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Some ukrainian banks just disdain appropriate credit procedures?


Vasily Gorbal, member of the Council of the National Bank of Ukraine, honorary president of OJSB “UkrGasBank”: “Some banks just disdain appropriate credit procedures"

- Vasily Mikhailovich, what can you say about October inflation rates? Don’t you think that the Ukrainian authorities have absolutely lost control over prices?
- Firstly, I would like emphasize the fact that I don’t consider current inflation something terrifying. To a greater extent it is caused by objective factors as well as extremely emotional statements on this topic and too much fuss about this problem. It seems to me that the sooner politicians give up their wish to get extra points exploiting and exacerbating the problem of price rise, the sooner the inflation fears which are often exaggerated will disappear and the price dynamics will start slowing down.
Despite increased values, inflation, nevertheless, remains rather well predictable and controlled, since the annual growth rates, to my mind, have already reached their peak. And, what is most important, it is accompanied by a steady dynamics of the economic development. This is the fact that essentially differs it from its much more unpleasant analogue of 2005, when the increase in inflation rates was accompanied by a sharp slowdown in GDP growth.

- But you will not deny the situation, in which price rise is measured by two-digit numbers the fourth year running, can’t be considered natural?
- Of course, I will not call this situation normal, but I would like to say that all those figures are quite clear for a dynamically developing economy, whose structure is still characterized by a number of imbalances. So I don’t see any special problems in this case.
Certainly, it is necessary to draw conclusions from the situation, having previously analyzed the underlying inflation factors. But extreme dramatizing of the current situation is also wrong.

- A lot of reasons for price rise have been mentioned lately and most of them just brought the discussion out of the sense of the events. And which main factors do you see?
- I would not like to enlarge on political factors of price rise which has already been analyzed a number of times. However, it is evident that the political crisis and another election race of social resolutions, in which our political force had to be involved, took their toll on current price processes.
I would also like to draw your attention to the fact that since the time eliminating most customs barriers and decrease of fees in 2005 we have actually been working under WTO terms and conditions in terms of the market openness. It means that we have practically completely opened our economy to the external influence, but at the same time haven‘t prepared it for such conditions. Ukrainian consumer market depends as much on the import that saturates it as the dynamics of the producers’ prices – that is world market. Therefore it is foolish to deny the fact that external world processes independent of us make a considerable influence on our domestic price situation.
Unfortunately, banking system has contributed to the escalation of consumer inflation, since it has increased the amount of extended consumer credits several times for the last years. As a result, buying power of population has increased not only at the expense of increase of the incomes, but also a considerable inflow of credit funds, which has become comparable with incomes.
Growth of consumer crediting, which we lost control over, was, undoubtedly, one of key inflation factors. Since additional credit resources will be used for increase of consumer demand instead of manufacturing sector, that is supply stimulation.

- That is everybody agrees with the opinion that there is crediting bank in the country now?
- And how else can this be called? Third year running banking system having considerably simplified extending loans to individuals increases their amount more than at double rates.
Can we say that our producers now suffer from the excess of cheap resources? On the contrary, there has been a bias to the demand stimulation in banking crediting and this situation has to be corrected in some way.
I don’t want to say that the banks don’t have to credit consumers; on the contrary, it is one of their main functions. And it is unacceptable to just limit consumer crediting. In the same way, it is impossible to neutralize price pressure by monetary methods under current circumstances limiting the availability of resources for entrepreneurs. In contrast, it is extremely important to create conditions to compensate a growing buying power of population by adequate increase in supply.
It will require the government, the NBU, the Financial Services Markets Regulation State Commission joint development and carrying out complex activities aimed at stimulating investments in production.

- The National Bank attempts to implement these or those restricting regulating measures from time to time, but the bankers have rather well-proven lobbyist means of resisting the regulator’s initiatives which they find inappropriate. The dialog between market entities and the NBU is a very useful thing. The National bank, though with many reservations, but hears banking system. But doesn’t it abuse its responsiveness and flexibility, since other approaches are rarely offered in exchange of the NBU’s really not always successful measures?
- It seems that the banks should not oppose much to such initiatives. Since in the current situation of an evident overheating some constraints will somehow slow down the growth of banking business, in the long run the whole banking system will benefit from the situation.
As trying to attract clients by means of credit availability, a series of financial institutions have totally refused to make a proper evaluation of their creditworthiness. The risks are just shifted to bona fide borrowers and are compensate by incredible loan rates – up to one hundred and more percent interest per annum.
I would like to draw your attention to the fact that even in the Soviet Union the percentage of non-repayment on installment credits reached 20%. What can we say now, if some banks just disdain appropriate credit procedures? Even numerous eminent foreign owners making retail banking the priority for the development of their subsidiaries do not rush to introduce European standards of borrowers’ merit rating.
It even reaches the point of absurdity: credit outlets started appearing in the markets and food supermarkets. And not only banks, over which there is a rather scrupulous supervision of the regulator with all reservations, are involved in this process, but also practically abandoned credit unions, which are 700, if I am not mistaken. It is a rather archaic type of consumer crediting has somehow actively developed lately.
It seems to me that the growth of consumer crediting by any means can’t be let ride. It is necessary to use a thorough approach to borrowers’ creditworthiness evaluation, unify standards of commercial banks and credit unions liquidity to exclude groundless imbalances and preferences

- If we continue the discussion of the National Bank’s activities, do you think that it rejects its intentions to implement unpopular measures quite easily? Absence if a sufficient political will – isn’t it a consequence of the Head’s of this institution being in limbo? Vladimir Stelmakh, who the politicians have once made resign, seems to be afraid to lose his post before time. Why do our politicians defy irrefutable principles of the world practice?
- Their motivation is always easy to understand: having a party program and election pledges it made which have to be kept. But they say it is possible only if all possible power leverage is maximally consolidated and concentrated in the hands of one political force.
Politicians used to be prudent enough and the post of the Head of the NBU was not in the list of those that were subject to allocation. But since the pledges have increased dramatically and it became impossible to implement them, it is necessary to use a “bottomless” resource – the National Bank - to keep them.
It is difficult to accept the idea that the post of the Chairman of the National Bank is the President’s exclusive right. And it is no wonder that the law has a special provision for the term of the NBU Head’s powers, there is the procedure of its appointment and his candidacy has to be approved by the Parliament. It is of paramount importance that the post of the Head of the agency regulating such a subtle and sensitive sphere as money circulation is beyond political bargaining.
It is quite difficult to accuse any banker of excessive political commitment, since the specifics of our business is that even in small commercial banks, as a rule, the interests of different political forces are balanced, if, of course, the president of this bank is not an idiot. What can we say about the central bank? It Chairman has to be absolutely equidistant from all political forces.
Surely, the latest peripeteias around the post of the Head of the NBU were also provoked by the fact that Mr. Stelmakh agreed to be included in the election list of “OU-NSD”.
Taking into account a rather uneasy process of “launching” the new parliament, I personally reacted to Vladimir Semenovich’s decision to stay at his post before the end of cadence, i.e. by 2009, very enthusiastically. At least by that time, political intrigue in Ukraine will hardly vanish in view of forthcoming presidential elections. Taking into account a high level of political uncertainty, it is good that the management of the National Bank for this unstable period will remain predictable and clear from the point of view of the policy which will be implemented.
- Does this mean that you do not believe in viability and ability of fully-fledged work of the coalition of democratic forces?
- I don’t believe that in Ukrainian realities it is possible to have a coalition a safety factor of only two votes. In this situation solving any matter of principle will require taking into account and meeting the interest of virtually each of its 228 participants. To reach a compromise between all members of parliament of such a mixed coalition will be incredibly different, since even economic positions of these people are often much different.
I am almost sure that if the coalition is established at all, it will only be able to work in some different format. I am afraid that in such fuss the country will have to stay until the presidential election campaign.

- Our economy has long been in a so-called political discord and has acquired rather good immunity. But how long could it be disdained?
- Of course, in my opinion, it is inadmissible to try the safety factor of the economy time and time again, causing further crises and observe how long it will be able to survive. It is common knowledge that political stability is one of the key factors of steady economic growth. So for its absence is compensated by a rather high growth rates and good outlooks of economic development, therefore the country is still an attractive object of external investments.

- Probably, you are referring the latest rating of the United Nations Conference on Trade and Development (UNCTAD), according to which Ukraine is in top 20 countries most attractive for investors. But most rating indicated disastrous arrears of our economy in respect of a number of indicators. How long can we postpone long-expected reforms and why our current executive power has not yet started their implementation?
- Any structural reforms require some opinion succession in its economic section. Never does it have to be dependent on only social pledges of politicians.
And for the last three or four years the economic sections of the government were only involved in attempting to perform these or those social pledges undertaken by political parties and blocs during election campaigns. Excessive budget socialization, like any other things, is a clear evidence of the above.
Additionally, after every other rotation of the cabinet members the accents of macroeconomic policy of the government change dramatically. The reforms started by someone are called unnecessary and new ones are developed and implemented. And since the change of the government happens too often, most of them remain incomplete and halfway. Can we speak about sufficient understanding of the macroeconomic policy of the government and trust to it under such circumstances?
I hope that once we will witness the times when succession of the economic policy reaches such level at which the posts of the Head of the NBU and other regulatory bodies and the economic section of the government will not depend on the political situation.

- Vasily Mikhailovich, now you are expressing rather good recommendations, but the reality is much more prosaic. Hardly had the stir of the Stelmakh’s oppress-conference at which he announced that he was not going to leave got quiet, when either a false report or true information that under a new version of coalition agreement it will be the Prime Minister, but not the President to nominate the Head of the NBU…
- That allows us to draw a conclusion that the initiators of this step either heard nothing about Stelmakh’s statement or are already preparing for the presidential elections and posts are allocated on such grounds.
It seems to me that this matter doesn’t have to be paid much attention too at least for the reason that the discussion concerning the Head of the National Bank is over and the change of management under the current circumstances looks hardly probable.

- Is the discussion on the need of more flexibility of setting the rate of hryvnia over? Which threat – that of devaluation or revaluation of national monetary unit – to your opinion is more actual today?
- Only for the reason that in a developing economy, in which price rise parameters which can’t be yet regulated effectively by monetary methods and a lot of factors are variable, it is necessary to have at least one rather clear, understandable, predictable and stable indicator on the basis of which it is possible to evaluate more or less definite outlooks for the future.
The events that took place in April 2005 resulted in rather clear negative consequences, which can’t be but taken into account today. Therefore in 2008 the NBU Council will recommend to hold back the exchange rate of hryvnia within the current exchange rate band.

- Shouldn‘t the government’s initiative to move from one currency pegging to a so-called basket of currencies made of some currencies be supported? It was proposed to implement as of next year…
- The discussion on this matter have repeated taken place in the National Bank. These ideas appeared and started implementing as far back as three-four years ago in Russia and echoed in Ukraine. It is mainly connected with the changes in the structure of the country’s balance of payments, since all settlements have shifted from dollar to euro and other currencies lately.
Moreover, there was a serious weakening of dollar which enhanced this discussion.

Therefore such ideas are quite clear and reasonable. It may be possible to continue discussing them on the basis of the results of 2007 taking into account the established structure of the balance of payments, since, as far as I see it, weakening of dollar in the world markets will continue next year.
But firstly it is necessary to clearly determine the methodology of setting the basket of currencies and pegging of the exchange rate in order to make this procedure clear and transparent and the exchange rate predictable.

- To your mind, is the need of currency market liberalization referred to priority ones? When can hryvnia become a hard currency?
- As it is known there is a respective bill in the VR. And it has been discussed both in the financial parliamentary committee and the mass media, but also at the meeting of the National Bank. I am sure that liberalization of the currency market will take place gradually and first will concern simplification of procedures regarding individuals and capital investments in Ukraine.

The matter of transition to hryvnia as a hard currency which has often been discussed lately will become actual when the number of currency market participants increases qualitatively. It has to happen as a result of the development and formation of fully-fledged financial markets: stock, insurance and non-government pension funds, etc. As I see it, the activities on stimulating the development of those instruments have to become one of the main state priorities. Since it would be their development that might provide for effective reallocation of resources for the economic needs and turn the incomes of population into savings, whose growth does not do any good for the economy, but provokes additional price pressure.


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