Volodymyr Lavrenchuk: Our Bank’s growth testifies to positive reforms

How has the massive transformation of Ukraine’s banking sector in the last few years and the departure of many unhealthy banks affected Raiffeisen Bank Aval’s operations here, especially compared to the last major financial crisis?

It has, indeed. In the last three years, we’ve seen our operations become highly profitable and our customer base has grown. This is what our shareholders and management dream about. For example, our corporate lending portfolio has expanded by nearly 40% each of the last two years. The same is true for SMEs. These growth numbers testify to the effectiveness of the reforms that have taken place since 2014. They confirm the notion that honest competition based on transparent application of the regulations governing the banking sector to all market players leads to positive transformations. Reforms based on the unbiased application of capital requirements and risk management methods, and control over lending to related parties set the conditions for banks to properly compete. Customers win from this kind of honest competition.

Given that protecting creditor rights plays a major role in renewing lending, how do you expect the adoption of key legislation to change the situation on the bank lending market?

The Law “On protecting creditor rights,” as we call it, is the result of a lengthy drafting process involving experts. We are satisfied with this bill, which the president signed into law on November 1. It contains quite a few updated instruments that will ensure the effective application of protections for both lenders and borrowers. The actions of the parties to an agreement now have more protection, based on the procedures for collecting, litigating and preparing for lawsuits, settling disputes out of court, and so on. This considerably improves the judicial environment for interactions between creditors and debtors.

Whether this will be enough to be able to say that we can now lend on a mass scale – no. For lending to revive, we need two more things. First is higher incomes among ordinary Ukrainians, which means greater creditworthiness. Second, the cost of money has to go down. We know that the National Bank plans to bring inflation down to single digits, which is directly linked to reducing interest rates for loans.

As you can see, we have a legal bridgehead. We also have experience in dispute settlement that we gained during the crisis years. Household incomes are on the rise. For now, the interest rates are not acceptable. When all these components are in place, we will have a better basis for mass personal lending, as well as commercial lending to businesses and organizations. Right now, with interest at 20% and higher, borrowing money is only possible short-term and not in all areas.

How have requirements of borrowers changed, given that banks managed to accumulate vast volumes of NPLs?

Right now, banks around the world are instituting stricter requirements of borrowers in terms of revealing information about the ultimate beneficiary and about the nature of their commercial operations. This is what is known in the industry as KYC or “Know your client” and financial monitoring. This is world practice that has been introduced by the decision of bank regulators, governments and international financial institutions (IFIs). They can’t be avoided. We can say that this is tightening requirements, but it won’t work any other way. And so my answer is: it’s become harder to borrow for those who have incomplete or covert documents regarding ownership, or who were engaged in activities that were not directly related to their statutory activities. Of course, in Ukraine, where 40% of the economy operates in the shadows, these conditions seem very harsh.

They could also seem burdensome because clients are meeting the requirements manually and on demand, rather than the lending institution getting this information through electronic registers. But the future is digital, which means that the next 3-5 years should resolve this problem.

What share of NPLs form Raiffeisen’s lending portfolio?

Things are going very well now. During the crisis, NPLs were up to 50%, but now they’re down to less than 20%, and we plan to have them down to 12% by the end of the year. Next year, they should be in the single digits.

I have to say that during and since the last crisis, borrowers have behaved far more constructively in terms of settling their debts, compared to before the crisis. The court system is also working more predictably now and artificial problems with the judiciary have gone down. New rules are making it possible for us to put together agreements to settle or write off debts on the go when there is no prospect of collecting. Those factors that used to restrain us for a long time have disappeared. This makes it possible to clean up our loan portfolios a lot faster.

What are the results of your many years of close work with the EBRD in issuing inexpensive loans?

We have two partnership agreements: one with the EBRD and the other with the European Investment Bank (EIB). They contain different conditions but have a common goal: to offer customers credit when the assessed risks of working with them are on the margin of our lending policies, that is, they are high enough and, based on formal requirements, we would have to reject such a borrower. So we share these risks with another bank. This makes it easier to monitor them and, should they prove unsuccessful, it won’t be so painful. Between the two programs, nearly €35 million in credits have been given out. This seems to be an effective model for supporting business in Ukraine.

It seems that export credits are one of the underserved segments and exporters are feeling the pinch. How might this problem be resolved in specific sectors and what instruments does Raiffeisen offer exporters?

In Central and Western Europe, as much as 30% of financing is covered precisely by guarantees, letters of credit and promissory notes – what’s known as trade financing. In Ukraine, this is at the level of 5-6% so far. This is very little and so the complaints are valid. When banks were constantly competing for capital, customers lost part of the services to which you are referring, and so banks and bankers need to hear this criticism.

As to Raiffeisen, we would like to increase the volume of export operations. We believe that we have the proper expertise in trade financing, as we have been getting high marks from the EBRD as the best bank in this area for several years now. In fact, we are now the #1 bank for the number of guarantees issued. Still, I can confirm that the volume of such operations does not reflect the real needs of Ukraine’s economy.

What are Raiffeisen’s plans for expanding in sectors where you haven’t been strongly represented in the past and where do you see the greatest demand for lending?

Firstly, there’s the IT industry, which has become the third largest exporter in Ukraine after farming and steel. It’s been growing by 27% a year. Of course, banks are keen to compete for their business. This is also a very demanding customer and providing them with quality service is among our priorities as a bank.

The second sector is renewable energy, which is becoming the main component of alternative energy. Right now, Raiffeisen is somewhat limited in this area.

The third area is infrastructure projects. The scales of financing that they needed are far beyond what any individual bank can take on. I predict that at some point we will see banking syndicates again, to handle this demand. This is a more complicated and requires greater expertise and lengthy preparatory work. But this is also something without which I can’t imagine the banking sector playing a significant role in reviving Ukraine’s economy.