facebook
twitter
vk
instagram
linkedin
google+
tumblr
akademia
youtube
skype
mendeley
Wiki

THE MAIN TENDENCIES AND PROSPECTS FOR UKRAINIAN BANKING SECTOR IN TERMS OF EXTERNAL LOANS

Автор Доклада: 
Статва М. Г., Кравченко Я. А.
Награда: 
THE MAIN TENDENCIES AND PROSPECTS FOR UKRAINIAN BANKING SECTOR IN TERMS OF EXTERNAL LOANS

УДК 336.773 (477)

THE MAIN TENDENCIES AND PROSPECTS FOR UKRAINIAN BANKING SECTOR IN TERMS OF EXTERNAL LOANS

Statva Maryna Gennadiyivna, student,
Kravchenko Jana Anatolіїvna, student,
State High Educational Institution “Ukrainian academy of banking by the National bank of Ukraine”

During the global financial crisis Ukrainian banking system faced enough problems. But the point of external loans has put a great question mark on the ability of the national banking sector to survive. At the post-crisis stage, while handling with previous debts and reviving the bank activity, Ukrainian banks are facing the dilemma: either to take new syndicated loans or to involve more national resources. Moreover taking into the account plenty of contradictory legislation acts that the National bank of Ukraine has adopted on the one hand and readiness of foreign lenders to continue cooperation on another, Ukrainian banks should formulate consistent and confident policy of their lending. In this paper we made an analysis of the variety of all possible solutions and their probable impacts on the future development of the Ukrainian banking system.
Keywords: Ukrainian banking sector, external loans, foreign syndicated lending, financial crisis.

With a domino effect the global financial crisis has shaken a lot of economies and involved them into a world recession. According to scientists, the transmission effect of negative pulses (called “infection effect”) can vary between 5-10% from one country to another. Unfortunately, the Ukrainian economy is not an exception. Moreover, today it is obvious that the Ukrainian banking system is already significantly integrated into the global economy. For example, out of 176 banks operating in Ukraine as for 01/01/2011, 55 - are banks with foreign capital, including 20 - with 100% foreign capital. The total share of foreign capital in the Ukrainian banking system - 40,6%. Therefore, the sensitivity of domestic banking sector to foreign banking environment in some way determines how vulnerable Ukraine is to the world crisis.

At the stage of deficit of long-term financial resources in the domestic market, banks’ external borrowing started to play a significant role for Ukrainian banks. As for 10.01.2010 external lending of the banks was at the level about $27.9bln. That stands for 25% of the whole Ukrainian gross external indebtedness. Within the period from 2003-2010 years, the share of external banks’ indebtedness increased from 7.33% to 25% that is 3,4 times higher. Besides, according to the National Bank of Ukraine, about 70% of these indebtednesses are syndicated loans, with the share of long-term loans about 60%. That’s why we focused our research on the syndicated loans, as it is a main type of external borrowing among the Ukrainian banks.

On the one hand, attracting foreign financing allows financial institutions to attract cheaper resources for a longer term. But at the same time, active borrowing significantly increases risks for the national banking sector in particular and for the Ukrainian economy in general. It happens through the increasing dependability of domestic financial sector on foreign capital and changes in foreign financial markets. Another negative factor is increasing level of dollarization of the Ukrainian economy. The problem is that the external debt of banks is usually denominated in the foreign currency, while the assets of credit institutions are denominated in the national one. In case of sudden fluctuations of the exchange rate excessive foreign indebtedness can be a cause of serious banking crisis and seriously complicate the consequences of currency crisis. So, that means that in case of sudden shocks in the international or domestic financial markets, the foreign creditors may ask for a withdrawal of their funds. As a chain reaction, it will put pressure on the banking reserves and may cause outflow of deposits. Thus, the problem of banks’ foreign indebtedness is a part of a bigger problem - the problem of capital outflow from the country. In such way the final effect on the economy and banking sector greatly depends on whether the level of external debt is optimal. Besides, another key factor is the efficiency of banks’ risk management in terms of external debt financing.

During 2006-2008 years, the banking market in Ukraine has shown strong growth. Therefore it caused a sharp increase in the public demand of personal and business loans that were lent for investments in the expansion, modernization, launching or other businesses purposes. Lack of the experience in the financial planning and set of institutional factors led to the intensive lending. As a result, banks began actively to attract external financial resources that were less expensive than domestic.

Syndicated loan – is the main type of external financial resources. Analysis of international money market has shown that the syndicated loan offers quite limited number of banks and their disclosure requirements for borrowers are easy enough. That is why syndicated loans are mainly popular among those banks, which either unable or not willing to disclose all information fully, and need resources urgently. Syndicated loan is a flexible source of funds that could be arranged relatively quickly (the process of getting such loans takes only a month for existing borrowers and three months - for new ones). Syndicated loans are also efficient for the banks that require small amounts of money (about USD10 mln.).

 So these factors have provoked the development of active syndicated lending and consequently have led to a rapid increase of foreign debt. Besides, it took place on the basis of implicit assumptions of Ukrainian bank managers about the possibility of permanent refinancing of their external liabilities. That means that in the most of the cases in the financial plans of banks, only regular interest payments plus the payment of the current part of the long-term external debt were taken into the account. The necessity of paying off not just the current part of a debt, but the whole sum of it wasn’t forecasted in the financial plans of the most Ukrainian banks.

As we can be seeing from the Table 1, in the beginning of 2011 in the group of the largest Ukrainian banks there are some that have certain obligations to foreign creditors. Only “UkrEximbank”, which has a rather positive trend in the loan market, not only pays off in time its previous loans, but takes new ones as well. At the same time, UkrEximbank is a 100% state-owned bank, and consequently it has received some financial support not only within the financial context, but especially within the political one. And the brightest proof of this is syndicated loan from Japanese Bank at the beginning of 2011. It was a part of the agreement, signed by the heads of these countries, regarding international cooperation in general and increasing investment inflows to Ukraine in particular.

However other banks have made some progress in the agreements with the foreign lenders as for prolongation and restructuring the loans. Moreover, only “Finance and Credit Bank” made losses last year, while other banks were showing quite steady growth and this fact increases the trust of lenders to the banking system in general. It can be seemed from the table 1, where the revenue of the banks on 01.10.2010 is listed.

Table 1 – Foreign syndicated lending to the largest Ukrainian banks

 

Bank 

name

Loan amount (USD)

Loan terms

Interest rate, %

Lenders

Prolongation or restructuring

Revenue on 01.10.

2010

Nadra Bank

55

08.2008 - 08.2009

LIBOR+1,5%

BayernLB and Standard Bank

Restructuring

4,695

First Ukrainian International Bank

237

Combined pool - 01.08.2009

LIBOR+1,95%

BayernLB, Landesbank Berlin, Standard Bank, Unicredit and RZB

Prolongation till December, 2014

154,976

Finance and Credit Bank JSC

113

08.2008 - 08.2009

LIBOR+2,5%

Standard Bank Plc, Bayerische Landesbank and Banco Finantia

Prolongation till January, 2015

-54,072

UkrGazBank

23

08.2008 - 08.2009

LIBOR+3,25%

ING and Standard Bank

Prolongation till August, 2012

14,212

Ukrainian State Export Import Bank

345

01.2011 - 07.2011

LIBOR + 0,8%

BAYERNLB, Deutsche Bank, London Branch и Standard Bank plc

- *

39,674

Ukrainian State Export Import Bank

98

18.01.2011

 

Japan Bank for International Cooperation

- *

39,674

 * - Information is not available

Nevertheless, that’s necessary to mention that attracting the new syndicated loans to Ukrainian banks in the post-crisis period is not happening. There are several reasons for it. First of all, the restructuring of sovereign and quasi-sovereign external debt of commercial structures generally leads to a drop in quotations of debt instruments at the foreign financial markets. Secondly, it increases the value of leveraged resources for Ukrainian borrowers. In addition, portfolio investors may lose interest to Ukraine because of insecurity in terms of defending their rights. Thus, they consider such investments as too much risky.

Nowadays, German banks BayernLB, English Standard Bank and the Italian group UniCredit are the leaders among the creditors of Ukrainian banking system. So undoubtedly the main creditors of domestic banks are European ones. Besides, Japanese banking institutions also play an important role for Ukraine. Those are Japan Bank for International Cooperation and Bank of Tokyo-Mitsubishi UFJ. With the first one Ukraine started to cooperate only this year. The second bank acted as Ukrainian lender for some time before. So, in crisis time it has agreed quite easily for restructuring and prolongation of Ukrainian banks’ external debt.

Table 2 – Foreign lenders of Ukrainian banks

Lenders

Amount,

mln. USD

Market share, %

The number of borrowers

The number of lenders

BayernLB

502

17.33%

12

16

Standard Bank

399

13.77%

11

13

UniCredit Group

340

11.74%

4

4

RZB Group

217

7.51%

5

6

ING Wholesale Banking London

191

6.61%

5

6

BNP Paribas

150

5.18%

1

1

RBS

140

4.84%

2

2

Societe Generale

125

4.32%

1

1

Bank of Tokyo-Mitsubishi UFJ

117

4.03%

2

3

Deutsche Bank

115

3.97%

1

1

However, rates on the syndicated loans are unlikely to stay at the pre-crisis level. Probably the borrower will pay some bonuses over the pre-crisis margin and obviously that will be not less than 150-300 basis points. For example, for FUIB’s credit pool (USD237 mln.) since 2013 the margin will be increased from Libor +2,5% to Libor +3%. Overall, this is the main external factors that prevent syndicated borrowing in Ukraine from the resumption to a pre-crisis level.

Among the internal factors, the most significant impact on foreign borrowing has the National bank of Ukraine (NBU). Thus, to normalize the situation with bank liquidity in the beginning of the crisis, NBU supported banks through the mechanism of refinancing. So, credit refinancing of Ukrainian banks was carried out with using of transparent procedures based on Act of NBU “On Approval of the Policy of the Regulation of the Liquidity of Banks of Ukraine by NBU”. In 2008, NBU issued about UAH105 bln. as refinancing loans (including overnight ones – UAH43 bln.), while in 2009 NBU issued only UAH64.4 bln. Such support from NBU contributed greatly in the completing current obligations of the banks in front of NBU. It is necessary to admit, that NBU’s providing for banks refinancing loans in terms of the money outflow and increased customers’ demand for foreign currency helped for banking system to provide economic turnover [1, 2].

The average interest rate on liquidity support operations in 2008 stood at 15,3% compared with 10.1 % in 2007. Taking into account how high system risks are NBU cannot compete with syndicated loans of foreign financial institutions. It provides loans for shorter periods and at higher interest rates.

Moreover, Ukrainian Monetary Policy for 2010 was very much controversial. First of all, it was proclaimed promotion of further containing inflation through preventing monetary risks of price stability, namely – preventing from the creating a misbalance situation at the monetary market in terms of liquidity surplus. And at the same time – encourage credit activity of banks, providing internal and external stability of the monetary unit and to mitigate the conditions for increasing the credit activity of banks.

Overall, the NBU policy in our opinion is a short-term oriented and does not consider many important factors [2]. Besides, the inconsistency of the negative phenomena in Ukrainian banking sector to some extent neutralizes the effectiveness of implemented measures.

As a proof of this thought we want to make some reference to the Law of Ukraine “On the National bank of Ukraine” where there is mentioned, that NBU have to define and implement the monetary policy in accordance with the “General Principles of the Monetary Policy” developed by the Council of NBU. The last one, in its return, is based on the fundamental criteria and indicators of the national economic development program and the “Basic parameters of economic and social development of Ukraine” for the relevant period, including forecasts of economic indicators approved by the government of Ukraine.

It follows that while working out the “Basics of monetary policy”, formation and further implementation of monetary policy, the National bank of Ukraine must use government forecasts and the documents that are not always in the sequential way. So, that could be a cause of considerable difficulties in the planning and implementing policy of NBU [3].

So far in Ukraine was actively discussed the expediency of establishing administrative restrictions on the involvement by natural person’s loans in the foreign currency. Some scientists suggest to determine some limitations on the return of export earnings in currencies, to strengthen control over non-residents purchasing shares of Ukrainian issuers, to raise standards of liquidity and solvency of banks, to suggest new requirements for capital, to fix a few more tough rules of forming provisions for credit risks, but this may be only partial and temporary solution.

Association of Ukrainian Banks (AUB) has supported the arguments of NBU as for the need to reduce dollarization of the Ukrainian economy. NBU considers it appropriate to establish on a permanent basis prohibitions of giving loans in the foreign currency to natural persons [4].

In addition, adopting the standard of the Bill  0884 “On amending some laws of Ukraine for a request to the of already existing banks”parliament has established more stringent requirements than AUB proposed, such as minimal level for the bank authorized capital – UAH120 mlnMoreover according to this bill The NBU could prohibit attraction of deposits of nature persons to banks, that hadn’t UAH120 mln. of authorized capitalThis would mean thatinstitutions with smaller capital would be deprived of their licenses and most likely would go to liquidation because since June of 2010 it already was forbidden to take such deposits and at the same time to increase the authorized capital is allowed only till 2012Out of of 122 banks that on 01.01.2011have profit in their financial results, 42 of them have authorized capital less than UAH120 mlnThis situation would be catastrophic because 36 of themare profitableOverall this bill makes the working process of 80 banks more problematic and complicated [5].

At the same time, position of the World Bank and IMF remains unchanged - they are still interested in increasing the authorized capital to a level ofUAH500 mln. It is associated with fears that the banking system of Ukraine absorbs all the risks of the real sector, which are quite high. It is clear that funds from the syndicated loan will be used first of all in the real economy and in the case of their not returning back payments of external debt on such loans will be suspended.

 From this perspective, the position of the World Bank and IMF is completely understandable. However, the requirement as for increasing the level of authorized capital by 60% (till the point of UAH120 mln. that is more than EUR10 mln.) will not meet current global trend and international banking standards. For example, according to EU Directive 2006/48/EU in case of creating new bank the minimum of authorized capital stands for EUR5 mln., almost twice less than the requirement of UAH120 mln. for Ukraine.

Thus we can conclude that the requirement to increase the authorized capital of Ukrainian banks is not an option for today. Moreover, in such way, the prospect of Ukrainian banks to gain the confidence of foreign lenders and to restore the loan syndication at the pre-crisis level is doubtful enough. As the CEO of UCBS Galina Olifer mentions, "Standard of the Bill № 0884 to increase its authorized capital and its forced concentration does not match any international practice and the interests of depositors as well" [6].

The National Bank of Ukraine has adopted Act of NBU 273, which amended the Instruction “On order of the regulation of commercial banks in Ukraine”, the Provision “On the banks issuing banking licenses, written permits and licenses to perform certain transactions to banks” and other legal acts of the NBU. This decision effectively prohibited banks with a regulatory capital, less than UAH120 mln. to take public deposits. The legality of Act of NBU № 273 is controversial because it conflicts with antimonopoly, civil and a few other laws. Also Act of NBU № 273 introduces actually more restrictions as for banking licenses and that is illegal. We believe that in this case, the defendant has violated Part 1 Clause 19 of the Constitution of Ukraine, according to which "the legal order in Ukraine is based on the principles according to which no one can be forced to do things that are not required by law" [2].

It becomes obvious that changes in the regulatory requirements in terms of compulsory redundancy have had a certain impact on the current liquidity of Ukrainian banks. The activation of NBU’s actions as for immobilization of free resources in the banking system had influenced on it as well. Despitesome stabilization of the situation with foreign borrowing (through restructuring and debt repayment), the risks for the banking system are still high enough.

In our view, the regulation of foreign syndicated lending is necessary. First of all, taking into the account national economic priorities, and secondly, considering the role of macroeconomic, institutional and structural features of the national credit systems. Currently, recovery of syndicated lending in Ukraine is theoretically possible, because there is some improvement in the credit ratings of Ukrainian banks. Moreover payment and restructuring of current debt were quite successful as well. At the same time, experts say, that rates of syndicated loans in the world market are expected to increase. However, a temporary pause in the investment flows from abroad to Ukraine can be used in reducing the real level of dollarization of the domestic economy.

However, in the practice the greater problem is within the country. It relates to the policy of NBU in foreign lending. It has applied administrative actionsaimed to reduce money supply in the market, acquiring its forces to limit the volume of consumer credits. NBU has obliged banks to sharpen the policyof reserves, limited the length of the process of giving loans and implemented the appreciation of grivna. In addition, NBU has reduced the level of funding for commercial banks on the local market, especially in the foreign currency. From the macroeconomic point of view such measures arejustified. But on the other hand, it is necessary to stimulate the economy as a whole, and therefore to conduct expansionary monetary policy. Under such conditions NBU policy has enough controversial points.

In general, it’s carried out the restriction policy of minimizing systemic bank risks. This is reflected in the adoption the Bill № 0884 “On amending somelaws of Ukraine”, which provides increasing of authorized capital to UAH120 mln. and Act of NBU № 273, which amended the Instruction “On regulationbanking activities in Ukraine”, Regulations “On the issuing licenses, written permits and licenses to perform certain transactions to banks”, and otherlegal acts of the NBU. In no way such policy is aimed to restore external borrowings. So for Ukrainian banks it appears the prospect of attracting more expensive than pre-crisis syndicated loans, while there is a prohibition of lending the nature persons in foreign currency. Therefore, Ukrainian banks do not see a great need to attract syndicated funds.

Furthermore during this stage restriction policy is quite justified and designed to minimize systemic risk. In the current situation NBU can conclude that the banking system of Ukraine is at the stage of stagnation, and only with the help of NBU its recovery is not possible. During this trial it would be better to concentrate all the efforts on the establishing the internal market of financial resources in the national currency. Such resources would be cheaper and free from exchange rate fluctuations, as they are denominated in the national currency. So in such way, that will restore long-term lending to the real sector, not to the consumption of import. Thus the need to pre-crisis volumes of syndicated loans will be significantly reduced.

Literature:

  1. Bathovsky V., Domrachev V., 2009. Policy of interest rates in central bank in crisis period. Visnyk of the National bank of Ukraine, 9, 14-16.
  2. Judisial analysis of Act of NBU “On confirmation of Regulation on certification persons for providing temporary administration and bank liquidation” from July, 16, 2001 №273 shows discrepancy with Constitution and laws. 
  3. Law of Ukraine "On the National Bank of Ukraine" from May, 5, 1999 №679-ХІV 
  4. Large debt financing: syndicated loans versus corporate bonds by Y. Altunbas, A. Kara and D. Marqués-Ibáñez, March 2009.
  5. Lyamets S., 2010. Who’ is for genocide of small banks. Economichna Pravda. 
  6. UCBA: Increase in authorized capital of 120 million - is discrimination. 
0
Your rating: None
PARTNERS
 
 
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
Would you like to know all the news about GISAP project and be up to date of all news from GISAP? Register for free news right now and you will be receiving them on your e-mail right away as soon as they are published on GISAP portal.