As soon as they do not check the banking structures of potential borrowers. Place of work, income, proper repayment of previously taken loans, age, and many other points are clarified by the lender when considering the loan application. However, despite all these efforts, it is not always possible to thoroughly check the applicant and ensure the high probability of repayment of loan funds: the number of problem debtors is currently steadily increasing. Of course, this is not yet a natural disaster on the lending market, as it was during the crisis, but a new problem has emerged, no less serious. Many borrowers, having taken out several loans at the same time, simply cannot cope with their debt obligations, and many of our compatriots are doing the same today, and the reason for this is the availability of certain credit products, which can be obtained by almost anyone. In this regard, quite often people resort to another loan thoughtlessly, which entails unpleasant consequences. Regardless of the circumstances that caused the occurrence of bad debts, banking organizations have classic methods of dealing with unscrupulous borrowers.
Problem loans and their consequences for lenders
It is no coincidence that I call problem loans that way. For banking structures, this is a truly significant problem, which they are trying in every possible way to combat. First of all, the lender loses the planned income; accordingly, he is forced to withdraw these funds and his own reserve in order to pay off depositors who provided their money to the financial institution for temporary use for a certain percentage, and the bank, in turn, gave this money to the borrower, hoping that he will return them according to the payment schedule and no problems will arise. In addition, the lender has to pay for the activities of specialists working with unscrupulous borrowers, as well as for losses caused by the seizure of the debtor’s property and legal proceedings. Of course, when the banking organization manages to return the problematic loan, almost all of the above costs will automatically be transferred to the borrower, however, until then the financial institution will have to spend a lot of time and its money. If, after all the negotiations, it turns out that the debtor is not able to repay the loan on the same terms, and it is required, the banking structure will definitely suffer significant losses, and it is unlikely that they will be able to recover them. If we take into account the fact that even the most prosperous financial institution has a share of problem loans among all loans provided is 6-8%, it becomes obvious how detrimentally such a situation affects the financial position of the bank. But in most credit structures this ratio is much worse, and problem loans in some banking organizations can reach 30% of the bank’s total loan portfolio.
As a rule, the lender begins working with problem loans as soon as they arise. may allow a very slight delay in the monthly payment, and the bank will already start calling him and insistently reminding him of the need to make timely payments and of the penalties that will be imposed in connection with violation of the terms of the agreement, which clearly states the date of the obligatory payment. Along with calls, the financial institution will begin to send letters to the debtor’s address, the content of which will again remind the borrower of debt obligations. In these letters, the lender will indicate the outstanding debt on the loan and once again remind you of the significant fines that by that time will have already been accrued on the loan balance, and of the likelihood of possible early termination of the loan agreement, which will entail the borrower’s forced repayment of the full amount of the debt in one payment , if the debtor does not have such an opportunity, the bank will give the loan to collectors or take the case to court, after which the property will be confiscated from the unscrupulous borrower, at the expense of which the creditor will receive his money. However, the loan acquires the status of problematic after three months, during which the debtor did not comply with the terms of the borrowing agreement and never made a payment on the loan, and did not try to agree on loan restructuring. On the other hand, restructuring itself can be quite painful for a financial institution. Often, if borrowers try to come to an agreement with the lender, it is about extending the loan term in order to reduce monthly payments. However, such a concession is not always possible for a credit structure, and therefore they agree to it only in order to maintain positive statistics. Sometimes debtors themselves put up obstacles that prevent them from reaching any agreement with the creditor, demanding incredible concessions that no bank will agree to. For example, some troubled borrowers agree to repay the debt only if the financial institution waives fines or even waives the required interest, which is simply impossible.
If your own strength is not enough
If the borrower ignores all the lender’s demands to pay the debt, or worse, even tries to hide from responsibility, the banking organization may assign the problem loan to third parties. This possibility is stipulated in each loan agreement. Moreover, the bank can give the collection organization the authority solely to collect the debt from an unscrupulous borrower for a certain fee, or sell the loan completely. The actions of collection agencies imply social and psychological influence on debtors in order to force them to repay the loan, however, the methods of collectors are often more persistent and radical compared to banking ones, therefore, as a rule, the borrower still gives in and pays the debt, otherwise the matter submitted to court.
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The concept of “problem loan”. Problem loans are the so-called substandard, doubtful and bad loans, i.e. everything except current loans, defined as non-overdue loans (regardless of collateral), as well as loans with very short-term overdue debt (up to 5 days inclusive) on the principal debt and payment of loan interest, as well as only once reissued without changing the terms of the loan agreement.
Meanwhile, an overdue loan cannot be called problematic in its true meaning, because short-term non-repayment in a number of cases cannot indicate a genuine danger of non-repayment of the loan. It is also true, however, that the absence of a late payment to repay a loan is not a guarantee of its reliability; a loan that is not currently overdue may in the future become a bad debt.
However, a violation of lending principles is a serious signal for the bank, a certain riddle that it should solve during the organization of the lending process.
A problem loan is a loan for which the bank has doubts regarding its subject, object and collateral.
Well-known American expert in the field of banking management, Peter S. Rose, believes that the transfer of individual loans to the category of problem “means that the borrower has not made one or more payments or that the value of the collateral for the loan has decreased.”
Losses from problem loans are expressed not only in direct losses from non-repayment of loans and non-payment of loan interest. The damage associated with problem loans may be more significant considering that their occurrence:
“freezes” the bank’s funds in unproductive assets;
Leads to undermining the reputation of a credit institution, the trust of depositors and investors;
Increases the administrative costs of the bank, because in practice it requires special attention and additional control from credit departments;
Increases the threat of an outflow of qualified personnel from the bank due to a decrease in their material incentives due to a fall in the profitability of credit operations.
Factors in the formation of problem loans. Of course, we should talk about problem loans only in relation to loans that have already been issued. The reasons for their formation can be very diverse. Some of them may be related to the client’s work, others to the bank’s activities; Some factors may be objective in nature, while others may depend on the subject.
Factors in the formation of problem loans, depending on the borrower, are most often associated with poor management of the enterprise. The inefficiency of the borrower's work may also be caused by the deterioration of the quality of its products, its displacement from the market, weak control of the enterprise over finances and, as a consequence, an increase in accounts receivable, overhead costs, etc.
Factors in the formation of problem loans that are beyond the control of the borrower most often include unforeseen political and economic events, changes in legislation, a general deterioration in the economic situation, the impossibility of quickly restructuring production due to a certain technological breakthrough, natural disasters, etc.
The reasons associated with the bank's activities are also varied.
Reasons beyond the control of the bank should also include a sharp deterioration in the economic situation, when non-repayment of bank loans became a common phenomenon (such as, for example, the events of August 1998). Of course, natural disasters, etc. can have an adverse impact on the bank.
Reasons depending on the bank are associated with various violations of the credit process. It could be:
Providing a loan not on the basis of economic justification, but on the basis of friendly disposition towards the borrower;
Weak or unprofessional analysis of the loan application;
Poor structuring of a loan from a risk perspective as a consequence of a superficial understanding of the specific industry characteristics of the enterprise and its true needs;
Lack of loan collateral, for example due to an overvaluation of the collateral;
Incorrect documentation of the loan, for example, the absence of clauses (conditions) in the loan agreement that protect the interests of the creditor bank;
Poor control over the borrower’s work during the period of using the loan, etc.
All these and other reasons one way or another lead to disruption of the lending process and undermine the stability of both the borrower and the lending bank. Of course, the consequences do not appear immediately. “As they mature,” they give signals of their negative impact on the circulation of capital. These may be signals reflecting the financial condition of the borrower, its production activities, the organization of lending, indicating:
The presence of overdue debts on payments to the budget; unstable demand for finished products of the borrower enterprise;
Violation of deadlines for submitting financial and primary documents to the bank;
Serious deficiencies in accounting;
Deviation of the actual indicators of the borrower’s economic and financial activities from the planned ones;
Failure to fulfill the plan for product sales by more than 5%;
Low quality of loan collateral;
Using proceeds from the sale of fixed assets of a production nature as a one-time source of loan repayment;
Lack of working capital of the borrower;
Short-term delays in loan repayment and fees for its use;
Frequent requests for loan extensions.
The bank should also pay attention to such phenomena in the financial and economic activities of the borrower, such as:
A sharp increase in accounts receivable;
Slowdown of inventory turnover;
Decrease in the share of short-term assets;
Decrease in liquidity ratio;
Reducing the volume of sales of goods;
Increase in overdue payments (including accounts payable);
The occurrence of losses from operating activities;
Systematic excess of the credit line;
Weak diversification of the circle of suppliers and buyers.
In foreign practice, there are a number of indicators that are used to assess the possible bankruptcy of a borrower. In relation to the Russian specifics of entrepreneurship, the following two-level system of indicators can be used.
The first group includes indicators that indicate possible serious financial difficulties for the borrower in the foreseeable future, bringing him closer to bankruptcy. Among them:
Repeated significant losses in core production activities;
Exceeding a certain critical level of overdue accounts payable;
Excessive use of short-term borrowed funds as sources of financing long-term investments;
Consistently low values of liquidity ratios;
Chronic shortage of working capital;
The share of borrowed funds in the total amount of sources of funds is steadily increasing to dangerous limits;
Wrong reinvestment policy;
Excess of borrowed funds over established limits;
Chronic failure to fulfill obligations to investors, creditors and shareholders (regarding timely repayment of loans, payment of interest and dividends);
High share of overdue receivables;
Availability of excess and stale goods and inventories;
Deterioration of relations with banking system institutions;
Use (forced) of new sources of financial resources on relatively unfavorable terms;
Use of expired equipment in the production process;
Potential losses of long-term contracts;
Unfavorable changes in the order book.
The second group of indicators includes those whose unfavorable values can be considered critical. At the same time, these indicators indicate that under certain conditions or if effective measures are not taken, the borrower’s situation may deteriorate sharply. These indicators include:
Loss of key management staff;
Forced shutdown, as well as disruption of the production process;
Insufficient diversification of the enterprise’s activities, i.e. excessive dependence of financial results on any one specific project, type of equipment, type of assets, etc.;
Excessive bet on the predicted success and profitability of the new project;
Participation of the enterprise in litigation with an unpredictable outcome;
Loss of key counterparties;
Underestimation of technical and technological renewal of the enterprise;
Ineffective long-term agreements;
Political risk associated with the enterprise as a whole or its key divisions;
Deterioration of asset structure.
Preventive measures of banks. Timely response to signals of early manifestations of emerging financial difficulties allows the bank to take preventive measures to improve the situation and protect the interests of the bank. These measures must be taken as early as possible before the situation gets out of control and losses become inevitable.
What should a bank do if it notices early signs of a crisis situation?
First of all, bank employees must carry out a more in-depth analysis of the borrower and identify the specific reasons that led to the deterioration of the situation. It is important to find out the position of the borrower: does he want to repay the debts, can he be trusted, is he able to restore the status quo by achieving the desired profit? Regardless of whether the bank decides to maintain its relationship with the borrower or to abandon it in the future, it is advisable for the bank to develop a corrective plan for further actions. In this case it is necessary:
Find out how deep the reasons are that led to the deterioration of the situation;
Add this loan to the special observation list;
Meet with the management of the enterprise, outlining a plan for further activities;
Taking into account the results of the analysis, if necessary, change the terms of the credit transaction (reconsider the size of the credit line until its closure, use additional collateral, increase the loan interest, etc.);
Find out potential dangers for the bank in other areas of interaction with this client;
Critically analyze all loan documentation, including the loan agreement with the loan terms indicated therein, the collateral agreement (from the standpoint of the completeness and value of the collateral);
Re-evaluate the reliability of all forms of ensuring loan repayment (the presence, in addition to collateral, guarantees, sureties, bills, etc.);
Increase attention to the state of the client’s current account;
Develop a program for changing the debt structure (if necessary, defer loan repayment).
Credit rehabilitation measures. If a deteriorating loan cannot be quickly normalized, measures that are collectively called credit rehabilitation (rescue) become appropriate. This includes:
1. Attracting additional forms of ensuring loan repayment:
Obtaining additional guarantees and warranties;
Attracting additional collateral;
Partial sale of collateral;
Sale of part of assets, prevention of investing resources in low-profit assets;
Reduced overhead costs, overall more economical use of resources;
Strengthening control over accounts receivable and inventories;
Obtaining government guarantees (obtaining budget funds to repay the loan and pay interest on the loan);
2. Attracting additional capital and financial assistance:
Search for new investors willing and able to invest additional resources in this enterprise;
Investment of new capital using a simple partnership agreement;
Increasing the borrower's equity capital at the expense of its shareholders and subsidiaries;
Organization of financial assistance from other financial and banking institutions;
Sale of the enterprise to a third party;
3. Organizational and administrative measures:
Discussion with the main shareholders of the issue of new managers of the enterprise, recruitment of a new management team;
Concluding a settlement agreement with the borrower (to avoid judicial collection of loan debt);
Appointment of managers and consultants to work with the borrower on behalf of the credit institution.
If credit rehabilitation could not prevent the threat of loan default, it becomes advisable:
Taking legal measures, including formal appeals to guarantors and guarantors about the fulfillment of their obligations;
Sale of collateral;
Sale of credit;
Preparation of documents (claim for bankruptcy of the debtor enterprise).
A bank’s work with problem loans is quite often in practice organized in a special department for managing problem loans.
ladies. Where this is impractical (small portfolio of problem loans), banks create special working groups from among employees of the credit department, legal department, and security department. The methodological support for this work is most often the “Regulations on working with problem loans” developed by the bank.
It is important that this work is comprehensive. As already noted, the transition of current loans to the category of problem loans is associated with improper organization of the credit process at various stages. This can be either a consequence of poor analysis or an inflated price of the collateral. Loans can be potentially problematic both due to excessive concentration of risks in the loan portfolio, unprofessional execution of loan documentation, and due to the inability to effectively control and audit the loan process. The effectiveness of working with problem loans is largely determined by the qualifications of bank personnel, the quality of information and methodological support, and the bank’s ability to quickly respond to signals about deteriorating loan investments.
In the course of the bank’s implementation of its credit policy in terms of ensuring loan repayment, working with “problem” loans is of no small importance. “Problem” loans are understood as loans for which, after issuance on time and in full, the borrower’s obligations are not fulfilled or the value of the loan collateral has significantly decreased. Managing problem loans is one of the most important aspects of banking practice. Not only the success of resolving an individual conflict situation, but also the stability and reputation of the bank itself depends on the correct choice of method of working with problem loans.
In practice, solving the problem of managing overdue debt largely depends on two conditions. Firstly, does the loan agreement contain provisions giving the bank the right to check the borrower’s accounting and financial statements by carrying out inspections directly at the enterprise, and is it possible to terminate the loan agreement and foreclose on the collateral if the bank has reasonable suspicions about the borrower’s insolvency. Secondly, what powers are vested in the bank’s loan officer, under whose constant control every loan issued should be. There is a basic “set of signals”, indicators that characterize the emergence of a low-quality, “problem” loan. There are no universal rules regarding the loan rescue strategy, since each problem loan is unique in its own way. Therefore, it is of interest to summarize the techniques used in banking practice.
“The most widely used approaches are: Firstly, in the process of monitoring compliance with the terms of fulfillment of obligations by borrowers, “alarming” signals are systematized into two groups: 1) having signs of an organized (non-financial) and 2) economic (financial) nature. This allows you to develop a reasonable and effective response to them. Secondly, they are developing an action plan that will help improve the quality of the loan provided. Thirdly, they accept (choose) ways to resolve the conflict between the bank and the client on a specific loan.
Problem loans are most often the result of a client’s financial crisis. This crisis may appear suddenly, but it develops gradually. And as it develops, even weaker, but still signs (external and internal) of its onset begin to appear. Employees of the credit department are the bank’s first “line of defense” against possible losses.
Deterioration in credit quality must be detected at an early stage, when the bank still has enough ways to correct the situation. The credit policy must clearly define what the bank will do with problem loans.
Let’s take a closer look at the signs of a “problematic” loan.
Organizational features include:
- - unreasonable delays in receiving financial statements from the borrower. They are especially significant when the loan agreement contains terms requiring quarterly reporting;
- - the borrower's reluctance to provide a detailed explanation of the financial statements. In this case, the loan officer needs to conduct a thorough analysis of the situation and determine whether the borrower is abusing his right to non-disclosure of certain information;
- - sudden changes in the borrower’s business plans, transition to new markets and sales;
- - radical changes in the composition of the management of the borrowing enterprise;
- - unfavorable trends in the development of the market in which the borrower carries out its financial and economic activities;
- - frequent changes in legal address, location, telephone numbers, etc.; long-term lack of contact with the management and employees of the enterprise;
- - requests to defer payments on previously extended loans.
Financial signs of a problematic loan appear when analyzing the borrower’s financial statements and its accounting statements directly in the process of conducting inspections at the borrower’s enterprise (these inspections are carried out by a credit specialist during the validity period of the loan agreement). In the loan repayment mechanism, this stage seems to be the most critical. Economic (financial) signs are manifested in the deterioration of indicators obtained as a result of the analysis of liquidity, solvency, capital structure, turnover and profitability.”
In order to promptly and timely identify such negative aspects, credit officers constantly monitor the loan transaction, comprehensively analyze the economic and financial activities of the borrower, and conduct comprehensive checks of the availability, condition and adequacy of the accepted collateral in strict accordance with the requirements of the bank’s regulatory documents.
Sources of information about such loans and borrowers are: data from an analysis of the borrower’s financial condition, a list of documents for issuing loans and debt servicing, an action plan for servicing the loan agreement; results of on-site inspections, information received from other divisions of the bank informed about the loan portfolio of the head office and branches of the bank, incl. client; publications in the media, etc.
A study of the structure of the balance sheet liability allows us to establish one of the possible reasons for the financial instability of an enterprise, which led to its insolvency and, as a consequence, non-repayment of the loan (non-payment of interest). This reason may be an excessively high share of borrowed funds in sources attracted to finance business activities.
Identification of a trend towards an increase in the share of borrowed funds in the sources of formation of enterprise assets indicates, on the one hand, an increase in the financial instability of the enterprise and an increase in the degree of its financial risks, on the other hand, an active redistribution (in conditions of inflation and failure to fulfill financial obligations on time) of income from creditors to the debtor company.
The assets of the enterprise and their structure are examined both for their use in production and for their liquidity. The most liquid assets of an enterprise include cash in accounts and short-term securities; to hard-to-sell assets - fixed assets and other non-current assets. When analyzing the first section of the balance sheet asset, you should pay attention to what trends in change are manifested in such elements (items) as equipment for installation, unfinished capital investments. Since this part of the assets does not participate in production turnover, under certain conditions an increase in their share may negatively affect the performance of the financial and economic activities of the enterprise.
The turnover rate of an enterprise's current assets is one of the qualitative characteristics of the financial policy pursued: the more effective the chosen strategy, the higher the turnover rate.
However, the growth (absolute and relative) of working capital indicates not only the expansion of production or increased inflation, but also a slowdown in the rate of turnover, which objectively causes the need to increase their mass.
When studying the structure of inventories and costs, it is advisable to focus on identifying trends in changes in such elements of current assets as inventories, work in progress, finished goods and goods. Thus, an increase in inventories and costs can lead to a temporary increase in the value of the current ratio. However, it is necessary to analyze whether this increase is due to the unjustified diversion of assets from production turnover, which will ultimately lead to an increase in accounts payable and a deterioration in the financial condition of the enterprise.
High growth rates of accounts receivable for payments for goods, works and services, and for bills of exchange may indicate that this enterprise is actively using the strategy of commodity loans for consumers of its products. By lending to them, the company actually shares part of its income with them. At the same time, if payments to an enterprise are delayed, it is forced to take out loans to support business activities, increasing its own accounts payable.
If the enterprise is unprofitable, the credit specialist concludes that there is no source of replenishment of own funds for the enterprise to conduct normal business activities. If a profit is made in the course of the enterprise’s economic activities, it is necessary to evaluate the proportions in which the profit is allocated to payments to the budget, contributions to reserve funds, accumulation funds and consumption funds. At the same time, the presence of significant contributions to consumption funds can be considered as one of the characteristics of the strategy chosen by the enterprise in carrying out financial activities. But in case of insolvency of an enterprise, this part of the profit is a potential reserve of its own funds, which, by changing the ratios in the distribution of profit between consumption and accumulation funds, would need to be used to replenish working capital.
When considering a loan that shows signs of “problem”, it is necessary to find out the reasons for their occurrence. It should be taken into account that in some cases these signs may have a different interpretation (different from the problematic one). For example, a change in the client’s business plans may be caused by a change in the general market conditions, which does not allow the borrower to operate profitably in his usual market segment. If a deviation in financial reporting indicators is detected (for example, a decrease in revenue, an increase in accounts payable and receivable), it is necessary to analyze similar financial indicators for previous years. If a change in financial indicators is associated with the seasonal nature of the business, this does not yet indicate a real deterioration in the financial condition of the borrower as a whole.
If a loan is recognized as “problematic,” the bank develops an action plan aimed at repaying the loan.
The global economic crisis has forced governments of different countries to develop anti-crisis programs. “And although each country follows its own path, and different governments make decisions independently of each other, oddly enough, the main “anti-crisis” measures can be attributed to one of three types of economic stimulation.
- 1. Public investment in the creation and renewal of infrastructure. This includes the repair and construction of roads and housing, the arrangement of schools, and the like. It is assumed that the state order will provide manufacturers with demand for their products, and jobs for the population, which will push the economy to emerge from the crisis.
- 2. Stimulating consumer demand through subsidies, tax breaks, lowering the base interest rate, which entails lowering interest rates on loans (which should encourage people to make more purchases) and on bank deposits (which makes keeping money less attractive, and, accordingly, more attractive to spend them). The idea is that the more money people spend on consumption, and the less they save, the more money will return to the economy in the form of profits, wages, etc. This is supposed to push the economy towards growth.
- 3. “Urgent assistance” to financial institutions and some other “selected” corporations, distinguished by their large size and managerial neglect (the latter made them the first victims of the crisis, which actually reached bankruptcy).”
Separately, it is worth noting the measures to bring the macroeconomic parameters of a particular state into compliance with the requirements of international creditors, such as the International Monetary Fund (IMF). But in general, as a rule, the anti-crisis program of a particular country consists of measures of the third group (which depend on the state of state budgets, the persistence of the banking lobby and the political views of the country’s leadership) plus a “cocktail” of measures from the first two main groups of varying intensity. Let us consider in more detail the measures that Kazakhstan will use.
There are many problem areas in the work of the state regulator - the FMSA of the Republic of Kazakhstan. In general, the positive situation in the financial market still has not gone away, the problem of defaults by banks that have suspended debt payments. Memorandums and plans for debt restructuring (more like writing it off) are being signed, but no real progress is yet visible. In general, the liquidity of the banking system has tripled since the beginning of the year. Deposits of individuals in June increased by 44 billion tenge (although all these indicators pale against the backdrop of BTA’s mind-boggling annual loss of one and a half trillion tenge).
In short, despite the external sluggishness of the financial system of the Republic of Kazakhstan, the process of redistribution is bubbling inside it. It inevitably leads to the fact that the role of problem banks will rapidly decrease. Therefore, even if we assume the most pessimistic scenario, it will not become a disaster. Although at the beginning of the year I definitely would have. Things are moving towards the point where the division into “systemically important banks” and “others” is disappearing. If there are no monster banks, then there is no threat of collapse.
President Nursultan Nazarbayev made a political statement that domestic banks can be trusted. “The talk that our banks will go bankrupt, that some foreign bank will come and all the funds will go there is absolutely wrong. I responsibly declare that we will not allow any foreign bank to control the banks of Kazakhstan. We will support them, because the main thing for us is - our own financial system,” the head of state emphasized.
In any case, the specter of bankruptcy of individual banks has now been overshadowed by the problem of managing the entire system. Banks are rightly called a brake on overall economic development. And it’s not just that they cannot provide businesses and the population with affordable loans. It has reached the point where national companies, which are quite successful and rich in money, have their ratings reduced only because, at the request of the government, they store funds in domestic banks.
The world economy is gradually emerging from the crisis. Perhaps next year there will be a recovery in demand for raw materials. This is a good signal for Kazakhstan, whose budget directly depends on world commodity prices. However, international analysts believe that economic recovery will not automatically lead to the revival of the dream of “the No. 1 financial system in the CIS.” “No matter how many petrodollars flow into Kazakhstan, our banks will no longer receive loans from the West on such a scale. Until they improve their management and the government improves its regulation. The Standard & Poors rating agency has lowered the status of the entire banking system of Kazakhstan, transferring it from the eighth risk group to the ninth - penultimate. Our neighbors turned out to be Belarus, Georgia and Azerbaijan.
The revision of the assessment reflects the fundamental, “chronic” nature of the deterioration of the banking system’s performance, as well as the inadequacy of the measures taken to recapitalize banks. These negative factors became apparent against the backdrop of the global financial crisis, starting in August 2007, as well as shortcomings in the regulatory and supervisory system,” Standard & Poors explained its actions.
One conclusion can be drawn - state supervision is not sufficiently perfect. One cannot but agree with this. Now many of the measures taken may no longer be effective. For example, starting next year, 100% provisions will be introduced for loans issued to offshore residents. In other words, if a loan is issued to a company registered in Bermuda-Bahamas, then you need to have a reserve for the full amount of the loan. Such norms could have been envisaged earlier.
Financial regulators around the world have not addressed the crisis. And now everyone is concerned about how to turn the “night watchman” into a vigilant and effective supervisor. In the United States, President Barack Obama proposed creating a single regulator to supervise banks within the Ministry of Finance. The European Union has already decided to create a unified financial supervision system. True, its mechanism is only at the approval stage. If we take an example closer to us, then in Georgia it was decided to merge the National Bank and the Financial Supervision Agency. They were separated just a year ago, but came to the conclusion that a single structure would be better able to cope with the crisis.
A new concept for the financial sector is also being discussed in Kazakhstan. The first - and most resonant - initiative was put forward by the head of the Samruk-Kazyna fund, who proposed a recipe similar to the Georgian one. Such a merger would give greater strength to the regulator, greater weight,” noted the head of the Samruk-Kazyna National Welfare Fund. To resolve systemic risks in the financial market of Kazakhstan, the measures of the supervisory authority are not enough, therefore, it is necessary to unite these structures again, since the National Bank can manage both inflation and the financial stability of the markets simultaneously and consistently, which also implies an effective macroprudential policy of the concept of the development of the financial market of the Republic of Kazakhstan. In his speech during the FitchRatings Annual Conference on Kazakhstan, D. Watson noted that over the past 5 years there has been an improvement in the funding structure of banks, the burden of external debts of Kazakh banks and debt obligations in general is gradually decreasing. At the same time, the deposit base is growing and the liquidity of banks is strengthening.
According to D. Watson, in most banks the recovery in lending growth is slow.
Non-performing loan ratios are likely to remain high, according to the forecast. It is noted that, despite some progress, examples of actual resolution of the situation with problem loans are still rare. Restructured loans, in fact, often have an indefinite maturity. Banks are beginning to take a tougher approach to some problem borrowers as banks strengthen their regulatory capital.
“As of April 1, 2013, in the structure of the banks’ loan portfolio, the share of standard loans was 26.1%, doubtful - 51.5%, bad loans - 22.4%. The amount of loans classified as doubtful loans of category 5 and bad loans (including provisions for homogeneous loans) amounted to 3 trillion. 502 billion 200 million tenge or 33.1% of the total loan portfolio, the decrease in this indicator for March amounted to 51 billion 800 million tenge or 1.5%"
The launch of the troubled assets fund (PAF) is of great importance for creating precedents for the market turnover of problem loans in the Kazakh market, international analysts believe. This may spur the interest of private investors in this market segment. For example, in China, it is private investors who are actively buying problem loans from banks, especially in the segment of medium and small businesses.
According to the law on risk minimization, FPC has the right to buy and sell shares and (or) participation interests in the authorized capital of legal entities, the rights of claim to which were acquired from banks. In addition, the fund has the right to lease the property of debtor companies or use other forms of paid temporary use of such property. The fund can also sell collateral if it is impossible to restore the solvency of the enterprise. Measures to deal with a viable debtor include “soft” debt restructuring, changing the repayment schedule, reducing rates, etc.
But “deep” restructuring implies entry into the debtor’s capital. If we remember that FPC, according to this law, has the right to purchase trust management services, we can assume that even if it does not manage the enterprise, it will be able to send its representatives to the management bodies of the debtor company. Let us recall that earlier representatives of the National Bank announced that an infrastructure would be created to manage the purchased assets, including for the assessment and sale of collateral that was transferred to the balance sheet of the FPC, as well as for the management of equity shares.
“People's Bank has been actively working with the Problem Loan Fund since May 2012. Over the past few years, our bank and the fund have worked out the main terms of cooperation and have begun the final stage of transferring the “first-born” to the fund as part of the so-called “pilot project,” notes Serikzhan Samratov, director of the department for working with problem loans of Halyk Bank of Kazakhstan JSC. . The final decision on transferring loans to the fund based on the assessment made and the discount to the debt proposed by it is made by the bank, which is an important factor. If the Problem Loan Fund is successful and the ultimate goal of creating the fund is achieved, the balance sheets of Kazakhstani second-tier banks will be significantly “cleared” of problem assets, and this will allow banks to focus on their core activity - working with businesses.”
Every bank has many clients who have not repaid their loans. Dealing with problem loans is an important component of banking practice. The reliability and reputation of the bank will depend only on the correctly chosen method for each individual situation.
Solving problems with non-payment of a loan occurs according to the following scenario. First, the loan agreement is checked for the presence of a provision that gives the bank the opportunity to check the financial statements directly at the enterprise, as well as to terminate the agreement and collect the collateral if the client is suspected of insolvency. Next, the credit specialist of the bank who issued the loan uses his powers. He not only develops ways to improve the quality of the loan provided, but also adopts ways to resolve the conflict between the bank and the client.
A loan is considered problematic if the following signs are present:
- unreasonable delays and lack of financial reporting from the borrower, especially when the agreement contains a clause that specifies the need to provide quarterly reporting;
- the borrower's reluctance to provide financial statements;
- change in direction of activity;
- long absence of contact with the borrower.
- reduction in loan turnover;
- misuse of credit;
- increase in credit debt;
- appearance of negative information about the borrower;
- reduction in the value of collateral;
- deterioration in the financial condition of the guarantor.
Conflict resolution
Initially, the bank revises the terms of the loan agreement, changes the interest rate and payment amount. The reliability of his profit and the fact that he is a regular customer of the bank can be in favor of the borrower. The second step may be to change the status of the debt from overdue to current. By this, the bank understands the borrower’s temporary difficulties and does not want to interrupt profitable cooperation.A more common method is to terminate the contract with a partial sale of the borrower's assets to repay the debt. The client voluntarily decides to sell assets, since the basis of his relationship with the bank is the collateral.
The most radical way is considered to be the sale of collateral. Once the debt is repaid, the relationship between the client and the bank is completely interrupted.
Before the bank takes any action, it must contact its debtor in writing. If he does not respond to the written notification, the bank has the right to contact the guarantor.
To ensure the maximum level of profitability of the loan portfolio, banks must constantly monitor its condition by constantly monitoring signals indicating the occurrence of possible complications with the repayment of interest or debt on the loan from borrowers on time; properly organized work on credit monitoring makes it possible to timely to detect signals of problems with loan repayment and take appropriate measures aimed at minimizing the bank’s losses. But regardless of the level of organization of credit monitoring and the effectiveness of loan portfolio management methods, all banks in one way or another face the problem of non-repayment of loans. The dynamics of problem loans (overdue and doubtful) in the banking system during 2000-2006 is presented in Fig. 10. 10.1.
The indicators shown in Fig. 101 indicate that the frequency of problem loans in the loan portfolio of banks is
Fig 101 . Dynamics of problem loans (overdue and doubtful) in the banking system for 2000-2006(according to Vestnik. NBU data as of January 1, respectively)
pitchforks: as of January 1, 2003 - 4.5% of the loan portfolio, as of January 1, 2004 - 3.4%, as of January 1, 2005 - 3.2%, as of January 1, 2006 - 2.2%. There are such problem loans in the loan portfolio, which allows us to conclude that the quality of the loan portfolio in the banking system has generally improved.
To improve the bank's work in managing the loan portfolio in order to prevent an increase in problem debt on loans, it is necessary first of all to consider the essence of problem loans and identify the factors leading to its occurrence.
The loan falls under the “problem” category and requires the adoption of measures aimed at minimizing the bank’s losses in the event of the borrower’s failure to repay interest and debt on the loan on time.
Problem loans are loans for which one or more payments have not been made on time, the liquidity and market value of the collateral have significantly decreased, or circumstances have arisen that make the borrower’s fulfillment of his obligations doubtful.
Problem loans in most cases do not arise suddenly. Therefore, the primary task for banks is to identify signals indicating the occurrence of possible problems with the repayment of debt on the part of the borrower. In our opinion, signals indicating the occurrence of possible complications with the borrower’s repayment of loan debt can be presented as follows (Figure 1020.2).
Banking practice shows that difficulties with loan repayment are usually caused by a deterioration in the financial condition of the borrower, which leads to an increase in the risk level of the credit transaction. Therefore, identifying signals of deterioration in the borrower’s financial condition (Figure 103) and identifying them at an early stage will allow the bank to take timely measures aimed at minimizing the bank’s losses from outstanding loans.
Information about the deterioration of the borrower's financial condition can be obtained from financial reports, contacts with the borrower, internal and external sources of information. The greatest value is information obtained from external sources, since it makes it possible to foresee negative developments of events.
If the bank does not receive the amount of interest or the loan amount within the time period established by the agreement, an employee of the bank’s credit department must inform management about the presence and problem of repaying the debt on the loan, its nature and transfer the loan to the “Special control” category. In this case, the debt that is not repaid within the established period the contract period is taken into account in the bank as overdue.
Fig 102 . Signals of a problem loan
Fig 103 . Signals of deterioration in the borrower’s financial condition
The bank may keep a loan in the "Special control" status for a period determined by internal regulations (usually 10 days). During this time, the credit department employee must determine other reasons for the borrower’s non-payment of the loan (interest or principal) and develop appropriate measures aimed at minimizing the bank’s losses. Can be used to find out the reasons for non-payment. Tanivikoristani:
Requests and letters to the borrower asking to explain the reasons for the late payment of the loan;
On-site verification of the borrower;
If a loan becomes overdue, the risk increases that the borrower will not be able to repay the loan, causing the bank to incur losses. Under such circumstances, the bank may downgrade the category of the credit transaction and, as a result, increase the amount of the reserve to cover possible losses from the credit transaction. For late loan payments, the bank increases the interest rate and charges the borrower a penalty in the amount stipulated in the loan agreement.
The occurrence of problem debt on a loan, as a rule, is caused by various factors that may be associated with the activities of the bank, with the activities of the borrower or with macroeconomic factors (external factors) (Fig. 1044).
Since it is impossible to completely avoid losses on credit transactions, they are sometimes considered as a cost of doing banking business. Consequently, the management of problem loans aims to minimize losses in credit transactions through the development and implementation of appropriate measures aimed at protecting the interests of the bank. These measures must be taken before the situation gets out of control and the losses become irreversible; however, it should be taken into account that the bank’s losses will not be limited only to the amount of uncollected interest and debt on the loan (Fig. 10510.5).
The losses that the bank incurs if the borrower fails to fulfill its obligations are significantly greater than financial, and will primarily affect its reputation. Such losses in size can far outweigh direct losses from an outstanding loan, so the cost of implementing an effective credit policy and proper organization of credit work in a bank, including qualified
Fig 105 . Possible bank losses if the borrower fails to fulfill loan obligations
mandu from credit analysis and monitoring, of course, significantly lower the costs of managing problem loans and losses that could have been avoided
