t able to pay back the loan, so they gave over own­er­ship of the as­set that was the col­lat­eral,” Ma­chio said. “Since then, there have been hun­dreds of court hear­ings on this case.”

In an­other case, a Ukrainian no­tary reg­is­tered rights of a non-ex­is­tent prop­erty to a Unicredit cus­tomer, who sub­se­quently used those rights as col­lat­eral on a loan from the bank.

“The level of not com­pletely trans­par­ent and… bad be­hav­iors by the ac­tors in this sys­tem is enor­mous,” Ma­chio said. The cus­tomer “prob­a­bly knew the no­tary and the no­tary made the trans­ac­tion in the full knowl­edge that the trans­ac­tion was not le­gal.”

Busi­ness in Ukraine is of­ten based more on per­sonal re­la­tion­ships and bribery, Ma­chio said, leav­ing those who fol­low the law at a dis­ad­van­tage.

“As an in­ter­na­tional group, there are ap­proaches that we can­not ac­cept, that we don’t even want to con­sider putting in place, be­cause they’re against our val­ues, in­ter­na­tional rules and our rep­u­ta­tion,” he said.

A vis­i­tor en­ters the Kyivska Rus bank in July 2015. The Na­tional Bank has liq­ui­dated more than 66 banks in its cleanup of Ukraine's bank­ing sec­tor. (Anas­ta­sia Vlasova)

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