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Point crediting: Autumn 2011 Trend

The Cabinet of Ministers instructed the National Bank of Ukraine to take action for commercial banks to raise requirements to a paying capacity of individual borrowers. The government reasons the instruction by a necessity to revitalize the balance of payments.

Besides, another strong reason is taking care about banking system health.

An established deficit in resources urges banks to increase rates on unsecured consumer loans – that is, cash credits, credits for durable goods purchase and credit cards.

The forced increase in rates is sure to result in the growth in the share of troubled borrowers in the segment of unsecured loans for individuals. To avoid that course of events, distinct and transparent measures in raising requirements to a paying capacity of individual borrowers will be more than ever useful.

This is a long-felt need. The matter is that at the beginning of this autumn, we saw banks imposed requirements to augment the percent of credit application approvals at retail networks, whatever it takes. Thus, creditors were pushed to grant loans to anyone, without regard to commitment and capacity of prospective borrowers to repay granted loans.

Some banks whipped up by their yearly business plans had to make concessions and decrease risk management quality. A result of the compromise will be evident in followup of 1Q 2012 or even 4Q 2011.

So, the rise of requirements for к a paying capacity of borrowers is a reasonable and escalated measure. But is it necessary to shrink an unsecured crediting to individuals? I am sure, not.

A decelerated inflation and aggravated consumer expectations create risks of an economic slowdown. It is required to stimulate the demand – first off, on domestic products and services – to stimulate economic growth in whole. Of course, this is a more difficult and delicate task rather than suspending a consumer crediting. However, crediting the industrial sector encouraged extensively by Ukrainian government is pointless without an extensive consumer demand as manufactured products and services will fail to be purchased, and credits granted to the industrial sector will fail to be repaid.

The Ukraine’s banking system will be on a narrow track. It should keep on crediting a consumer demand, significantly improve borrowers’ selection and enhance risk management quality.

To provide proofs, crediting of individuals by banks reduced to UAH 203.722 billion in 3Q 2011, from UAH, whereas crediting of legal entities went up to UAH 606.541 billion in the same period, from UAH 579.973 B. Thus, if we admit there’s a problem in individual crediting, the problem is not related to the volume of loans granted to individuals, but to their quality.