20 November 2014

Expert column of Group DF CFO Sergiy Sichkar ‘How to Restart the Banking System and Regain Trust to Banks’

WSS_5206 - Copy (2)If banks raise funds at 25%, then they can credit at even higher percentage. There are very few businesses which can afford it. To launch a workable business cheap money is needed. Latest actions of National Bank of Ukraine concerning banks’ stress testing have detected the huge capital inadequacy, provisions for unrecoverable loans and losses. That is why the first goal is to restart the banking system.

What has to be done for it? First, it is necessary to build up real reserves for bad debts and include collateral in the asset list at actual cost. Secondly, it is advisable to establish a “bank of bad assets” into which commercial banks would transfer assets lost in temporarily occupied territory as well as in consequence of crisis and economic instability.

Assets should be transferred instead of refinancing credits of National Bank of Ukraine and other liabilities. Certainly, the same bank should obtain collaterals from transferred loan portfolio. This would unwind banks’ sheets of unprofitable assets and expensive liabilities and contribute to financial rehabilitation. When Ukraine gets its territory back, government will regain a part of assets, perhaps, at a profit. Thirdly, it is necessary to restructure the banking system through mergers, incorporation of small banks into large ones. National Bank of Ukraine has already recognized that the country doesn’t need so many banks. Besides, in my opinion, it is obvious. And finally, it is necessary to increase capital of Ukrainian banks with negative equity which would remain after the profile is refined. Of course, foreign banks would take care of themselves. Populists would say that “banks’ owners will benefit again”, “rich men will become richer again”. But the point is who should be the one to win: common greed and communist hatred against oligarchs or Ukrainian economy? I cheer on Ukrainian economy.

There is also a possibility of nationalization of the banking system. Followers of Marxism-Leninism and lumpen populists would surely like this. It is quite possible that such a decision would result in restart of the banking system. However, county’s expenses wouldn’t be lower than in case of capitalization. Nevertheless, I’ve never heard of enormous success of North Korean banks as well as about the government as an effective owner.

It is also essential to regain trust to banking system. Crowdfunding and volunteer movement provide many millions of hryvnia for the army, wounded, migrants, war orphans, sick children, aged people… Everyone who participates knows that. People are ready to give money but just for noble things and just to someone they trust.

How can the banking system regain trust?

  1. Issue investment certificates for significant national investment projects that will bring guaranteed income. For example, construction of LNG terminal or gas pipeline to Polish LNG terminal, replacement of low efficiency CHP plants with up-to-date ones, decentralization of heating systems and hot water supply, completing construction of power generating unit at nuclear power plant, mining of shale hydrocarbons etc. Banks as agents could sell and buy these certificates. Banks would get fee at the expense of investment income. For this, reliable person should be appointed the head of the project. We can’t trust anyone? Make all project income and expenditures totally transparent and controlled. By the way, it is relevant for all the projects.
  1. Issue domestic investment certificates in foreign currency on security of honoured international bank with moderate but significant income and completely guaranteed liquidity. Thus, you would be able to come to any agent bank and buy or sell a certificate at any time only for foreign currency cash. Use raised money to recapitalize banks. Agent fee to banks may be paid at the expense of investment income so that clients would not noticeably lose their income.
  1. Establish bank supervision in order to make banks more conservative and reliable, conduct stress testing more often. Publish reporting, ratings, reliability criteria and banks’ degree of conformity to them.
  1. Give the banks right to collect collateral back, gradually abolish restrictions on financial transactions. Any kind of restriction, foremost, stimulates to evade it, secondly, it brings a big discredit.

The third goal is to fill the banking system with liquidity. How?

According to figures from National Bank of Ukraine, people have over trillion hryvnia in hand. What is the profit for Ukrainian economy from enormous currency turnover? What transactions does this money provide? It is necessary to bring cash turnover back to banking system. Current accounts are cheap money that is needed by the economy. What steps should be taken?

  1. I offer to start by funding acquiring i.e. payments by means of cards: cost of terminals, free lease of terminals, lower dealers’ fee. Capability of non-cash payments should be implemented on a large scale in any outlet including stalls. It is advisable to put into operation up-to-date contactless terminals and cards with contactless payment systems. Let the banks compete with each other in the best service for dealers.
  1. Additional preferences can be implemented to make card payments profitable. The rule is simple: using card, customer pays lower taxes than during cash transaction. It would be more profitable for customer to pay with card. Consequently, money will be in the banking system.
  1. Then we gradually limit the amount of cash money for payments. Black market and avoidance schemes, you would say. Of course, it would work this way, especially if we would not work hard to carry out other reforms. And only prior to currency reform.
  1. Implement currency reform. What is the point of it? Old currency notes become inoperative. People can receive new ones only in a non-cash form in any bank in the country, without limitation. Foreign cash is bought from population for non-cash hryvnia (we keep in mind already issued investment certificates in foreign currency). Banks do not credit in foreign currency, earlier loans are converted at the current rate of exchange. Certainly, the authorities would have temptations to impose taxes on everyone who brings cash for exchange. This temptation should be nipped in the bud. We should inform everyone about it, advisably in the form of actual law.

How to live without cash? How to pay on the market? We can organize unorganized markets, payments through cash registers or include card terminals to the rent of trading places. We can make cash turnover allowed but highly restricted while dispensing cash in ATMs and counters in banks and collecting it in the same ATMs and counters with big fee for cash transactions. All is needed is strong will to implement reforms and people who are willing to do this.

Source: Forbes.ua