How can State Banks Get Rid of Bad Debts?

The crisis of 2014-2015 left the banking system with a huge amount of problem loans. At the same time, in the state banks and DGF (the Deposit Guarantee Fund), there are problem loans at about UAH 600 billion, or 75% of toxic assets in the sector. State banks tend to cope with problem debts much worse than private banks. There is no noticeable progress in the clearance of balances.

The general recommendation of the experts of the Center for Economic Strategy on the reforming of the state banking sector: the banks should be sold to private investors; the state should withdraw from the capital of these banks by 100%. However, the sale of banks with huge problem debts does not look realistic at this stage.

Therefore, the primary task for the state banks is to clear balances from troubled assets. At the same time, the option of transferring bad loans from the balance sheets of the banks faces a risk of a threat that the debts of bad faith lenders, especially, politically-related individuals will be written off secretly.

Nevertheless, it is necessary to get rid of bad debts. CES suggests using international experience in this issue to Ukrainian realities. Before the privatization of banks, the return of bad loans (rather than the growth of market share or increase in assets) should become strategic objectives of the new management and the Supervisory Councils. And only before the sale of the bank, the troubled assets can be transferred: mortgage loans can be transferred to AMC, while corporate debts – either to “a bad bank’, or, on the contrary, to allocate a healthy part of the state bank for sale.

There is a need for some changes to laws and practices – both in terms of mortgage loan restructuring and the sale of corporate loans to the debtor below nominal value. At the same time, it is important to ensure full transparency of information on bad debtors, especially those involved in politics. This transparency will create powerful stimuli for repaying or voluntary restructuring of loans.