Date: May 26, 2016
Last week, the Verkhovna Rada Committee on Financial Policy and Banking recommended that the Parliament, the Cabinet of Ministers and the National Bank take for guidance the draft Strategy for the Development of the Banking System of Ukraine for 2016-2020. According to the Committee's head and the document's sponsor, Serhiy Rybalka, the draft strategy outlines the ways of overcoming the crisis, creating prerequisites for the stability of the national currency and the banking system, increasing confidence in the regulator.
"In our work on the project, we set the goal of re-focusing the national financial policy to stimulate economic growth, and to gradually change the very structure of the national economy," says the deputy. In particular, the priorities to be pursued in the next 4 years include changes in monetary policy towards promoting economic growth, transformation of the state banks into drivers of economic growth, stimulating the export of high tech products and high level services, attracting foreign capital and increasing the effectiveness of international assistance. Why do banks need a new Strategy, and what economic effect does it aim to achieve? These questions were raised and widely discussed during the All-Ukrainian Forum "The Strategy for the Development of the Banking System of Ukraine - Synergy of Development of Banks and Industrialization of the Economy", which was held on the eve of the Banker's Day in Kiev.
Loans in short supply
In the crisis years of 2014 and 2015, the economy of Ukraine was rapidly shrinking. In 2015 alone, the national GDP fell by 9.9% and in 2014 by 6.6%. In 2015, the consumer prices grew by more than 43%. These factors directly affected the cost and availability of bank lending for the corporate, in fact, one of the cornerstones of economic development.
Throughout 2015, the loan portfolios in banks were shrinking fast. In a year, the volume of loans to the corporate sector went down by UAH 16.7 billion and stood at UAH 785.9 billion. In 2016, the trend continued. Only in the first quarter of 2016, the volume of loans to the corporate dwindled by UAH 16.6 billion up to 785.9 billion UAH. The reasons included the high cost of loans that the business could not support and the risks the banks faced by issuing loans. After all, in a crisis many companies cannot guarantee the timely returning of loans, which is converted in an increased number of non-performing loans for the banks. The overall liquidity and stability of the banking system is thus compromised. According to the NBU, in early 2015, the portion of the overdue loans in the banks' portfolios did not exceed 13.5%, and in April 1, 2016 it jumped to 23.6%. "Most banks are crippled with non-performing loans. In some cases the size of non-performing loans in the banks' loan portfolios may reach 60% and 70% or even more," says Viktor Skirta, head of the KSG Bank Supervisory Board. According to the Strategy's authors, the state must intervene and help banks reduce the ratio of problem assets.
If some banks write in their first quarter of 2016 statements that their loan portfolios are growing, the joy may be misplaced. "We are in the middle of the anti-crisis lending spree, which can be considered a quasi-lending or illusionary lending. For example, a bank may report an increase in the loan portfolio, but in fact if the hryvnia's devaluation is taken into account, the increase is non-existent. Or they say about the increase in the number of loans that have been issued but forget to mention that these were mostly the round robin type arrangements. That is, the new loan is issued to an old client or a group of companies who spend these funds to cover the debts under the previous loans," says Gennady Bortnikov, senior research fellow at the Academy of Financial Management.
The authors of the Strategy emphasize that the NBU and the Government's last year efforts to reduce the money supply significantly exacerbates the situation: it not only nearly kills lending but also causes substantial damage to the real sector of the Ukrainian economy.
According to the well-known financial expert, managing partner of Capital Times, Eric Naiman, "when the National Bank kills the financial sector, it only plays in hand to shadow economy." "They accept the IMF recommendations that they like and disregard those which they do not like. The main goal of the NBU and the Cabinet should be to promote economic growth rather than try to achieve inflation targets at all costs. What they do is to turn notions upside down. Where do we have all the money? It is not in loans as it should be, instead it is stuck in the National Bank's deposit certificates," - says Nyman. According to the expert, by having established the overvalued interest rate on deposit certificates, which now is maintained at 19%, the NBU not only makes any lending and economic activity senseless but it also bloats inflation, which it is allegedly struggling, through an unsecured issue of money to pay for huge interests.
The Strategy authors insist: it is necessary to dramatically revamp the financial policy sponsored by the authorities: banks should start providing loans to the corporate, not necessarily the large enterprises but also to the small and medium businesses. "Today the strategic goals for Ukraine must be to restore lending to small and medium-sized businesses. We need to give them the opportunity to develop. The banks should become key partners in building up their investment and financial potential. I think that the situation in this sense now is close to deplorable: only 2% of all loans are the investment loans provided to enterprises. 70% of all banks do not engage in investment lending at all. This means that banks are still lukewarm about taking part in the process of economic development," said Tatyana Mayorova, Doctor of Economics, Professor, Head of the Department of Investment Activity at the Vadim Hetman KNEU University.
Strategy of development
Stimulating economic growth is impossible without stabilizing the banking system and fostering lending. That is why the experts of the banking community promote the idea about implementing a single strategy, a system of real actions that would boost up lending and, consequently, the business. For this purpose, following the initiative of Serhiy Rybalka, the Radical Party's member and the head of the profile parliamentary committee, a group of experts developed the draft Strategy for the Development of the Banking System of Ukraine for 2016-2020.
After the presentation of the basic draft in April, the Strategy was distributed among more than 150 scientific and educational institutions, and more than a dozen expert institutions and profile associations joined in on its finalization.
"Ukraine needs a national economic strategy. We have to combine industrial, commercial, financial, and regional policies in one single reform agenda. One of the main tasks of this project is to have the government focus all efforts on capturing economic growth and changing the structure of the national economy. The banking sector should be used as the basis for the development of the corporate sector. Without a healthy banking system, without affordable lending the significant growth will hardly be achieved," said Serhiy Rybalka.
"For 10 years in a row, our governments have been consistently exhibiting their ignorance and their lack of understanding how important it is to create modern well-known systems of regular support for at least small businesses, and how to act on our competitive advantages. The way our governments behave during this period can be compared with the behavior of a pathologist at the bedside of a patient with severe cerebral disease," says Viktor Lisitsky, a member of the PrivatBank's Supervisory Board and the president of the Ukrsudprom Association of Ukrainian Shipbuilders.
The structure of the draft Strategy includes diagnostics: the document is very elaborate in detailing the problems, patterns and causes of the Ukrainian economic crisis. "We can differentiate between three groups of reasons for the banking crisis. First, the structural long-term problems of the national economy; the exports of raw materials, imports of consumer goods are the root of the problem. Second, the force majeure external factors plus the mistakes of the monetary, currency and banking regulation, which are very rarely mentioned in public, professionally, in a calm and well-though-out way, without going too deep into politics," said Tatyana Unkovska, director of the Institute for Development of Economics and Innovation Strategies. The main idea of the Strategy is to steer the economy away from the raw material model toward the high-tech industrial model. "We are living in the cusp of the fourth industrial revolution. It is advancing, inexorable like a tsunami. And we remain on the sidelines. This is very dangerous for the country. We need to change our perspective. The banking system should assume the role of one of the main drivers. We need to achieve a resonance effect between the development of the banking system and the development of a high-tech industry. This is the internal mechanism of the economic miracle that we saw in Singapore, post-war Germany and in many other countries," said Tatyana Unkovska.
The draft Strategy provides for a set of critical steps that will help banks to step up corporate lending. "The strategy outlines the short- and medium-term actions: protecting consumers and creditors' rights; addressing the problem of toxic assets; increasing transparency and accountability of the National Bank; correcting errors in the monetary and foreign exchange regulation; implementing the program to stimulate lending of the real sector," Unkovska said.
According to Serhiy Rybalka, the authors of the document are expecting that the Cabinet of Ministers and the NBU will significantly revise their plans and programs, taking into account the key proposals of the Banking Strategy. The final result must be a jointly developed set of bills to implement the ideas proposed by the expert community.