Nearly half of borrowers are not repaying their debts to Ukrainian banks

Photo: Alexey Solodunov

Commercial banks continue to suffer from loan defaults. According to statistics of the National Bank of Ukraine, in November the share of overdue loans reached 12.3%. According to NBU statistics, since the start of the year the volume of problem debts increased 4.6 percentage points. According to the assessments of market players, the real indicators are much higher than the official ones and could reach 40-50% of the entire loan portfolio.

Start the meter

Problems in the national economy, GDP decrease and a decline in the real personal incomes contributed to the increase in non-payments in November. “The growth in overdue debts is due to the more than 20% devaluation of the hryvnia in the first weeks of November. On the one hand, banks were forced to recalculate overdue hard currency portfolios in connection with the decrease in the exchange rate. On the other hand, the devaluation of the hryvnia reduced the purchasing power of borrowers with foreign currency debts,” Director of the Financial Ratings Department of IBI-Rating Anna Apostolova.

In addition to that, the financial status of many borrowers worsened due to the rise in prices. In the period January-November 2014, the consumer price index (CPI) was 121.8% compared to the same period in 2013, while in the periods January-October and January-September this indicator was 119.0% and 116.2% respectively, Apostolova noted. The military actions in the east, where many large industrial plants are operating, had a negative impact on the repayment of loans to banks.

Director of the Center for Problem Assets at the Finance and Credit Bank Serhiy Motailo says in the retail segment the main deadbeats are debtors of mortgages in hard currency, who stopped servicing them in the end of 2008 – early 2009, and who are currently being sued in court by banks.

Motailo also told Capital that clients with credit card debts in hard currency, borrowers in Crimea and the ATO zone and debtors of loans in cash and credits under wage contracts with companies that accumulated arrears also fall into this category.

In the banker’s opinion, companies associated with the former government are experiencing the greatest difficulties in recovering loans from borrowers. “We also predict that major construction companies that took out loans in hard currency and sell real estate for hryvnia will also face problems. Structures oriented towards the Russian market are also facing difficulties. At the same time, small and mid-sized businesses that did not take out bank loans in hard currency may be the most vibrant and have a good chance of survival on the market,” Motailo says.

A sober outlook

At the same time financial experts affirm that the real volume of overdue payments is much higher than the official indicator and could be as high as 40-50% of the entire loan portfolio. Banks are attempting to veil the real volume of unpaid loans by different methods in order to not form additional reserves. For this financial institutions may transfer such debts to the accounts of affiliated structures. Moreover, the calculation of the size of debts on loans in Ukraine is quite wishy-washy. “The method that the NBU uses to calculate this parameter notably differs from the principles of international standards. For example, in one of its documents the International Monetary Fund pointed out that the volume of bad loans relative to the total credit portfolio of banks reached the level of 27.7% back in June of this year,” said Manager of the Analytical Department of the Eavex Capital Dmytro Churin.

In December the official size of the portfolio of overdue loans of commercial banks should not significantly increase and it may even decrease, Executive Director of the Collectors’ Association of Ukraine (CAU) Serhiy Nikifirov. “In December the collectors and banks are proposing several promotional programs to borrowers, writing off a part of their debts on condition of paying off the loan principal and so on. This year the collection of overdue loans was 20-30% higher than usual as borrowers are trying to take advantage of promotional offers and economize by paying less,” he emphasized.

The legal aspect

Only a full-fledged recovery of the national economy can considerably reduce the amount of unpaid loans. “In order for the level of bad debts be acceptable in the future the devaluation of the national currency should not be as sharp as it was this year and the country should pull out of the protracted period of recession,” Churin believes.

In addition, market players speak of the need for the revision of laws that affect relations between banks and borrowers. “After all, today a creditor is in a better situation than a borrower. The responsibility of a creditor should be raised to the stage of signing an agreement. The loan agreement should be simple, understood and transparent,” a judge of the Supreme Specialized Court of Ukraine on Civilian and Criminal Cases Olena Sytnyk said.

Banks, on the contrary, unanimously clamor for the need to reinforce legislation on the issue of protection of creditors. “This should be done right up to the introduction of norms on criminal liability for the failure to repay loans. And this bill should be publicly reviewed with the participation of bankers, law enforcers, lawmakers and borrowers,” says Motailo.