How to restart lending in Ukraine despite unfavorable macroeconomic and legal conditions
Bank lending dries up in recessions and Ukraine is no
exception. In January-July 2014 total loan portfolio of the banking system
shrank by 8% as both loan demand and supply nearly vanished in response to looming
political and economic risks. Whether tight credit is a cause or an amplification
mechanism in recessions is perhaps not so important from a practical standpoint
because in either case the key issue is how to restart lending to minimize
adverse effects of depressed economic activity. This is a challenge because
default/counterparty risk in recessions is high and so banks are reluctant to
issue new loans. In Ukraine, this risk is further magnified by imperfect legal environment
(i.e. pervasive loan fraud as well as
weak and slow legal enforcement of loan agreements) and tight funding
conditions (the access to global debt markets is shut down, while the banks
faced strong deposit outflows in the first half of this year) .
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| Source: IIF |
So, how can Ukraine’s government restart lending? In an
ideal setting, the right answer is that the sustainable lending growth should
be based on the stable macroeconomic conditions, adequate legal framework, and
healthy and transparent banking system. Unfortunately, none of that is feasible
in the short-run and even if comprehensive economic and structural reforms are
started now, we will not see effects for some time. Therefore, the question is
what should be done here and now to facilitate bank lending in Ukraine. This
task could be understood as a constrained optimization problem: the objective
is to restart lending subject to constraints, such as macroeconomic
instability, imperfect legal environment and low confidence in the banking
system.
