You're reading: ​Banking sector cleaner, but still no lending

Vladyslav Rashkovan, one of four deputy governors of the National Bank of Ukraine, can list many areas that are finally going right with the nation's banking sector.

But the biggest problem remains: Almost no lending is happening. And lending is what banks are supposed to do.

Without affordable credit flowing, Ukraine’s economy will have a hard time growing. Bankers, despite having record-high liquidity of Hr 100 billion ($4.3 billion), don’t want to risk lending because they’ve been burned in the past by deadbeats and courts that don’t punish fraud and make it difficult for banks to collect on non-performing loans. So they’re satisfied to park the money with the central bank and earn 18 to 20 percent annual returns.

“There has never been such liquidity,” Rashkovan said. “The problem is it will not go to the market for lending for one simple, stupid reason: creditor rights.” Parliament has still not enacted legislation to protect the rights of creditors, perhaps for self-serving reasons, or depositors for that matter.

“What we need to resolve is non-performing loans and it’s again about the courts. If you loan $100 million and the guy is sitting in parliament and we have a number of such cases, for these people having corrupt courts makes it very easy not to repay the loans,” Rashkovan said. “Banks say our capital is being eaten by the corruption.”

While Rashkovan said overhauling the legal system “is not the mandate of the central bank, we will try to do everything possible to push other state officials to enforce and to speed up those changes in the the court system, legal system, rule of law, anti-corruption. Without this, the economy will still not see money from lending. If this does not happen there will be no economic growth. There are very weak internal sources of funding to feed the economic growth – and also no external funding to feed economic growth. For external funding, they need the rule of law to work. They need courts judging fairly.”

Rashkovan said external audit companies will be hired to find cases of fraud involving banks, including Delta and Nadra. “We are in favor of some bankers to be in jail. We want this and we are sure we will achieve it,” Rashkovan said.

So, there it is in a nutshell: a banking system with more than Hr 1 trillion ($43 billion) in assets remains frozen partly because of past fraud and the inability or unwillingness of prosecutors and judges to punish wrongdoing.

The analogy for the central bank’s current role is that of a renovator who has gutted a home in terrible shape to prepare it for a proper and complete remodeling.

That is what is under way in Ukraine’s banking sector, a painful process that will continue in 2016.

“Today we have a new national bank,” Rashkovan said in a recent interview with the Kyiv Post. “We are one team working to achieve the same target – to build a real sustainable banking sector and drive it forward.”

Since Rashkovan and a team of reformers came on board after the EuroMaidan Revolution ended in February 2014, driving President Viktor Yanukovych from power, the central bank has racked up an impressive string of successes.

Stress tests led to the closing of 60 of the nation’s weakest banks, leaving only 120 of the strongest left on the market. And that number is likely to shrink as more banks undergo audits and the smaller ones are unable to meet capital requirements.

Bank ownership is now fully transparent in almost 100 percent of the cases — and accessible online. Before Rashkovan came in, the central bank didn’t know who owned more than half of the banks, making them fertile grounds for fraud, especially for owners who simply used deposits as a source of private funds — so-called “vacuum cleaner” bankers.

Curbs have been placed on related-party lending, another source of much corruption through insider financing deals.

All of the clean-up has come at a high cost.

Some Hr 70 billion, or $3 billion, in deposit insurance has been spent to reimburse customers up to Hr 200,000 who lost savings in the weak or corrupt banks, for which no one has been held to account.

Additionally, the National Bank of Ukraine has shed more than half its workforce — to 5,500 from 11,800 — as it dropped the previous focus of keeping the hryvnia tightly pegged to the value of the dollar and defined new core functions.

“What was done in the past – fixed rate pegging (proved) too costly for the state, especially when reserves are eaten year after year after year, Rashkovan said.

Instead, the central bank set price and financial stability as its core functions followed by employment and economic growth. Still, the bank is involved in 41 projects, including anti-money laundering efforts and economic research and forecasting.

Still, the new central bank leadership team under Governor Valeria O. Gontareva were able to lay off most employees because they were not engaged in priority areas.

“We found out 6,700 people were doing non-core functions,” Rashkovan said. “All the areas which were non-core, there was a separate project to sweep them out…it’s the largest HR (human resources) reduction in any state-owned enterprise.”

The main aim of the post-revolution team was to “return trust to what the central bank is doing,” Rashkovan said. The return of hryvnia deposits to banks is a sign the new policies are working and that people have more trust in banks.

“Believe it or not, not everything is money,” Rashkovan said. “We can calm down the panic sometimes with just strong words.”

Kyiv Post chief editor Brian Bonner can be reached at [email protected]