Affordable and developed lending is considered one of the indicators of economic prosperity and the welfare of society; the ability to take out a loan at a reasonable percentage allows industry and business to launch their products.
In turn, the ability to take a loan to buy the necessary things for an ordinary citizen allows us to guarantee the sale of part of the industrial products and to stimulate them to take a new loan for their own further development.
In any case, this is how the theory of the mutual influence of credit and consumption in a developed market economy looks like in theory. What is the situation with this in Ukraine?
First deputy chairman of the National Bank (NBU) Kateryna Rozhkova called four arguments in favor of the success of reforming the banking sector of Ukraine in 2014-2016 when the country lost more than 80 banks that were declared bankrupt and left the market.
Kateryna Rozhkova called the growing second year in a row lending to the population - by 30% and businesses that did not allow defaults in the past - by 20% one of the arguments “for” the success of the banking reform.
However, the population more often credited banks in 2017 - when the NBU reported a 42% increase in loans taken by ordinary Ukrainians compared to 2016, and only in the 4th quarter of 2017, interest on loans brought the banking sector 0,4 billion USD.
However, in general, domestic banks completed 2017 with a combined loss of 0,7 billion USD due to losses of PrivatBank.
However, a year later, according to the results of the banking system in 2018, the NBU noted a record profit of Ukrainian banks at 0,7 billion USD, as well as an increase in lending. So, according to the results of 2018, the population took loans by 34% more than a year earlier, and the share of "non-working", that is, loans not repaid by debtors, decreased by 1.7%, to 52.8%. Lending by Ukrainian banks to legal entities and businesses increased by 8.1%.
In general, the NBU forecast growth in retail (population) lending in 2019 by at least 30% and an increase in business lending.
In this forecast, the National Bank’s analysts turned out to be exactly half-right - the growth in lending to the population really amounted to almost 30% in January-September, but the business took out loans from Ukrainian banks for the 3rd quarter only 2% more than a year earlier.
Incomes of the banking system over nine months increased in comparison with January-September 2018 immediately by 4.4 times - up to 2 billion USD.
Credit growth in Ukraine is beneficial for foreign manufacturers
Experts are extremely skeptical of NBU reports on credit growth as a sign of a recovery in the domestic economy and are more likely talking about a large-scale crisis of the latter.
So, financial expert Vasyl Nevmerzhytsky calls the current situation in domestic lending - nonsense.
“GDP growth in any country is due to production growth, primarily in the heavy industry. This growth is largely achieved due to the growth of lending by banks - an indicator of the state of the economy. However, if we look at lending to domestic businesses today, we will see that companies having European reporting standards and management structures, they prefer to take loans abroad, where they are much cheaper," the expert says about the imbalance in domestic lending.
However, according to Nevmerzhytsky, the banks themselves are not too interested in lending to legal entities.
“In the 2014–2015 crisis, many borrower legal entities did not repay loans, with the help of dubious schemes they removed their pledges, bought their debts at a big discount. As a result, banks are now cautiously approaching such “risky” clients - they analyze the reporting and ownership structure , which our business is not used to and tries not to invest too much in large customers to avoid risks,” the analyst explains.
As a result, the situation in the lending market has changed a lot in favor of the more profitable lending to the population.
“Banks and other financial companies have found a market niche convenient for themselves - consumer lending with their own specifics: high-interest rates, short turnaround times, all this leads to superprofits of up to 100-150% per annum, albeit with a risk of non-return of an average of 15-20 %, that is, the benefits outweigh,” the expert says.
In practice, the current situation leads to the fact that lending does not fulfill its tasks for the national economy in the form of stimulating production, but rather, it harms it.
“If a consumer takes a loan from a bank and buys an imported vacuum cleaner at a technology supermarket, it stimulates an import manufacturer to produce goods and sell them to Ukraine, rather than a Ukrainian manufacturer,” the expert cites a simple example.
Financial analyst Borys Kushniruk calls the situation on the credit market of Ukraine the last 5 years close to a disaster, in which, in his opinion, the blame lies with the NBU.
“In recent years, the NBU’s high-interest rate has led to expensive loans for businesses and, as a result, to a drop in lending to the real, producing sectors of the national economy. Instead, lending to trade and consumer sectors is growing. Therefore, it’s stupid to be happy to be pleased with the NBU’s declared growth in lending, especially they are leading the national economy to a standstill,” the expert said.
According to Kushniruk, the NBU in its desire to fight inflation by setting a high discount rate made interest on loans for legal entities at the level of 23-25% simply unbearable for the processing and manufacturing sectors.
“The situation for the commodity sectors of the Ukrainian economy looks better, as an alternative to a loan from Ukrainian banks having the opportunity to take export financing abroad from Western banks or companies at 3-4% per annum.
Lending in Ukraine is falling
Growford Institute expert Oleksiy Kushch is even more categorical in his negative assessment of the situation on the domestic lending market, arguing that this is not about the growth of the credit market of Ukraine, but about its fall.
“The main problem of the credit market is the state, which has significantly influenced the banking system in recent years. Currently, about 60% of the assets of the entire banking sector are concentrated in state-owned banks, which are almost not represented in the field of lending to production and the implementation of industrial policy.
Although it would seem that it would be possible, using banks, to arrange to lend based on the current specialization of state-owned banks, for example, Ukreximbank lends to export-oriented industries, Sberbank to the population, PrivatBank to small and medium-sized businesses,” expert says about one of the shortcomings of lending.
Instead, according to Kushch, the state attracts the assets of state and commercial banks to finance the state through the government bonds mechanism and certificates of deposit. But the worst thing, according to him, is that the ratio of credit to GDP of Ukraine is rapidly falling.
"In 2008, before the crisis, this ratio was 73%, in the period 2010-2013 it fell to 60%, and today it is 27%, which is already one of the world counter-records and indicates a catastrophic decline in lending, but not about it growth," Kushch comments.