Credit expansion still weak after financial crisis
Usually commercial banking expands sharply after a major financial crisis. But that is not happening in Ukraine for many reasons, including the fact that borrowers have a bad habit of not repaying their loans.
The more one delves into banking in Ukraine, the more difficulties emerge. As soon as one problem has been resolved, a new one appears. The problems are many but they can be resolved.
The first big headache is to get paid. Especially big Ukrainian businessmen have a habit of not paying anybody, which is a convenient way of enrichment for many in the elite. To begin with the legal base needs to be improved. Creditors’ rights need to be reinforced so that bankers can claim collaterals of debtors and sell it off in case they do not pay. Half a dozen laws need to be promulgated.
The next problem is the judicial system, about which nothing positive can be said. The Prosecutor General’s Office is famous for not going after important people, while it is
seemingly quite successful at extortion. A new real office of prosecution needs to be built up with new staff.
The court system seems to get worse the higher up a matter gets. Therefore, serious cases are likely to lose. If contrary to expectation a sensible verdict is passed, the collection services of the Ministry of Justice have a rather poor reputation of not collecting. Private collection services have too restricted rights, which should be broadened.
In addition, Ukrainian banks have three big problems, their biggest customers, their managers and their owners. Many members of the Ukrainian elite enjoy parliamentary immunity, which they also apply toward banks. Senior members of important committees feel particularly immune, especially if their committee deals with economic matters, as most do. Quietly, a number of major Ukrainian banks not managed by their owners have seen a complete change of management. The rumor has it that a habit of kickbacks of 10 percent of unjustified loans developed under the years of President Viktor Yanukovych, who fled the Euromaidan Revolution on Feb. 22, 2014.
The worst problem of Ukrainian banks, however, tends to be their owners. The owner of a bank has usually a capital of about 1/10 of the bank’s assets, that is, its loans. Under Yanukovych, many bank owners developed a habit of giving 80 percent of the loans to themselves. As they wasted their funds, their banks went bankrupt and their poor depositors lost their money. This has been the main reason for the National Bank of Ukraine closing down almost half of the country’s 180 banks in the last three years.
The NBU needs to do more. It needs to complete the closure of substandard banks. Statements are often made that the end goal is 50-60 banks. The NBU has sufficient capacity and routine to head for that target right now, so that people know that the bank cleansing is completed. The big remaining question is what will happen with Privatbank, and it alone accounts for one-fifth of the banking assets in the country. How can banking be pursued under these conditions? Admittedly most have failed, but most hazards can be handled. To begin with, a bank needs to secure sufficient collateral and make sure that it can be seized and sold. As a rule, banks should avoid big clients enjoying legal or actual immunity, while a significant bank can make life sufficiently hard for a small or medium-sized debtor. Management needs to be checked with rigorous corporate governance and good audits.
Finally, bank credits need to be affordable. At present, the NBU policy rate has stabilized at 14 percent a year, and the consumer price index at 12 percent a year. Corporate loan rates have declined but stay high at 17 percent. Most borrowers have to pay far higher interest rates. Scarily, the NBU estimates non-performing loans at the high level of 30 percent of all loans.
Usually, commercial banking expands sharply after a major financial crisis. Logically, it should start now, but so far credit expansion has barely begun.
Ukraine's banking sector resembles a piggy bank that was emptied out due to bank fraud, embezzlement and unpaid loans to insiders. The staggering costs since 2014 are expected to exceed $20 billion before recovery.