While the general health of Ukraine’s banking system is improving, one ailment is still getting worse - non-performing loans and the inability of banks to collect on them.
Non-performing loans have roughly doubled in the last two years, from 12.9 percent in 2013 to 24.3 percent in 2015 of total lending, according to data from the World Bank. Many of those bad loans are more bills coming due from the era of President Viktor Yanukovch. To reimburse depositors who lost their savings in banks, partly because of loans gone bad or fraud, taxpayers have paid out Hr 70 billion ($2.8 billion) from a deposit insurance fund.
Before Yanukovych was overthrown in 2014 by the EuroMaidan Revolution, not even the National Bank of Ukraine knew who owned most of the nation’s 180 banks. Consequently, regulation was non-existent. The parasitic “pocket owners” hid behind shell companies, using banks to either launder money or lend to insiders (such as themselves) with no hope of repayment.
While Ukraine’s central bank has gotten rid of about a third of the banks from that era – leaving 120 financial institutions left – that money may be gone for good. There is simply no enforcement of major financial crimes happening among police, prosecutors or the courts.
The government, citing bank secrecy laws, won’t even identify the deadbeats that costs taxpayers so much.
Global crisis
Mauro Machio, the CEO of Italian bank Unicredit in Ukraine, says that “the level of non-performing loans as a percentage of the total volume of loans in the banking industry is much bigger” than in other European countries.
The deadbeats, coupled with a lack of strong creditor rights, have deterred banks from lending despite record-high liquidity. Many banks have simply parked their assets with the central bank and earned the going interest rate at no risk.
Against Ukraine’s 24.3 percent of loans hitting non-performing statues in 2015, Poland had 4.7 percent, Sweden 1.1 percent and Moldova 14.4 percent.
Creditor’s rights
In Ukraine “it’s extremely difficult for a creditor to have their rights recognized and protected,” Machio said. “Even when you’re right… a lot of the times you face a system that’s acting, behaving in a way that you wouldn’t expect in any other market.”
Unicredit announced it was leaving the Ukrainian market in February. It plans to sell its unprofitable Ukrainian Ukrsotsbank chain to Russia’s Alfa-Bank, which is owned by Russian billionaire Mikhail Fridman.
Alfa-Bank advisor and former Economy Minister Roman Shpek told the Kyiv Post that Ukraine was one of the easiest countries in the world in which to obtain credit, but that it was among the most difficult for creditors to collect.
“These conditions affect the daily work of the banks,” Shpek said. “For those that try not to repay the loans, we take them to court, but it’s a long process – four to five years.”
Unfair cases
Unicredit, Italy’s largest bank by assets and the biggest foreign bank active in Eastern Europe, has indeed been involved in a years-long case in Ukraine to defend its ownership of an asset it acquired as collateral on a non-performing loan.
“The customer wasn’t able to pay back the loan, so they gave over ownership of the asset that was the collateral,” Machio said. “Since then, there have been hundreds of court hearings on this case.”
In another case, a Ukrainian notary registered rights of a non-existent property to a Unicredit customer, who subsequently used those rights as collateral on a loan from the bank.
“The level of not completely transparent and… bad behaviors by the actors in this system is enormous,” Machio said. The customer “probably knew the notary and the notary made the transaction in the full knowledge that the transaction was not legal.”
Business in Ukraine is often based more on personal relationships and bribery, Machio said, leaving those who follow the law at a disadvantage.
“As an international group, there are approaches that we cannot accept, that we don’t even want to consider putting in place, because they’re against our values, international rules and our reputation,” he said.
More suspicious
But another reason for non-performing loans is not fraud, but economic crisis.
Those who took out hard currency loans before the 2013 crisis saw the cost of repayment skyrocket as the hryvnia lost two-thirds of its value following the EuroMaidan Revolution.
“Some customers in this situation, instead of finding a way to even reach an agreement with the bank on how to resolve the issue, run away… with the money in their pocket,” Machio said.
The consequences of failing to repaying a loan “are not extremely serious” to the borrower, Machio said, but hurt prospective borrowers as banks curtail credit and impose tougher standards for loans.
Government’s fault
Shpek, who is also the chairman of Ukraine’s Independent Bankers Association, says that part of the problem is that the government has led by bad example. For instance, the State Fiscal Service still fails to return value-added tax refunds to banks promptly.
The government is not transparent in identifying problem borrowers.
Shpek said that it makes sense to establish a database of borrowers for banks to consult in order to identify individuals who repeatedly fail to repay loans.
While Ukrainian taxpayers deserve to know who doesn’t repay loans – since it’s their money that effectively goes to cover depositers’ losses – bank secrecy laws forbid the disclosure of such information by the government.
“But it would be possible to release this information from open sources,” Shpek added.
