More bank loans for the economy. What is needed for this?

Accusations that banks do not want to lend, but rather make money on government securities and NBU certificates of deposit, have been heard in Ukraine from time to time for many years.

Only now, there are not so many negative comments about government bonds deposits. At a time when there are active discussions about what percentage of what tax should be increased to cover the critical deficit of the state treasury, many people have begun to look at the growth in the volume of government bonds purchased by banks in a slightly different light.

After all, an increase in financial institutions' investments in government securities could reduce the need to raise taxes on individuals and businesses.

Meanwhile, banks are presently reducing their investment in NBU certificates of deposit.  According to the regulator, the volume of banks' investments in such securities in the first three months of 2024 decreased for the first time in three quarters - by 11.6% compared to the same period last year.

The reason is that state-owned banks have less liquidity and have paid higher taxes and dividends to the budget.

At the same time, there has been a certain revival in corporate lending since the second half of last year. In the first quarter of this year, the net hryvnia loan portfolio of businesses grew by 2.9%; the annual growth of the portfolio is 7.2%.

The volume of net hryvnia loans to business entities returned to the level of December 2021. Banks and businesses expect lending to pick up in the next 6–12 months.

Perhaps, there is nothing wrong with the volume of lending by banks to the Ukrainian economy, and there is no need to break so many spears around this topic? No, because any positive picture is spoiled by the structure of the banking system's assets, according to which, as of the end of the first quarter, government bonds with deposit certificates accounted for almost 47% of the banking system's assets, and loans to individuals and legal entities accounted for 23%.

To improve the situation in bank lending to the real sector of the economy, the government, represented by the Financial Stability Council, has developed a strategy that is a roadmap for the changes needed to increase investment in the Ukrainian economy.

The National Bank was the driving force behind the strategy. Its value lies primarily in the fact that one concise document contains a specific plan with a list of measures and responsible organizations, which can be considered an answer to the "eternal" question: what should be done to make banks lend more?

The strategy prioritizes lending to defense and industrial enterprises, critical energy infrastructure, processing industry, agriculture, as well as support for the recovery of businesses operating in the de-occupied territories and those close to the front line.

In the course of our cooperation with regional authorities, we have repeatedly come across the fact that local authorities may have their own priority sectors for development. To support them, regional administrations and municipalities are developing their own lending incentive programs, which partially compensate for bank loan rates from their budgets. And this is a positive development.

State and international guarantees, insurance of military and political risks, programs of partial compensation (subsidization) of interest rates on loans (I mentioned such regional programs above), and project financing should become government policy instruments that will facilitate the development of lending.

Many such programs are already being implemented, while others are being developed. The most urgent is risk insurance. The ECA has started working in this area, but the agency has very limited funding. Therefore, the number of such projects will not be significant.

To increase investment, Ukraine needs legislative changes. Some of them are contained in the lending development strategy. They should concern the development of such instruments as factoring, financial leasing, and securitization of financial assets.

A separate group of issues relates to ensuring the rights of lenders and consumers in lending, and the settlement of non-performing loans. Another area is expanding the number of ways for financial market participants to obtain information from state electronic information resources and improving the function of the NBU's credit register.

To increase lending volumes, in addition to the government's efforts, banks need to do their "homework". At the same time, the banking system is already fulfilling many of the tasks set out in the Lending Development Strategy. I can illustrate this with the example of Oschad.

At the beginning of the full-scale war, many private banks reduced their risk appetite. Instead, Oschadbank promptly revised its lending policies in line with wartime conditions and significantly increased its loan portfolio, especially in the MSME segment: from UAH 9 billion at the end of 2021 to UAH 22.3 billion as of today.

At the same time, NPL (DPD 90+) on loans issued since the beginning of full-scale aggression in any of our bank's business lines does not exceed 1% and amounts to 0.3% in the total portfolio.

The lending development strategy provides for the adaptation of credit risk assessment mechanisms (in particular, for project financing) to martial law conditions to increase lending to priority sectors for all banks.

The problem of still rather high interest rates (market rates for hryvnia business loans in Q1 2024 amounted to 16.7%, for new loans to individuals - 27.5%) can be partially solved through cooperation programs with partners.

These partners of Oschadbank include government agencies at the central and regional levels (grants, 5-7-9%, portfolio guarantees, ECA, regional business support programs), international partners (grants, risk-sharing, cashback), as well as sellers of various machinery, plant protection products, seeds, etc.

To increase the volume of credit support for the economy, we need not only attractive interest rates but also improved lending procedures. In our experience, the introduction of the OschadBusiness remote loan application service increased the number of such applications from MSMEs by 25%. Digitalization is the main vector of reforms in banking processes and products.

The development of lending is a really important strategic task for all stakeholders involved. I believe that by working together, we will be able to ensure that bank lending becomes a more significant factor in the reconstruction and development of the domestic economy.

Source:  https://www.epravda.com.ua/columns/2024/08/9/717824/