Ukraine’s AIS automobile distribution corporation, which is owned by two Party of Regions lawmakers — Dmytro Svyatash and Vasyl Poliakov — has not been repaying a UkrSibbank loan worth $100 million for five years. But after the overthrow of President Viktor Yanukovych, who controlled the party, the bank debt may finally get repaid.
“We would like the example with the AIS corporation to become a good opportunity to strengthen the confidence towards judicial and law enforcement systems of Ukraine. It’s not a question of UkrSibbank only. It concerns the entire banking system — fairness of justice and investment attractiveness of Ukraine,” Oleksandr Shevchenko, press secretary of UkrSibbank BNP Paribas Group, told the Kyiv Post.
Yet, other banks still struggle to recover their loans due to the weakness of Ukraine’s legal system. According to the National Bank of Ukraine, as of Feb. 1, the share of overdue debts was 7.8 percent of the loan portfolio of the entire Ukrainian banking system. The share of the overdue debts fell from 8.9% to 7.7% during 2013.
Dilyara Mustafayeva, the expert of the Independent Association of Banks of Ukraine, insisted that the amount of overdue debts does not always correspond to the quantity of the problematic loans because many such loans are paid in separate tranches and are not reflected on the accounts of bad loans.
That’s why the more accurate benchmark for determining the quantity of problem debts is summarizing non-performing loans. As of Jan. 1, the National Bank of Ukraine determined the share of such loans in the whole banking system reached 12.89 percent.
The lawyers, however, said the quantity of problematic loans is much higher and is set to increase.
“Even before the political crisis, bad loans in some Ukrainian banks constituted up to 40 percent of issued loans,” Anna Kozhemyachenko, lawyer at the Asters law firm, said. “Depreciation of Ukrainian currency in the current political turmoil will inevitably lead to increasing non-performing loan portfolio of most Ukrainian banks.”
Mustafayeva of the Independent Association of Banks said that it is hard to say whether big corporations, small businesses or individual clients become bank debtors more frequently. “On the one hand, big companies are more solvent than small ones,” she said. “On the other hand, it is difficult for the banks to resist big corporations, full of professional lawyers, when such corporations try to avoid repaying the loan.”
Lawyers say that most of the problems impeding banks’ successful debt collection arise at the stage of issuing a loan. Misleading information on the financial state of a borrower may result in the bank unable to react adequately and timely when a borrower becomes insolvent. A bank therefore can potentially lose an opportunity to get the loan repaid.
Bad loans often originate from loopholes in legal documentation or breach of legal procedures at the initial stage. “Other problems are mostly related to the duration of court trials and law enforcement proceedings. In terms of practice, the collection of large corporate debts is a long process which may last from few months to a year or longer,” said Kozhemyachenko of Asters.
Roman Stepanenko, head of banking and finance department at the Egorov, Puginsky, Afanasiev and Partners law firm, said that it is hardly possible to describe all fraudulent structures used in order to avoid full or partial repayment of debts to financial institutions.
Borrowers may use various schemes to avoid repaying the bank loan. “(For instance) a borrower creates fictitious creditor that claims for substantial amount of financing, which would leave a bank among minority creditors,” Stepanenko noted.
Stepanenko believes that banks should take care of their financial security themselves. They should act more actively in terms of assessing each project to minimize any possibility of fraud coming from borrowers.
Lawyers stress that execution of the guarantees of creditors’ rights is a key question for now, while introduction of new amendments to existing legislation is a relatively minor issue.
“Even though many guarantees of creditors' rights are already declared and introduced within national legislation, very few of them are applicable in practice. Needless to say that even obtaining favorable court judgment by the creditor does not entail its actual enforcement,” Kozhemyachenko added.
by Nataliya Trach