Would Ukraine's banking system survive?

Author : Oleksandr Okhrimenko

Source : 112 Ukraine

As of May 1, 2018, the total amount of loans in Ukraine is about 38 billion USD, and the amount of reserves for soured loans is about 19 billion USD
14:00, 12 June 2018

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In the days of previous Ukraine’s National Bank (NBU) leadership, the title of our article would cause some panic, and now everything seems to be quite boring and trivial. However, the risks of the banking system are a common phenomenon, and they are always there.

One of the main NBU’s functions is monitoring the work of the banks and timely identifying the difficulties for their correction. And it is preferable that this "correction of mistakes" does not turn into a banks’ bankruptcy. But recently, the banks’ bankruptcy became less shocking for the people, and the risk of closing banks, especially large ones, is perceived as something insignificant. And the closure of small banks is of little interest. 

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The NBU uses its standards to assess the reliability of the banking system. This is a very simple and convenient mechanism for controlling how Ukrainian banks “feel” themselves. Of course, if you pay attention to these norms in time and analyze them correctly.

Indicator H2 – "regulatory capital adequacy ratio" – is one of the most popular banking standards. If this figure is below 10% for a bank, then the bank has the insufficient amount of its capital to answer to its clients for their money. There is even the NBU instruction, which prescribes that if this figure is below 10%, then such a bank should be closed and a temporary administration introduced. The fact that the previous leadership introduced temporary administration in banks, where this indicator was more than 10%, is just another point of the issue. And now this figure across the entire banking system of Ukraine is 17%. Isn’t it wonderful? Especially if you recall that a year ago it was about 13%, and in 2015 – 7.8%. Hence, there is no risk of closing the new banks. In general, there is no such risk. But there are data on the H2 norm, issued on May 1, 2018, for individual banks, and a number of interesting facts could be revealed. Indicator H2 of "Pivdenniy" bank amounted to 10.46%, "Credit-Dnepr" bank – to 10.43%, Globus Bank - to 10.28%, MEGABank – to 10.01%. It is clear that the owners of these banks simply need to increase the authorized capital of the bank or, for example, reduce the number of problem loans, then their H2 index will improve. Everything could be corrected and done. There is nothing horrible about the fact that banks have problems with the indicator of regulatory capital. It is just business. The main thing is to do the right actions in time and not to bring the situation to the crisis.

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Loans issues are a major problem here. As of May 1, 2018, the total amount of loans in Ukraine is about 38 billion USD, and the amount of reserves for soured loans is about 19 billion USD. Banks are forced to form huge reserves for the soured loans. And there is no other way. For more than a year, banks have been trying to reduce the share of the soured loans. But there is no radical change in this sphere. More or less, banks managed to convert part of the foreign currency loans, first of all, legal entities, from currency to hryvnia, and also to loan some old loans for new ones with partial repayment of debt, but that is all. It is impossible to reduce it radically. Even if there is an opportunity to take the collateral from the debtor, it does not save the situation. Since it is unclear what to do with this pledge and where to sell it. Banks need a loan repayment, and not the property because it is quite difficult to turn this property into money. And business needs loans, they also do not want to repay the old loans. Individual companies have really suffered losses after the Maidan and the so-called reforms. The collapse of the hryvnia and the increase in tariffs for energy killed many businesses. So some businessmen cannot repay the loans, but even more, he does not want to do it, hoping that Maidan will write everything off. Moreover, the massive shutdown of banks has led to ruining the business of many people, and the anger at banks among businesses is only intensifying. If Maidan did not happen, there would not be a major banks’ bankruptcy, and in general, we would avoid many different struggles.

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So, would Ukraine’s banking system be able to hold up? In general, there are no special problems. Even those banks that need to increase the statutory fund will be able to do this. The NBU does not hurry up to close them and, most likely, will make concessions on the issue of filling the statutory fund. This is not that critical. However, the banks do not know how to persuade or force a business to start actively repay the loans so that it is possible to issue new loans to the same business. And business does not know how to get a new loan without paying off the old one.

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