NBU puts small banks un­der pres­sure, yet experts stay pos­i­tive

Kyiv Post Legal Quarterly - - News - By Maria Ro­ma­nenko mro@ukr.net

Just three years ago there were 178 banks in Ukraine, with as­sets rang­ing from Hr 203 bil­lion ($8.12 bil­lion) to Hr 120 mil­lion ($4.8 mil­lion).

Then came rev­o­lu­tion, war, eco­nomic cri­sis… and bank­ing col­lapse.

To­day, only 103 banks re­main, a 42 per­cent re­duc­tion, with six of those un­der tem­po­rary ad­min­is­tra­tion or re­ceiver­ship. As the ar­ti­cle was be­ing pre­pared, an­other small bank, In­vest­bank, was placed un­der tem­po­rary ad­min­is­tra­tion by the Na­tional Bank of Ukraine.

After such blood­let­ting, which the cen­tral bank refers to as “cleans­ing” of the mar­ket, the prob­lem of low liq­uid­ity in the bank sec­tor is less ur­gent than it was even six months ago, ac­cord­ing to fi­nan­cial expert Va­syl Nevmerzhit­skiy.

The is­sues for to­day are, in­stead, cap­i­tal­iza­tion and the qual­ity of loan port­fo­lios at the re­main­ing banks, he said.

The NBU cur­rently sets the min­i­mum share cap­i­tal for a bank at Hr 120 mil­lion ($4.8 mil­lion), but from July it will in­crease this to Hr 200 mil­lion ($8 mil­lion). As the reg­u­la­tor grad­u­ally raised its share cap­i­tal re­quire­ments, banks have been clos­ing, or have merged with, or been bought out by the stronger banks.

“Strate­gi­cally, by the end of 2017, we may only have around 50-60 banks left,” Nevmerzhit­skiy told the Kyiv Post.

And with a new res­o­lu­tion from the cen­tral bank (No. 351, set­ting stricter re­quire­ments on re­serves to cover loan port­fo­lios) com­ing into force on Jan. 1, Ukrainian banks, es­pe­cially the smaller ones, will have to find ad­di­tional cap­i­tal­iza­tion, mak­ing con­di­tions for their sur­vival even tougher.

Small banks "need to cre­ate a strat­egy of

sur­vival, to decide how they will com­pete with sys­temic banks,” Nevmerzhit­skiy said.

How­ever, the new rules are not de­signed to sweep all small banks from the mar­ket, said Ihor Olekhov, the head of Baker & Mcken­zie's reg­u­la­tory and fi­nan­cial in­sti­tu­tions groups in Kyiv. Small but strong banks should be able to keep go­ing.

“Ukraine is in the process of an as­set qual­ity re­view, and there is an in­ten­tion to set up clear rules in gen­eral, un­der which only banks with suf­fi­cient cap­i­tal­iza­tion and high level of re­li­a­bil­ity can op­er­ate,” Olekhov said.

“If banks can sat­isfy these re­quire­ments, no­body will stand in their way,” he added.

But with the Ukrainian bank­ing sys­tem un­der­go­ing pos­si­bly the great­est changes in the his­tory of the coun­try, what is the out­look for the sec­tor? And more specif­i­cally, is there a fu­ture for the 60 small­est banks, which make up less than 5 per­cent of the whole bank­ing sys­tem in terms of as­sets? like loan giv­ing, loan buy­ing, fac­tor­ing and guar­an­tee pro­vi­sion,” Nevmerzhit­skiy said.

Ac­cord­ing to him, many of the new fi­nan­cial com­pa­nies could be off­shoots from banks that have closed, with for­mer bank workers set­ting up shop to pro­vide niche fi­nan­cial ser­vices by them­selves.

“If (for­mer) man­agers of sys­temic banks car­ried out fac­tor­ing in their banks, they might think ‘We’ve al­ready writ­ten the pro­ce­dures, we know the method­ol­ogy and un­der­stand the risks. We can take our old clients, find some money, and set up a fi­nan­cial com­pany to carry out fac­tor­ing op­er­a­tions.'" Ways to sur­vive Olekhov thinks the smaller banks can sur­vive, but to do so they need to take ad­van­tage of their strong points.

“They can make de­ci­sions quickly and ef­fec­tively, un­like big banks, where non-stan­dard de­ci­sions may take 3-6 months, and some­times even up to a year,” he said.

“Thanks to their quick­ness and agility, small banks can of­fer new and non-stan­dard ser­vices.”

And there is a lot of po­ten­tial in the Ukrainian mar­ket for such banks, and if they go about this task cre­atively, they will do well in Ukrainian en­vi­ron­ment, Olekhov be­lieves.

A high qual­ity of cus­tomer ser­vices is an­other sell­ing point of small banks.

“In a small bank no­body will tell you that the cash reg­is­ter is clos­ing, or that it’s lunch time, or that a com­puter has bro­ken down. It’s this level of (cus­tomer ser­vice) that’s very much trea­sured by clients,” Nevmerzhit­skiy said.

“A man­ager and a client al­most be­come friends: you help him, he helps you. You just don’t get this in the sys­temic banks,” he added.

So it is vital for bank man­agers in the small banks to un­der­stand the value of their re­la­tion­ships with clients, that these clients are im­por­tant to them, if they hope to sur­vive, Nevmerzhit­skiy said.

Ex­pand­ing a branch net­work is not as good a way for the smaller banks to de­velop as it once was, Nevmerzhit­skiy said.

Those that do decide to ex­pand their branch net­works can do so by pick­ing up the best staff from smaller banks that have foundered, he said.

“Those banks that are able to (sur­vive) will form a strong team of top man­agers from peo­ple who are work­ing, or have al­ready quit their jobs at other banks, in or­der to build the most ef­fec­tive sales team, and cre­ate in­no­va­tive ser­vices to de­velop their busi­ness.”

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