Andrii Volkov: Which Ukrainian Companies Are Most Likely Not to Repay Loans

A column by Andrii Volkov, Investohills Group’s founder and managing partner, for NV Business.

The National Bank of Ukraine has recently published its data on non-performing loans in the banking system. As expected, the NPL value went up by UAH 1.2 billion in March, while the distressed debt percentage grew from 26.6% as of March 1 to 27.1%.

Why was such an increase expected? It is because corporate borrowers (both large and medium-sized businesses) have been fully affected by the military conflict in Ukraine. Unfortunately, not all companies can repay their loans on time.

According to the NBU, the total value of loans granted from February 1 to April 1 went down by almost 5 percent, from UAH 1,189 billion to UAH 1,131 billion (we can ignore January in this case, for this month is usually dead in terms of the business activity). Business borrowers account for 95 percent of the aggregate portfolio of bank loans. It means that corporate clients set the tone in banking lending. Thus, any issues with loan repayments on the part of businesses immediately affect the quality of banks’ credit portfolios.

To put that into perspective, the percentage of corporate NPLs before April 1 was 31.6%, or UAH 264 billion, while that of retail NPLs came to 16.15%, or UAH 43 billion.

However, the situation with debt repayments is not disastrous at all. In March, many companies kept repaying their loans because they had made provisions for the repayments earlier. It was in April that businesses started facing problems with repaying their loans. These problems do not occur on a mass scale yet.

Clearly, businesses in the fighting zone are in the hardest situation. They are either destroyed or have stopped operating. For this reason, loans to such borrowers definitely become distressed. However, almost 90 percent of the borrowers try to keep meeting their obligations under loans. Of course, not all of them can do it in full. But companies try to make at least partial repayments. At least they keep paying interest.

Why hasn’t this issue become more widespread, so far at least? It is because most companies realize that they have to keep living and rescuing their business despite the war and that debt will have to be repaid sooner or later. Otherwise, a company with non-repaid loans won’t be able to operate in the future because banks are not charities, and they will claim the debt in any case.

It is hard to say how the NPL situation will change in the future. Firstly, a lot will depend on how long fighting will last and what territory will be affected. Obviously, the longer it lasts, the worse for the economy in the mid-term and long-term. Secondly, the issue of logistics needs to be addressed, as it affects fuel supplies to Ukraine, imports of raw materials and components, and exports of finished products directly. Thirdly, businesses are strongly influenced by consumer demand and its distribution within the country.

However, it is evident that loan repayments will be most difficult for export-oriented sectors, such as agriculture, the steel industry, and mechanical engineering. Unless the seaport blockade is lifted, farmers will not be able to fund the sowing campaign and sell their harvest.

The steel industry will also face major difficulties while exporting. Furthermore, many iron and steelworks, located mainly in Ukraine’s east, have been destroyed or rendered inoperable by their inability to obtain raw materials.

Mechanical engineering companies were focused mainly on the CIS countries. Therefore, it will be hard for them to find new markets.

The construction sector is in a bind as well. On the one hand, the destroyed properties and infrastructure must be restored. The state is ready to fund such projects. On the other hand, some developers and contractors will not survive the war because of the disruption of supply chains for construction materials, the termination of operations by related businesses, and the manpower shortage.

Companies in the services sector, logistics, fuel and energy sector, and retail trade can also have issues repaying their loans due to the weaker purchasing power of the population.

Thus, the NPLs can go up to 40% of the entire credit portfolio of banks by the end of May. The further NPL development trends will depend on policies pursued by the NBU and the Cabinet of Ministers in supporting the banking sector and businesses, as well as on the behavior of the borrowers.

The most appropriate strategy for the borrowers would be to inform the bank comprehensively about the situation – what is going on with the business, what are repayment opportunities, and what kind of the repayment schedule would be most suitable to enable the bank to develop an effective debt restructuring and recovery plan. Then, if the borrower behaves adequately, the bank will make concessions to the client in almost any case and won’t hit it with penalties.

Banks apply penalties only in extreme cases. There are very few precedents. Most financial institutions are prepared to meet borrowers halfway, especially if they try to meet their obligations in such a difficult situation, and are willing to engage in dialog with the lender.