Non-per­form­ing loans cause in­som­nia among Ukrainian bankers

Shake­out com­ing in fi­nan­cial sec­tor as fi­nan­cial dis­as­ters mul­ti­ply

Kyiv Post Legal Quarterly - - Contents - By Olena Gordiienko

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.

A clerk pre­pares a doc­u­ment for a client at Procredit bank’s branch in Kyiv on Oct.3. (Volodymyr Petrov)

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