No way out. The NBU permitted banks to not repay old debts

Photo: Eugeny Musienko

The National Bank of Ukraine has allowed financial institutions unable to repay refinancing on time to not repay their debts. “Taking into account the complex economic situation in Ukraine and substantial limitation of access of the banks of Ukraine to internal and external funding, the central bank has moved the deadlines for repayment of the principal on loans issued by the NBU for maintaining liquidity and loans for preserving liquidity from September-November 2014 to December 10, 2014,” said Director of the NBU General Banking Oversight Department Alla Shulha. This step of the regulator to meet the banks’ needs will allow them to temporarily free funds, which will give them an opportunity not only to improve their ability to timely and fully fulfill their obligations, but also prevent instability in the banking system of Ukraine, assures Shulha. Since the start of the year, the regulator allocated refinancing in the amount exceeding UAH 130.1 bn for commercial banks.

Forced easing

The decision of the regulator to postpone repayment of the sums of refinancing is stipulated by NBU Resolution No. 551 On Changing the Terms of Repayment of Loans by Banks. Market players do not conceal that the regulator was forced to resort to such actions. In conditions when the banks practically do not issue loans and the payment discipline of borrowers is sliding, some financial institutions are incapable of settling old debts to the NBU. In July alone the portfolio of hryvnia loans issued to legal entities shrunk by UAH 2.4 bn. Overall, since the beginning of the year the credit portfolio decreased by UAH 40 bn (8.4%). Also, the volume of loans to individuals is on the decline. Since the start of the year, loans to individuals dropped by UAH 7.2 bn.

“After bank diagnostics, the NBU discovered serious problems with credit portfolios: the need for reserves (up to 40%) and the outflow of deposits of individuals (up to 20%). This created conditions for easing the requirements of refinancing of loans issued in 2008-2009. Today, 15 banks have been removed from the banking market and 32 have NBU curators working in them. This makes the total of 47 banks about which the NBU has kept silent since April 1,” emphasized Chairman of the Ukrainian Interbank Foreign Exchange Anatoliy Hulei.

If the NBU forces the financial institutions to repay loans in such conditions, they will not have the money to settle accounts with depositors and the regulator will be forced to declare them insolvent. In order to repay the depositors the Deposit Guarantee Fund will have to again borrow from the NBU, since it won’t have enough funds to do so. In the middle of June the DGF borrowed UAH 4.2 bn from the NBU. According to the DGF, over the first half of 2014 at total of UAH 3.2 bn was paid out as compensations.

The debtor’s path

Based on the results of H1 the largest debtors of the NBU included Oschadny – UAH 22.7 bn, PrivatBank – UAH 18.1 bn and Nadra Bank – UAH 10.3 bn. In its turn, Naftogaz of Ukraine is the largest debtor of Oschadny. “Clearly, Naftogaz cannot service its loans. Due to this the government decided to additionally capitalize the national company in the amount of UAH 63.3 bn. At the same time, the entire banking system required additional capitalization to the tune of UAH 50 bn based on the results of the first six months of the year,” a banker who asked not to be named told Capital. Furthermore, financial expert Artemiy Yershov believes that Oschadny should not have difficulties because of the problems of its debtor. “This is a national and political issue. The situation has been coordinated at all levels. That is why a solution will be found in any case: either Naftogaz will be recapitalized or the refinancing of Oschadny will be extended,” he predicts.

The NBU’s resolution can be linked to such financial institutions as Nadra Bank and Kyiv Bank, believes senior partner at the Kravets & Partners Law Firm Rostyslav Kravets. “For instance NBU’s curator was introduced in the Kyiv Bank and only payment of taxes is being serviced. I suspect that the bank also has a serious unpaid loan to the NBU. In order not to undermine the trust in the government altogether, the bank is being helped,” believes Kravets.

Information also surfaced in the mass media that the NBU named Nadra Bank a problematic financial institution. It is not totally clear whether it is true or not as the NBU does not have the right to publish the list of problem banks as it could further aggravate their condition. Before declaring the bank insolvent, the regulator performs measures aimed at salvaging it. It is quite possible that Resolution No. 551 will help Nadra Bank survive the current crisis.

During the 2008-2009 crisis Nadra Bank experienced financial difficulties. As a result it received two loans in the total amount of UAH 7.1 bn for maintaining liquidity. In February 2009, the NBU introduced provisional administration in Nadra Bank and extended its operation until 2011 when the new investor appeared, namely Dmytro Firtash’s Centragas Holding AG. Previous leadership of the NBU provided debtor’s delay for the new owner until 2016.

According to mass media reports, the bank still has not begun repayment of old debts, while in 2014 it again received a loan from the NBU in the amount of UAH 2.5 bn due to the outflow of deposits. Also, the fact that at the end of June Nadra Bank offered holders of its Eurobonds to restructure them also points to the problems the financial institution faces. These are securities in the amount of US $59.66 mn in circulation since 2007 and maturing in June 2017. Nadra Bank prefers to keep mum about received refinancing – Capital has repeatedly sent inquiries, but has not received any response.