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.

Kyiv Post Legal Quarterly - - News - Anders Ås­lund is a se­nior fel­low of the At­lantic Coun­cil in Wash­ing­ton and a mem­ber of the su­per­vi­sory board of Bank Credit Dnepr.

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.

(Courtesy) By An­ders As­lund

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.

Newspapers in English

Newspapers from Ukraine

© PressReader. All rights reserved.