Threat of big money
Attentive readers, perhaps, may have noticed, that Armenia’s banks have recently activated their ads linked to provision of loans, i.e. they propose loans, as they state, with beneficial, flexible, unprecedented conditions.
There are banks, which propose to shift the active loan to their bank, promising to apply interest rates by less than 2 percentage points. Thus, if your loan is in X bank with 20% annual interest rate, then Y bank proposes—shift the rest of the amount to us, and we’ll take 18% for that (shifting is an easy-to-solve technical issue).
Another nuance is frequently observed in ads of the banks as well. Some banks propose loan without the financial analysis of incomes, i.e. if you have a subject for mortgage—a car or a real estate, the bank is ready to provide a loan by some interest of the estimated price of the property, without discussion on how much you earn and are you able to serve monthly payment? The probability, that the number of bank’s insolvent customers will increase, in this case is increasing. However, the bank is taking that “headache”.
At first glance there is nothing tragic here. In particular, from the perspective of borrowers everything is even perfect: they may easily receive loans without seeking document asserting salary and other incomes. What’s the reason that banks have made provision of loans so accessible?
Firstly, regarding the interest rate. Reduction of interest rates for loans by banks to some extent is conditioned by the policy of the Central Bank of Armenia (CBA) in 2016. It should be noted, that in the period of the previous year CBA reduced the interest rate of refinancing—reducing 8.75% from the beginning of the year to 6.25%. Reduction of refinancing interest rate by 2.5 percentage points and mitigation of monetary policy (e.g. reduction of mandatory reserve normative for deposits in foreign currency). However, this doesn’t totally explain current behavior of the banks.
The main reason is hidden in other place yet from December 2014. It should be noted, that CBA at that time changed the minimum threshold of general capital of trade banks, raising to USD 30 billion from USD 5 billion. Change for acting banks entered into force from January 1, 2017. As of that date 21 trade banks are functioning in Armenia. At the moment the decision was made 5 of them comply with the demand, general capital was more than USD 30 billion.
Other 16 banks should either replenish the capital in the period of 2 years or leave the market. 4 of them have left. In the period of 2015-2016 ProCredit joined Inecobank, BTA-Armenia—to ArmEconomBank, Areximbank—to Ardshinbank and Armenian Development Bank—to Araratbank. Less time was left to the banks to replenish the capital. In the end of the 3rd quarter of 2016, 3 months prior to the deadline, 7 banks complied with the new requirement by the CBA. The others replenished their capital in the last quarter of 2016.
Moreover, some banks stated on capital replenishment a few days before the New Year. This means, that in a rather short period immense quantity of money entered the banking system (in the form of investments by shareholders or release of shares). In the period of 2016 general capitalization of trade banks grew by more than AMD 135 billion, considerable part of which is shared by the third quarter (around AMD 70 billion), i.e. in a short period a big capital was accumulated in the banks, or as it’s said, liquidity (liquidity requirements for banks may be serve as a proof, which have sharply grown by the end of the year).
And what should the banks do with these immense means? Yes—they should distribute. More simply said, those amounts should be operated—provide loans or buy bonds, so that money “didn’t sleep”. New Year holidays are a past and banks passed on to that work. If we pay attention, we’ll notice that in the loan ad more active are the banks, which have just replenished the capital.
Seemingly, this is good, the banking system starts to breathe, loan provision is being activated. Besides, big capital allows the bank to provide loans for big projects (as there is a maximal threshold for big loans depending on the capital). This is one of the very reasons by which CBA was grounding its decision leading to bank merging. However, this process contains a big hidden threat. The aspirations of the banks of speedy distribution of the capital will lead to increase in the number of borrowers.
And today it isn’t a secret that many need money at least to cover daily needs, agree on taking a loan by any conditions. And when the bank isn’t interested whether the person has the possibility to serve the loan, has new income or not, that loan will become a real headache for those people. Loans provided without survey of incomes, as a rule, are provided with high interest rates and mortgage.
The borrower with no stabile income will either face serious issues or lose the property. Can that risk be prevented? If yes, who should do that? Of course—the Central Bank of Armenia. To say more, we have the precedent as well, with the example of our EEU partner.
This January Russian president Vladimir Putin assigned country’s government and CBA to toughen responsibility of banks for the population’s overloaded provision of loans. Purpose of the initiative is to fight against the aggressive policy of involving new borrowers. In particular, it’s proposed to the banks to oblige to check liabilities of potential borrowers regarding other loans.
If it turns out that at the moment of signing the loan agreement correlation of client’s monthly income and payments on loan line is higher than the defined threshold of CBA, then the bank doesn’t have the right to demand from the customer to pay the overdue liability.
Russia’s financial regulator and government officials should submit proposals until March 1, 2017 regarding restriction of provision of loans to citizens with big loan responsibilities. Of course, we believe that the allegations, that compared with EEU our banking system is more developed, and CBA—more professional. However, sometimes it’s worth taking example of the others.
By Babken Tunyan
