Armed with new law, Ukraine targets its shadowy banks


  • World
  • Monday, 20 Apr 2015

KIEV (Reuters) - For the first time in its post-Soviet history, Ukraine now has a law to prosecute bank owners who use their lenders as little more than personal piggy banks.

Under pressure from the IMF, which has agreed a $17.5 billion (11.74 billion pounds) bailout for Ukraine in exchange for reforms, Kiev plans to use the new banking law to start cleaning up an over-populated and corrupt financial system.

Authorities will force banks to reduce lending to "insiders" following a review over the next few months, and weed out the bad performers - especially those that exist largely to fund their owners and executives, plus families and friends.

Ukraine badly needs the international aid to avoid bankruptcy; it faces near economic collapse, a plunging hryvnia currency and a conflict with rebels in its east. Already 45 of its 180 banks have been declared insolvent since the beginning of last year, while losses continue to soar among those that remain, and more casualties are likely.

"If we want to build a (robust) banking system, we need to remove weak, insolvent banks as quickly as possible. Maybe as a result we will have 80 or 100 instead of 180, but they will be healthy," said Roman Shpek, the head of the supervisory board of the Independent Association of Ukrainian Banks.

"The regulator has never examined banks so deeply. The previous supervisory system mainly fixed the ruins instead of predicting and preventing a bank's collapse," he said.

Some banks that have already gone under have been caught in what the central bank calls "risky lending practices", running up large losses on loans to insiders. But with little legal recourse available to the state, the owners have simply written off their losses, blaming the economic crisis.

The new law, which is part of reforms agreed with the International Monetary Fund and approved by parliament last month, should pave the way for prosecuting shareholders or management members for corrupt practices.

If this had been possible in the past, "every shareholder and bank management that planned to extract assets and write off everything over the crisis would have thought twice about it", central bank chief Valeriia Gontareva said last month.

The National Bank of Ukraine will not only test lenders' ability to resist macroeconomic risks and ensure they have enough capital, but also start assessing their exposure to risky loans to insiders.

DEPOSIT WITHDRAWALS

Banking was just one of many areas of Ukrainian life where corruption flourished under former president Viktor Yanukovich, whose overthrow last year helped to set off the separatist rebellion in the east.

Fearing a social backlash if savers lost their money, the authorities since then have mostly propped up even shadowy banks whose insufficient capital has been exposed by the nearly 50 percent dive in the hryvnia against the dollar and mass deposit withdrawals.

Where banks have closed, the government has used a deposit protection scheme to compensate savers. However, this has become stretched and diverted funds that are badly needed for defence and reforming almost every sector of the economy.

Banks must now submit reports on their "related-party" loans to the central bank in an assessment that will last from May to September. After analysing the data, the National Bank and banks have to agree schedules to cut the volume of loans to insiders gradually and increase reserves against credit risks. In addition shareholders will have to increase bank capital.

Some owners are not ready for this. "Many are not able to capitalise their banks to the level necessary to ensure the financial stability of the banking institutions," Credit Rating, a Ukrainian rating agency, said in a report.

CAUGHT IN THE MIDDLE

How many lenders will meet these requirements is not yet clear, but many are fragile. In 2014, the banks suffered combined losses of nearly 53 billion hryvnias ($3.5 billion) and these have jumped to 74.5 billion in the first two months of this year alone. Hryvnia deposits almost halved in the year to April 1 and those in foreign currency have fallen 37 percent, so even the best-run banks are under stress.

Senior central bank official Oleksandr Pysaruk said it would hold firm. "We reiterate our intention to keep only reliable and transparent banks on the market, those which operate effectively and consistently comply with their obligations," said Pysaruk, who is the first deputy head of the National Bank

The insolvencies have placed an additional burden on the State Deposit Guarantee Fund which compensates individuals who lose their deposits, forcing the state to contribute 30 billion hryvnias since the start of 2014.

They have also inflicted more hardship on a people already squeezed by rocketing inflation and stagnant wages.

In the shabby industrial town of Kalush in western Ukraine, three banks - including the local branch of the country's fourth-largest lender Delta Bank - have closed without any warning to its 68,000 residents.

Taras, a security guard at the branch of Delta which was declared insolvent in March, said depositors had reacted with resigned dismay. "A crowd of around 100 people gathered here then. They were annoyed of course, but not surprised. The question is, what happens when the rest of the banks in the town go bust too?," he said.

(additional reporting by Alessandra Prentice editing by Elizabeth Piper and David Stamp)

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