Reliable Money: Who and on What Conditions Can Get Loans from Banks during the War

A column by Andriy Volkov, Investohills Group’s founder and managing partner, for the website.

In late October, the National Bank of Ukraine published the results of its survey of banks about the situation with new loans. One of the core findings of the survey is that the banks keep lending to businesses that have already adapted to new realities and are trying to keep working despite the war.

Nevertheless, banks lend at a much lower scale than a year ago. According to the NBU, the banks’ aggregate credit portfolio, as of October 1, 2022, totaled about UAH 1.2 trillion. The amount has hardly changed since early February. Moreover, the business lending volume shrunk by more than 2% (the corporate sector absorbs about 75% of all bank loans).

At the same time, the banking sector has enough liquidity. I even dare say that it has too much liquidity. For instance, banks concentrated UAH 320 to 330 billion in the NBU’s certificates of deposit. In addition, the NBU stopped granting unsecured refinancing facilities effective November 5. It indirectly confirms that banks do not have an acute need for funding.

Lending shrinks down not because banks lack money but because banks lend selectively and choose their borrowers cautiously. New loans are mainly granted to existing customers. Creditors are afraid of doing business with untested borrowers because it is a huge risk. Banks surveyed by the NBU stated that their credit risk went up by almost 80% over three quarters.

A bank needs to be certain it will be able to recover its money. Therefore, for a new client to get a loan, it must be a highly profitable business or a promising project with certain prospects. Otherwise, the borrower will have to offer very liquid collateral.

New loans are granted not only by state-owned banks but also by private ones. State-owned banks put emphasis on lending to state-owned corporations because of their familiarity with this class of borrowers, their collateral and liquid assets, and their credit history. Private banks consider it more appropriate to deal with profitable businesses. State-owned enterprises are less attractive to them as borrowers. Private banks are more interested in them as depositors.

Working capital loans provide the foundation for the wartime credit portfolio of banks. These are rather short-term lines of credit ranging from several months to a year, for which collateral is required. One can hardly speak of investment loans for fixed assets of businesses. There may be loans for energy security (for purchasing electric generators), refurbishing destroyed properties or repairing the equipment, on which the regular process cycle depends. Nobody grants loans for expansion projects or to launch new lines of business. And there is no demand for them.

The attitude toward collateral and the approach toward its valuation changed substantially. The assets used to be deemed liquid earlier, such as properties, equipment, and vehicles, often raise a red flag for banks now. Firstly, the value of all assets went down. Secondly, all such assets are, in fact, uninsured. It is because the military risk is the major insurance risk now, but insurance companies do not cover it and consider such incidents an exception from indemnity payment. In addition, huge expensive collateral items cannot be reinsured abroad because insurers are faced with major difficulties trying to buy hard currency due to the imposed foreign exchange controls. For this reason, almost any collateral is currently illiquid and uninsured in the eyes of banks.

The assessment of borrowers strengthened considerably. It has already been told that new loans are only available for reliable and well-tested clients. Banks usually refuse to grant loans to questionable borrowers and businesses. The collateral is now playing a far less important role in loan repayments. A borrower has to compensate a bank for the gap between the loan amount and its portion that can be secured with collateral. In other words, a company must operate at a high margin, with stable proceeds, and be reliably solvent in principle. Banks also compensate for the growing credit risks by increasing interest rates –at least 25% for new hryvnia loans and 7 to 9% for hard currency loans. Hard currency loans are a rarity because they are only available for exporters on tailor-made terms.

Most active borrowers include companies in the fuel and energy sector, agricultural producers, and retail businesses that cannot exist without topping up their working capital. The steel industry has stopped operating for understandable reasons; the construction sector is stagnating, while the logistics sector is hardly developing. Thus, these sectors hardly use any credit resources.

Shortly, the lending standards will become more stringent. Banks emphasize the repayment, especially because the NPL grew to 37% as of early October, or 6 percentage points higher than in late February. In addition, the financial condition of many sectors keeps deteriorating, which will affect the lending policy and the approaches toward assessing borrowers. The NBU also urges banks to be realistic about assessing their credit risks by enhancing their regulatory requirements and trying to stave off bankruptcies in the banking sector.