Non-performing loans cause insomnia among Ukrainian bankers
Shakeout coming in financial sector as financial disasters multiply
The Ukrainian banking sector is having a tough year. A shrinking economy and devaluing hryvnia has led to 31 banks being declared insolvent since January, while 11.5 percent of loans in Ukraine are non-performing, far higher than the European Union average.
Non-performing loans, or loans over 90 days overdue, are up from 7.7 percent of banks’ loan portfolios at the end of 2013. According to Forbes Ukraine, Unicredit and Delta banks are experiencing the most severe problems as their percentage of bad loans surged to 37 and 17, respectively.
“We expect loan losses to increase in 20142015 to over 5 percent from 2.7 percent in 2013,” reads the September report of Standard & Poor’s, a credit rating agency. The report highlighted unrest in eastern Ukraine as a critical factor in explaining poor loan performance.
S&P expects a substantial increase in socalled “problem assets,” the numbers on a balance sheet not supported by any cash. The
agency described the Ukrainian payment culture as “weak and stillevolving” while its “current legal framework and judicial system lack effectiveness.”
Banks also blamed the non-performing loans on systemic problems rather than bank policy.
While Marchin Figlus of Delta Bank argues that the banks are suffering the unexpected consequences of Russia’s war against Ukraine in the Donbas, Pavlo Gashkovets, director of Unicredit’s risk management center, told Forbes Ukraine that the majority of his bank’s non-performing loans were accumulated during the 2008-2009 financial crisis, with loans issued since 2010 are of much higher quality.
Procredit Bank’s Kemal Seitveliev says there is little the central bank can do to improve the situation with non-performing loans. “Many clients are experiencing difficulties, but we believe it’s temporary. Improving the general economic and political climate is the best way the government can help our clients,” he said.
Oleh Zahnitko, an attorney with the Gide Loyrette Nouel law firm, disagrees. He believes the National Bank has all the power it needs to change the situation. “The NBU regulations on reserves are quite strict, but … the NBU seem to lose control of what is going on inside the banks,” he said.
The rules for reporting the financial data should be simplified in accordance to Basel III, the EU’S banking requirements, Zahnitko added.
The lawyer believes that many banks have been cooking the books for too long, making it harder to go back to realistic financial reporting. While the NBU has been concentrating on establishing financial power over the sector, most banks have been getting away with violations. Moreover, those banks that have tried to do business in full compliance with the requirements have incurred additional losses due to larger administrative expenses.
“The regulator should loosen the regulations on compliant banks and toughen requirements for the non-compliant,” Zahnitko suggests.
Unreliable insurance and audit companies add to Ukraine’s banking sector woes through their corrupt practices. Zahnitko thinks the NBU should introduce “black lists” that name and shame such companies.
A further problem is the weak protection of creditors’ rights, says Serhiy Mamedov, head of state-owned Ukrgazbank. “The loan collection period takes 3-5 years, while in case of forced sale of collateral banks receive only 25-50 percent of loan’s market value. Apart from that, banks have to bear court proceeding expenses.”
Experts say nation’s banking sector is way too crowded with almost 170 banks operating here. The NBU’S plans are to clean up the industry off the fictitious entities that are nothing but centers for laundering cash from shadow revenues and have little to do with the banking business, according to Valeriya Gontareva, central bank governor.
Ukraine has 170 banks, too many for the current market, including some that exist to launder money.