"Only cowards pay back loans in Ukraine" | BrightTitan
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“Only cowards pay back loans in Ukraine”

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“Only cowards pay back loans in Ukraine”

Not only the separatist conflict weighs on the Ukraine. Less visibly ticks another time bomb: Half of all loans are suffering from distress. This has many reasons, but a very dangerous one.


It could have gotten worse. But before an escalation, the Ukrainian banking sector was spared last. “All were prepared for a bank run and had a liquidity plan in the drawer,” says a board member of a well-known foreign bank, who wants to remain anonymous. “In the end, nobody had to get him out of the drawer.”



The industry apparently owed this to the calming attempts of President Petro Poroshenko and the intervention of the central bank. Just before the end of the year, she entered into a one-off action and announced that the money of the savers at “PrivatBank” was safe. It has 20 million customers – almost half of the Ukrainian population.


If they had panicked and the bank itself landed in bankruptcy, the entire financial system could have collapsed. Finally, the institute is the largest in the country and unites 21 percent of the balance sheet total of this sector. So Poroshenko pulled the emergency brake and let the bank nationalize shortly before Christmas.


Banks are sitting on a huge mountain of lazy loans


Since then there has been rest. But according to market participants, the crisis could quickly break out again. The banking sector is in a poor state compared to the euro zone. In its latest report, the National Bank speaks of a slight recovery in business, following a record loss of Hryvnia 159 billion (€ 5.45 billion) a year earlier. But only a glance at the extent of the nonperforming loans (NPL) shows a different picture.


The central bank itself writes in its latest report that 30.5 per cent of all loans granted are uncollectible. These figures are even significantly lower than in various analyzes and assessments on the market, which estimate the NPL level at about 50 percent.


Within the PrivatBank, currency custodians rate the NPL share as low as 11.4 percent, even though it has long been known that almost all of the company loans to this money institution have been given to companies associated with the bank’s shareholders. Repayment by this oligarchy structure is considered to be excluded.



In addition, according to the monetary authorities, some private banks with Ukrainian capital do not yet want to recognize the extent of the NPL. The state banks, whose market share has again increased to more than 50 percent, confess their disastrous results. According to the National Bank, they sit on 45 per cent emergency loans – without considering the private bank. The daughters of foreign banks officially reach 36.4 percent.


Corruption, economic activity, oligarchs in power


The National Bank, which has already been criticized for its weak policy, has become more active in the face of the pressure from the Western donors. With a new regulation, the banks now forced them to credit risk assessments. The true imbalance of the banking sector is therefore likely to come to light.


The sector suffers, above all, from the deep recession that the country has underway since 2014. Within two years, gross domestic product declined by more than 16 percent and also hurt the national currency of Hryvnia. This is due not only to the conflict with Russia, which has lured the industrialized East of the country, but also to the existing oligarchical economic structure. And, of course, corruption.


International rankings show the precarious situation: for example, the country is ranked 80th out of 190 countries on the World Bank’s business climate index Doing Business. And on the corruption index of Transparency International, Ukraine ranks even on the 131st place of 176 countries. Together with Russia, it forms the backdrop in Europe.


Corruption is the core problem in the banking business, say those responsible. The supervisor had allowed problematical banks to spend too long and had their owners deduct the money. Loans were difficult to collect because customers were paying less for the delay in court proceedings to collect money than for loans. In the Ukraine, one also says: “Only cowards pay back loans.”


The PrivatBank was simply granted


In the case of PrivatBank, this also had political-tactical reasons. One of their owners, the oligarch Ihor Kolomojski, was active as a governor in the east during the escalation of the Ukraine crisis. Verbally, he approached Kremlin chief Vladimir Putin like no other. He called him, among other things, a “small schizophrenic”. In Kiev he was allowed to do so. It bears the appearance of favoritism and corruption, writes the agency Reuters regarding the PrivatBank.


Obendrein, the deposited collateral of the private bank in its valuation were heillously inflated. According to two top officials of the Ukrainian banking regulation, the auditors of PricewaterhouseCoopers (PwC) were responsible. In an interview, the officials lastly spoke of other “serious mistakes” of the auditor. They even brought the demand to close the PwC branch in the Ukraine: the reports of the auditor were “qualityless and unprofessional”, concluded the conclusion.


The situation in Ukraine is now also being criticized by the EU. Above all, the oligarchically structured economy is one of the main reasons that the fight against corruption has been “stalled”. This is apparent from a special report by the EU Court of Auditors at the beginning of December. He also criticized the fact that “the law enforcement agencies are not sufficiently independent of the government and the oligarchs influence political parties.”


Economy is in the midst of a transformation


But there are also positive signs. The recession is over and the economy is slowly recovering. The forecast for GDP growth is between one and three percent this year. According to economists, Ukraine is benefiting from the global economic recovery and the higher commodity prices, which are decisive for Ukraine.


Yet the economy is still in the midst of a transformation from the Russian market to the European market, which demands numerous reforms. However, the performance balance remains negative for the time being. Inflation fell from an unbelievable 43 per cent (2015) to 12.4 per cent in the previous year. For 2017 market participants expect only a single-digit value. It is also noteworthy that the Bloomberg news agency in its Global Risk Briefing for 2017 shows the Ukrainian currency as the most stable worldwide.



Lending has thus stabilized. In the meantime, no more 24 percent interest rates have to be covered by new loans, but “only” 16 percent. There is also a stabilization in the deposits. The banking sector nevertheless suffers from a profit problem. And by the nationalization of PrivatBank, the state’s share in the sector has again risen to over 50 per cent, which is regarded as problematic with regard to the competition situation.


The market share of the five largest banks has risen by half to 57 percent within three years. Since 2014 about 90 banks – half of the money institutions – have been withdrawn from the market. A few dozen will probably still have to stop the operation.

Jack Goodman

Founder & CEO of BrightTitan

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