Ukraine will closely track assets belonging to owners of banks to stop the offering of sweetheart loans to shareholders – a practice that helped bankrupt 40 percent of the banking sector, a deputy governor of the central bank said.
So far the regulator has been praised for its clean-up of banks, required under a $17.5 billion IMF-led bailout program, which since early 2014 has closed 70 insolvent lenders that had become little more than personal piggy banks for their owners.
The progress made in revamping the banking sector is one of the rare bright spots in Ukraine's otherwise lackluster reform progress, which has stalled over political infighting and corruption allegations to the dismay of Kiev's Western backers.
Business activity analyzed
The central bank has now decided to analyze the business activity of the owners of Ukraine's remaining 110 banks annually to increase the transparency and prudence of lending practices.
"Almost all the shareholders have some kind of business and we will track and evaluate this so that in the case of any negative elements we can prevent risks developing," the central bank's Kateryna Rozhkova said in an interview with Reuters.
She pointed to the case of Bank Khreshchatyk, which went bust in April.
Shareholder loans
A postmortem of the bank's finances showed that over 80 percent of its loans were to its own shareholders, compared with the recommended limit of 25 percent. Its two main owners controlled 60 percent of the company through offshore firms.
"Lending to shareholders is risky for a bank, because often the terms are not based on market conditions, without sufficient collateral, and if negative trends emerge these loans are not repaid," Rozhkova said.
Khreshchatyk could not be reached for comment.
An IMF-backed program to diagnose the financial health of Ukraine's 20 largest banks, which account for 86.5 percent of the sector, was completed at the start of 2016 and showed that non-performing loans accounted for over 40 percent of their combined portfolio.
The central bank has now given the banks until Jan. 1 2019 to bring down lending to shareholders to 25 percent of capital, Rozhkova said.
Supervisory boards
It has also imposed new rules requiring owners of banks to establish supervisory boards of independent directors to monitor lending to shareholders and other beneficial transactions.
In 2015 the central bank managed to establish the main shareholders of almost all the banks, nearly a third of whom are owned through multiple offshore companies, according to Reuters calculations based on central bank data.
Understanding who owns what offshore will also help the central bank stem the flow of capital overseas, Rozhkova said.
Over the past two years $18 billion – 60 percent of foreign currency deposits – was withdrawn from the banking system, causing a 65 percent fall in the national hryvnia currency.
