The share of bad loans in the banking system increased for the first time since 2011

Photo: Ukrainian photo

In the first half of 2014 the share of troubled debts increased from 7.7% to 10.1%, the National Bank of Ukraine informed. At that, the general credit portfolio of the financial institutions grew over this period by UAH 106 bn totaling UAH 1.017 trillion. For the first time in three years the share of overdue loans increased.

Portfolio of problems

“The share of outstanding debt always increases during an economic crisis,” commented managing partner at the equity firm Capital Times Eric Neiman. He also noted that currently the annexation of Crimea and the anti-terrorist operation in Donbas contributed to the existing economic problems. “So, this is not so much a banking problem, as it is a problem of Ukraine in general,” emphasized Neiman. In this situation, deterioration of payment discipline of borrowers among individuals and legal entities was inevitable, admits financial expert Pavlo Mishustin.

The real volumes of outstanding debts may be much larger than those declared by the NBU. As Capital reported earlier, the data of the NBU regarding overdue loans considerably differ from the statistics of debt recovery firms. The NBU reports that troubled debts of individuals in absolute figures dropped considerably in 2009-2013: by 35% to UAH 13 bn. At the same time, according to the Association of Debt Recovery Business of Ukraine (ADRBU), over the past five years the amount of troubled loans of individuals in the credit portfolio of financial institutions increased from UAH 67 bn to UAH 75 bn, which is around 45% of the total volume of debts.

“Our figures are based on the data of world organizations, such as the World Bank and international rating agencies. According to Fitch Ratings, the amount of overdue loans on the market exceeds 40%, not 10%, as specified by the NBU based on the official reports of commercial banks, said ADRBU Chair Andriy Nyzhnyk. He believes that one of the key reasons for such a difference in figures is the “specific accounting” of troubled debts in Ukraine and, accordingly, incorrect formation of reserves for it by banks, which reduces the indicators of the reporting.

The difference of data of the NBU and International Financial Reporting Standards (IFRS) on the size of the troubled debts also appears because by international standards restructured debts are also deemed as troubles debts, explained Chief of the Financial Rating Department at IBI-Rating Anna Apostolova. “The current standards that are effective in Ukraine do not envisage anything of the kind, while the banks benefit from it. By performing restructuring of loan debts, sometimes more than once, financial institutions artificially reduce the share of overdue loans in their reports. In addition to that, according to the IFRS, in case there is at least one overdue payment, the entire amount of the loan debt is deemed a troubled debt,” she added.

Unflattering future

Experts point out that in the nearest future the portfolio of troubled debts will increase even more. “Unfortunately, based on the results of nine months and the whole year the increase in troubled debts is most likely to continue at a predicted level of 12% (official data – Capital), assumes Mishustin. Also, the banks need to increase their reserves on loans, which were deemed as troubled 90 days ago, confirmed CEO of the Ukrainian Interbank Foreign Exchange Anatoliy Hulei. “August and September will be difficult months for the reserves. All profits will be spent on NBU reserves,” he warned. In order to reduce the burden on the banks, the issue of currency loans of 2008-2009 needs to be settled, adds the expert. In addition to that, a moratorium on the alienation of residential property stopped stimulating borrowers to repay their debts, believes Hulei.

Neiman also points to the need for toughening the liabilities of borrowers, particularly, bank clients, who are trying to escape from financial institutions by withdrawing assets or through declaration of fictitious bankruptcy.