Banking sector Editor's Choice Interview

Olena Korobkova: «The rights of banks in Ukraine are absolutely not protected at the legislative level»

In order to protect their rights and lobby interests over six years ago, arose the idea of creating an Independent Association of Ukrainian Banks (NABU). In forming a serious team, this organization had all the chances to become the main platform for Ukrainian banks, whach has happened.

For today the Association unites 96% of assets of the whole banking system of the country, and it consists of 51 banks. This is the largest banking association that deals not only with the construction of a stable banking system in Ukraine, but also organizes lessons of financial literacy for citizens. According to NABU Executive Director Elena Korobkova, the main mission is to restore confidence in the banking system. But no less important is restoring the trust of banks to their clients. Why is there such a problem in Ukraine and what awaits the banking sector in 2018 – Olena Korobkova told .

: The banking sector of Ukraine felt uncomfortable since the political upheaval. Many financial institutions were not ready for a new policy of the National Bank, which in some cases led to the closure of branches. Do you think that the situation in the banking business is aligning now?

O. Korobkova: If we sum up, we can say that 2017 has become quite successful for Ukrainian banks. The system experienced the most difficult period in its history, when most of the players left the market, and finally came to profit. According to the results of ten months of last year, the total income of our banks exceeded 2 billion UAH. They have learned to live in new realities, but the problems have not diminished. Unfortunately, their decisions depend not so much on themselves, but on the legislators and the NBU. Some of these problems, due to populism, are lasting from year to year.

For example, the problem with the actual lack of protection of the rights of loans is not solved. From all spheres of life in Ukraine, the judicial system has undergone the slightest change – virtually nothing has changed in this area. As before, banks spend years and millions on litigations on loans issued under collateral that were fraudulently withdrawn or devalued. According to statistics, from $ 1, issued on credit, banks on average return $ 0,089, while the rest goes to court costs. In Ukraine, one of the highest levels of problem and bad loans form 56% of the total amount. And this situation has been going on for several years.

Mostly it is about corporate sector loans, and most of these “slag” loans have been hovering at state banks, which were previously used by the political elite as a bottomless pocket for the development of their connected businesses. Two years ago, we registered a bill in Parliament (No. 2286a), which is capable of changing this situation, but as soon as it reaches the session hall, deputies have traditionally lacked votes to support it. I think this is due to the fact that with its adoption in many people sitting there may be real financial problems. After all, the lion’s share of loyal debtors of domestic banks is people’s deputies or persons closely associated with them.

: And can we talk about the fact that the banking system is already cleared? Can we talk about the period of stability?

O. Korobkova: Yes, you are right. But I would not call this process a clean-up. It was a cleaning. Sweeping is associated with something violent. But cleaning has a more natural roots, which we have seen in the banking sector. In fact, the National Bank team for 2-3 years has seriously changed the supervisory system. And it became much more qualitative than ever before. Plus, there are many European directives that we have been implementing in the domestic banking sector in recent years. Not everyone could follow them. As a result of the cleaning, more than 90 banks were withdrawn from the market, some of them closed because of the opaque structure of ownership. And some – because of non-compliance with the requirements of financial monitoring, because their activities were often illegal. Some five banks re-qualified in financial companies, which became real due to the adoption of the relevant law. This gave them more opportunities with completely different, somewhat simplified requirements. Therefore, we can say that the period of purification has passed. I am confident that the market has remained mostly reliable banks that have proven their viability.

: You have noted that in 2017 the banking sector has shown good results. Can we already predict that the 2018 will be successful?

O. Korobkova: In 2017, the banks did not know what to expect, so they made small profits in their business plans. And now many banks surpassed these plans, due to which the generation of profits occurred. 2017 can be characterized as  it was good. I do not think that the same situation will be in 2018: it will be more complicated. This year there are no prerequisites from the point of view of the macro level for a certain growth: the laws are not voted on, reforms are not carried out, the IMF tranche does not receive a country, we have a huge public debt, a lot of questions to the state budget.

Therefore, what will be 2018, it is difficult to say. But it is clear that it is necessary to take the necessary laws, because without them nothing will be. Banks need to clear balances.

: Does such uncertainty discourage investors from the banking business?

O. Korobkova: Banking business is interesting in Ukraine. Because we do not have such severe requirements  to capital, bank registration, etc. Now, of course, everything has become tougher. But compared to other countries, we register a bank much easier. Instead, there are seven circles of hell to go through. In addition, compared to Europe in Ukraine, very high interest rates, despite the fact that in recent years they have fallen twice. And some financial institutions even give practically zero interest rates on foreign currency deposits. At the same time, the banking business does not cease to attract foreign and Ukrainian investors.

But we have other problem: the rights of banks, like any other lenders, are completely unprotected at the legislative level. That is, there are no humane courts that work transparently and make decisions not in favor of concrete individuals, but in accordance with the law. Why not invest in Ukraine? Because investors are not sure if they may get their money back. We are also doing what we advise investors who want to buy a bank, because we know what financial institutions in Ukraine want to sell or seek investors. And I can say that there is no excitement, nobody is in a hurry to buy a bank, although you can now buy it for normal money. And all because investors are not sure about returning their investments.

In addition, now there is no earnings that were in the banking system before. Much depends on the dollar, plus the legislative field has changed. Some banks had to re-qualify. For example, there is a bank in Ukraine that refused to lend to the oligarchs and switched to small and medium businesses. He has changed the programs and processes for small and medium entrepreneurship. And now this bank is showing good results.

: Do many investors look at the Ukrainian banking market?

O. Korobkova: They are about 5, among them Ukrainians and foreigners. They have extra money, so they are looking for where to put them. But the question is that it is necessary to calculate all the risks. You need to understand what you are buying. This is a fairly long process.

: It’s no secret that Ukraine’s bank capital flows from the country. What steps should we take to keep it?

O. Korobkova: Creating the normal conditions for honest classical banking business. In Parliament there are about 20 financial bills that are needed for banks. However, they are not accepted either because of populism, or because it is contrary to the business interests of political groups. For three years we have been living in a situation of constant currency restrictions of the NBU. They gradually become softer, but it’s going to be too slow to help turn the situation around 180 °.

I do not say that these restrictions are not justified: the National Bank is the same hostage to the economic realities of the country, as we all, but nevertheless – it’s a fact. While internal and external investors, including shareholders of banks with foreign capital, will not believe that in this country you can honestly conduct business and not be afraid that the money earned on investments in Ukraine will be blurred by a sudden leap of devaluation or inflation, or will not be taken away. The fraudulent way and the judicial system will remain in the same direction, – to rely on changes in the situation senseless. Ukraine is rapidly increasing its external debt, but the main reforms are not being carried out – such as, for example, the judiciary one.

: From your personal experience, what is the most complicated in the banking business?

O. Korobkova: Ukraine is a unique country. Everyone who comes is trying to create a Ukrainian bicycle on four wheels, but nobody understands if it will ride. We should take the experience of other countries, and not reinvent one’s own. This can often be seen in the bills that we write on the basis of the practice of European countries, and then in the committees of the Verkhovna Rada, every deputy tries to do something from himself, and eventually comes an interesting case that does not always work. Gradually, the situation in this segment is stabilizing, in the market there are transparent conditions, the same for all. Of course, there are certain distortions with state banks. Because the nationalization of “PrivatBank” (one of the largest deals in the world), which was spent with minimal expenses for the population, has led to a shift in competition in the banking market. Today, the share of state-owned banks on the market is 54%. That’s a lot. And as practice shows, the state is not a very good manager.

Also, we still have the decree of 1993 “On the system of currency regulation and currency control”, which is morally obsolete. There are not half of what is being practiced now. Now there is a draft, developed by the market and the National Bank, which provides for the abolition of this decree and the launch of the market, which will help to remove a lot of restrictions in currency legislation. The above mentioned problem, for its part, also holds the flow of investments in Ukraine.

But if we look at the results of 2016, then from 3.2 billion dollars. of US investments to Ukraine, 2.4 billion were invested in the banking sector. It turns out that investors put their money in this sector, but there are no companies that banks could lend. This is the main problem. It is easier for banks to refuse a loan than to take on the risks of a client and not to return the money at all. Now we are waiting for a voteing in the second reading of the bill on the creation of a credit register at the NBU. This will help banks to check the borrower at the stage of issuing a loan. If it is defaulted in one, then it will be defaulted everywhere. We have calculated that the adoption of this bill will reduce the interest rate on lending by 2%.

: Does the absence of the head of the National Bank affect the activities of the banking sector?

O. Korobkova: I can safely say that no. As the head of the NBU, Valeriia Gontareva, managed to create a team that works smoothly. And her deputy (now he acting Head) Yakov Smolij managed to establish an absolutely constructive dialogue with the competent committee of the Verkhovna Rada and with the parliament. It is also highly respected in the banking sector.

: Could you describe the strategy of Ukrainian banking: is it lacking at all or it is completely wrong?

O. Korobkova: During the last two years, the main strategy of Ukrainian banking was to survive. Now banks are trying to find their clients, develop their technologies, strengthen methods for calculating credit risk and strengthen their financial monitoring units. One can definitely say that the strategy of banking business in Ukraine is no longer an increase in the deposit base for lending to the related businesses of its shareholders.

Since the return to full-fledged lending to the population and business does not allow a holey legislative field, banks are restricted mainly to small loans in cash or targeted loans – for the purchase of home appliances, travelling, repairs … In general, small and medium consumer lending. Some financial institutions, such as the state-owned “Ukrgasbank” and “Oschadbank”, with the support of major international donors, make shifts towards SME lending or “warm” loans. But this is still not the scale that can significantly affect the country’s GDP growth. But, of course, they are very important.

: In your opinion, what steps should be taken by the state should be of prime importance in order to bring the industry out of prolonged stagnation or prevent an even greater crisis?

O. Korobkova: To begin with – stop doing surface cleaning and finally start repairs. The time has come for structural reforms that will break old schemes of withdrawal from their financial obligations to large corporations. Only in this way will we finally be able to clear our “Augy stables” – I mean NPL – and create a real ground for the country’s economic growth. To do this, it is necessary for the parliament to cease to be engaged in populism and take up work – and stop technically block the adoption of financial laws.

Please also read: Criminal prosecution of large business: what to keep in mind

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