Citizens and businesses in the midst of a devastating war need funding to sustain operations and meet urgent needs. However, banks are in no hurry to lend to Ukrainians, increasing not only interest rates on loans, but also requirements for borrowers. Why does this happen and can this practice be changed?
Ukrainians and businesses at war need funding to meet their needs in order to stay afloat in these turbulent times. However, in most cases, banks refuse to grant credit applications to borrowers. Often, even those who have proven themselves over the years as a conscientious borrower with a good credit history.
This is due to the fact that Ukrainian banks, as well as other businesses and citizens, found themselves in very difficult conditions. The difficult financial situation with the simultaneous increase in the cost of living has significantly reduced the ability of Ukrainians to service existing credit obligations and, accordingly, increased the risks for banks that the latter will not receive back at least the issued funds, not to mention the interest.
Even without taking into account the fact that in the first months of the war, banks went to meet their debtors and introduced “credit holidays” that lasted until May-June, it still did not save from the increase in the volume of overdue loans. Representatives of banking institutions speak openly about this.
“The payment discipline of citizens in our portfolio has deteriorated by 2.5-3 times compared to the pre-war situation,” said Artur Muravytskyi, Deputy Chairman of the Board of TAScombank.
At the same time, bankers admit that everything is not so bad, because despite the extremely difficult circumstances, Ukrainians continue to try to fulfill their obligations to creditors, albeit partially.
“We have a very small proportion of clients who have not paid at all. That is, of course, there are clients who pay partially, who have changes in their financial condition. And for such clients, we try to meet them and introduce appropriate restructuring programs that allow clients to change the schedule in a way that is convenient for you,” said Arkady Shider, director of the retail lending department of Credit Dnipro Bank.
Moreover, there is not a single region in Ukraine where the share of non-payments approaches the complete cessation of loan payments.
High interest rates
Important in the lending process is not only the ability of banks to issue funds for certain purposes, but also the desire of customers to take this money on the terms offered by the credit institution. The growth in the cost of loans is now influenced by so many factors that the final overpayment for the consumer is very significant. This applies both to citizens who want to receive funds for consumer needs, and to businesses that need additional resources to continue or restore their own business.
According to experts, the most significant circumstances that lead to the increase in the cost of lending are the continuation of military operations, the growth of inflation, which may reach 30 percent by the end of the year, and the devaluation of the national currency, which has reached almost 50 percent since the beginning of the year. And also, accordingly, an increase in the cost of funds for the banks themselves, because the National Bank has been issuing refinancing at 27 percent per annum since the beginning of the summer.
“Such conditions require banks to raise loan rates. Otherwise, they will lose any economic sense to continue operating and will be forced to simply leave the market. Also, the circumstances force banks to raise requirements for potential borrowers,” said financial analyst Serhii Kostiantynov.
The average lending rate offered to entrepreneurs in banks was over 30 percent per annum in September, and over 50 percent per annum for citizens. At the same time, some representatives of the market prescribe a floating rate in credit contracts, tying it to, for example, the discount rate of the National Bank or another indicator that may change in the larger direction over time. This creates additional risks of growth in the value of borrowed funds and, accordingly, greater overpayments in the future for clients.
“It should also not be forgotten that the vast majority of credit agreements, in particular with regard to consumer loans, include additional commissions and overpayments, which also make the cost of lending significantly more expensive. A vivid example is mandatory life insurance, which can sometimes reach 10-15 percent of initially the body of the loan, which is added to the total cost of the loan, that is, interest will also be charged on this amount monthly,” explained expert Kostiantynov.
Negative experience of Ukrainians
Ukrainians are often faced with similar difficult circumstances, who are most often forced to refuse credit on extremely unfavorable terms.
As Svitlana, a Kyivan who works as a freelancer, told UNIAN, she wanted to buy a laptop on credit for work, but she was refused a loan for the device model she wanted to buy. And they agreed to borrow funds at a huge interest for a cheaper device.
“I was approved for a loan of 20,000 hryvnias with an overpayment of more than 60 percent per annum of the initial cost of the product. That overpayment also included insurance, as well as other various commissions. I understand that now prices are rising for everything and I have to adapt, but on such terms I wasn’t ready for a loan. That’s why I decided to borrow money from friends for this purchase,” she said.
Business representatives face a similar situation. As Artem, the owner of a small cafe in the capital, told UNIAN, he needed to find about 200,000 hryvnias to restore his business, but he was refused a loan, agreeing to only 30,000 hryvnias on very unfavorable terms.
“I needed to urgently attract funds for the purchase of raw materials and equipment repair, as well as to pay the rent of the premises where the coffee shop is located. But, unfortunately, the bank refused to grant me a loan for the required amount, agreeing only to 30 thousand hryvnias at 50 percent per annum. Mandatory insurance was also included in the overpayment price. I refused such an offer,” he said.
In the conditions of war, banks mostly either refuse to lend to businesses and citizens or offer such conditions that are very difficult to agree to. However, recently, the authorities began to regulate this process in order to improve market conditions and help those who need them to protect priority directions for the state get funds.
Here it is worth mentioning the sowing campaign, which this year was financed by banks at preferential interest rates under state guarantees. That is, funds were allocated from the state budget to cover the difference between the high market rate and the low preferential rate paid by farmers.
It should also not be forgotten that preferential lending to small and medium-sized businesses operates within the framework of the “5-7-9%” state program. According to official information as of mid-September, since the start of the program, business entities have received almost 48,000 loans from authorized banks for a total amount of 140.5 billion hryvnias, of which more than 30,000 are from state banks for a total amount of 56.3 billion hryvnias UAH.
However, soft lending also has pitfalls. There is a long list of requirements that must be met before applying for funds. For example, to receive financing at a preferential rate, you must be an entrepreneur for at least 12 months. If it is less, then in the conditions of martial law, banks, as a rule, do not lend. It was for this reason that the entrepreneur Artyom was denied the necessary financing.
“Due to my lack of sufficient business experience, I was refused preferential lending for the required amount. I need at least one year of experience, and I only have 9 months so far,” he said.
The authorities are currently preparing initiatives for lending to citizens at reduced rates. In particular, the preferential mortgage lending program will be launched in October. The mortgage rate for Ukrainians will be 3 percent. The term of the mortgage is up to 20 years. The minimum down payment is only 20 percent of the cost of housing.
The program can be used by military personnel, law enforcement officers, doctors, teachers and scientists. However, in the near future, government officials promise to expand the program to a wider range of citizens.
The banking system of Ukraine is currently in a rather difficult situation, as is the entire economy of our country. This, of course, is reflected in the increase in the cost of lending in the conditions of inflationary and devaluation risks in which we are forced to live. Circumstances also force banks to choose more carefully the borrowers to whom they are ready to grant a loan.
The work of the state in the direction of reducing the cost of lending is carried out, perhaps, not as actively as it would be desired, but it is noticeable. This also applies to lending to priority areas of the economy, as well as co-financing of social programs in the context of mortgage lending.
However, unfortunately, it is worth admitting that not everyone can apply for preferential lending under state programs, which, in the conditions of high market rates for loans and a significant increase in requirements for borrowers, significantly complicates the situation of both businesses and citizens.
That is why banking institutions, led by National Banks, should think about how to help start lending to the national economy in these conditions, since there are actually enough resources in the system. As of mid-September, the liquidity of the banking sector exceeded 300 billion hryvnias. In other words, these are the funds that could be directed to support businesses within the framework of investment financing and citizens – consumer lending.
Of course, the developed strategy should be well protected from risks. Of course, you can’t issue funds to everyone in a row, but reducing the volume of lending to zero without the participation of the state is also not an option.
Many banks changed their business models during the war. If earlier they mainly earned from the difference between attracted deposits from the population and loans issued, now they mainly receive income from the difference between attracted deposits from the population and deposit certificates of the NBU, the yield of which is currently 23 percent per annum. The presence of such an instrument performs an important function, motivating banks to raise deposit rates and, accordingly, reducing the population’s demand for cash currency.
However, in today’s system, which was formed during the war, it turns out that there is still no place for active crediting of entrepreneurship and support of citizens with a good credit history in the field of consumer crediting. This practice in the future may make it difficult for us to restore the economy, which will have to be rebuilt after our victory.