NPLs are growing, but there is no calamity: How business repays loans during the war
And how banks solve the problem of bad debts
The volume of non-performing assets (NPL) in the banking system, according to the National Bank, exceeded 30% in the first eight months of 2022. Notably the volume of bad debts of business reached almost 36%, which is 4 percentage points higher than at the beginning of the war. At the same time, the amount of bad debts in the banking system is not affected by the issuance of new loans. Simply because there are almost no new loans. If the loan portfolios of individual banks are growing, it is mainly due to preferential programs such as 5-7-9. And what the National Bank reflects in its data as "fresh" debts, in fact, is only the restructuring of previously issued loans. Andriy Volkov, founder and managing partner of Investohills Group of Companies, explains for Mind what is going on with the "rub" in banks now.
As for banks, the situation with NPL is not uniform. Financial institutions that had diversified their portfolios, granted credits to various industries, scrupulously approached the assessment of pledges, now have much less trouble with bad debts. Banks with both poor risk management and credit policy already clearly have NPL levels that are much higher than the market average.
By the way, if the assessment of NPL was carried out according to the standards and measures of the pre-war time, the size of the "rub" in the banking system would be much larger. Because the NPL would definitely include those borrowers who do not comply with the repayment schedule, apply for restructuring, etc. But in the current realities, both banks and the NBU assess credit debt a little differently and do not consider (yet) problematic those loans that are serviced at least somehow.
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What is the structure of loan portfolios? If we delve into the structure of the banks' loan portfolio, we can divide it into three segments.
The first part is loans issued to companies that found themselves in the areas where hostilities were or are still ongoing, as well as loans to businesses that fell under occupation. Such borrowers do not repay the loans and restructuring is impossible. Thus, this debt has become uncollectible for banks and should be written off.
The second part is loans that are serviced and are serviced quite well. The most solvent categories of borrowers now are trade, agricultural enterprises (the revival of exports after the unblocking of ports greatly helped them), and the energy sector. These businesses are active and earn money. By the way, even the domestic metallurgy, despite significant physical losses of production capacities, continues to work with profit.
The third segment is loans issued to borrowers who have difficulties, but at the same time try to somehow repay debts to banks, to seek a compromise with creditors. In this category fall companies from almost all industries. But the most difficult situation is probably for developers, food industry, machine builders and services.
What policy do banks pursue? Banks should be given their due: they do not behave aggressively towards borrowers. That is, they do not force to repay loans at any cost, do not take away pledges. Moreover, most banks, both private and state-owned, agree to restructuring without any problems.
The most common option is to defer repayment of the loan principal. Revision of the interest rate is a little more complicated. But if the debtor is unable to pay interest, the bank may agree, for example, to reduce the rate or to capitalise interest. I am confident that the banks will continue to pull out such borrowers as much as possible.
At the same time, credit risk remains one of the key risks for the banking system. This, in particular, has been repeatedly stated by the NBU that estimates that about 20% of borrowers may default by the end of 2022.
This forecast is quite adequate, since 75-80% of companies pay interest on loans today. In fact, this is the "liveliest" part of the economy that continues to function.
What will happen to business loans? Many companies have either already run out of financial reserves or their reserves are drawing to an end. Therefore, the winter will be a real test for business. If there are energy carrier disruptions (notably due to damage to critical infrastructure) and logistics breakdown, we may see an avalanche-like growth of NPLs.
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In such a scenario, there will be a critical accumulation of bad debts in the spring of 2023, and many more than 20% of borrowers may become bankrupt. Moreover, the first at risk of default are those companies whose assets have suffered from military operations or remained in the occupied territories. Such debtors are the main candidates for adding to the NPL statistics.
But if the hostilities decline in the coming months, and the international assistance to Ukraine does not exhaust, the business, on the contrary, will level out the servicing of its debts. According to most forecasts, the active phase of the war will end after winter. This means that by the summer of 2023, the quality of banks' loan portfolios will improve, and the share of NPLs will begin to decline.
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