Businesses to get access to scarce three?year loans
to effect on Aug. 20 could help businesses obtain the funds they need for growth. Through the NBU, commercial banks will be able to offer three‑year “innovation” loans that firms can use to finance activities like plant expansions or the acquisition of new technology.
Banks have in the past been wary of making mid‑ to long‑term loans, analysts say, because of risks associated with default, the political climate, currency fluctuation and the undeveloped capital market. The NBU program should remove some of that concern, freeing up capital for loans.
The NBU will make loans to commercial banks for up to three years at its annual refinancing rate, which is currently 8 percent. Once a commercial bank makes a loan under the program, the central bank’s underlying interest rate won’t change unless the lender raises its rate. The loans cannot be extended beyond their three‑year term.
Bankers were receptive to the NBU program.
“It is a good development for the economy,” said Hans Broucke, deputy chairman of ING Bank Ukraine. “Raising medium‑ and long‑term bank financing at a fixed rate is currently a problem.”
“This is a very useful project,” said Serhy Vovchenko, deputy chairman of Aval Bank. “Ukraine has suffered from the lack of medium‑ and long‑term funding, and this lending program will help improve the situation for some Ukrainian enterprises.”
Andry Dmytrenko, an analyst at Dragon Capital, said that the new loan program could help businesses despite banks’ general wariness about making large, relatively long‑term loans.
“Default and other loan‑related risks are still high in Ukraine, and banks are trying to insure themselves by keeping interest rates high. They are also still leery of fixing interest rates in the long‑term, because of risk of potential macroeconomic instability,” he said.
President Leonid Kuchma and the government have criticized the NBU for providing loans to banks at excessively high rates and in what they consider insufficient amounts to benefit the economy. The central bank’s new program is being viewed as a response to this criticism.
While analysts agree that the program will have a positive impact on the economy, they also warn that a number of factors may constrain the program’s effectiveness.
“The program’s effect on the economy will be limited, since the NBU is constrained in the amount of financing it can offer commercial banks,” Vovchenko said. “Due to limited resources, the maximum amount of funds the NBU will be able to lend will be around Hr 3 billion, a small sum relative to Ukraine’s economy. This figure will represent only a 10 percent increase in overall loan activity.”
Aleksander Petroschuk, investment manager at Euroventures Ukraine, a venture capital fund, agrees. “The effect on the economy will depend on the amount of loans the NBU will provide to banks. Since the exact amount of loans has not been specified, it is hard to judge whether this program will have any considerable effect.”
Some worry that despite safeguards, the program could be poorly implemented.
“Poor implementation of this program might mitigate any positive effect on the economy,” said Mark Iwashko, chief investment officer at the U.S.‑based Western NIS Enterprise Fund.
Dragon Capital’s Dmytrenko agreed.
“Commercial banks will play a vital role in identifying appropriate enterprises and making loans. Therefore, the loan mechanism should be worked out with the banks in order for the program to have the intended effect,” he said.
Macroeconomic and default risks may also hinder the program’s effectiveness.
“Providing long‑term funding to commercial banks will not necessarily guarantee loans to businesses, since commercial risk will still be assumed by the banks,” Broucke said. “That may limit the amount of the loans that will actually be made.”
“Bankers are still unsure about economic and commercial risks, especially the risk of default, which the NBU will not take away,” Dmytrenko said. “This might make bankers reluctant to actually make loans.”
Despite constraints, however, analysts are optimistic about lending in the long‑term.
“Interest rates have been decreasing, and bank funds have been getting cheaper as a result,” Vovchenko said. “This tendency will continue in the future, regardless of the NBU program, and that is good for the economy.”
Iwashko agrees that the situation is gradually improving.
“In the past there was virtually no bank financing, and we had to provide this type of loans, in addition to our equity investments.” He said. “Now, the banks are slowly starting to offer financing, and we are beginning to work with Ukrainian banks.”
Under the program, banks that have identified viable innovation projects will need to perform the due diligence work usually associated with a major loan and ensure that the loan is properly collateralized. The NBU requires that 120 percent of the loan value, including interest, must be collateralized with real estate, rights to loans, deposits, government securities or other property.
Loans provided under the program cannot exceed 50 percent of a bank’s regulatory capital, but banks will be allowed to form syndicates to extend large loans. Banks will be required to provide at least 10 percent of the loan capital.
Banks participating in the program must have statutory capital of at least 5 million euros and meet other requirements.
