PrivatBank begins a mass restructuring of debts of its clients – individuals and small business. The restructuring program will start on November 26, it will work in the next 6-8 months and will cover almost 300 thousand loan agreements with the general debt to the bank of 48.5 billion UAH, formed prior to the nationalization of PrivatBank, that is, before 19.12.2016.
In most cases, it will be about small but mass loans, received through installments, so-called “quick” and “cash” loans, taken from credit cards but not refunded. That is, the restructuring will affect the mass banking products used by most clients. And unlike the corporate borrowers of the bank, ordinary Ukrainians are in fact quite responsible – from the mentioned 48.5 billion debt, the balance sheet debt (that is, the actual body of loans and their interest) is only 12.3 billion UAH. The remaining 36.2 billion UAH is an off-balance sheet debt consisting of additional interest, fines, penalties and commissions of the bank. That is all that the bank has charged to the client after the problems with servicing of loans have arisen.
Bankers themselves admit that such an excessive part of off-balance sheet debts is their fault because too tough fines and penalties are sometimes not justified and instead of stimulating a person to pay a loan, on the contrary, they deter it from cooperation with the bank. And the requirements for the use of mass credit products are not always fully explained to clients in the offices, which in the end makes people think that the bank decided to deceive them, earn extra money, and wrongly charge additional interest. As a result, it also worsens the indicators of servicing loans by citizens.
In order to make a fresh start with the clients, the bank has to get rid of already existing overdue debts that significantly damage financial indicators. Restructuring from PrivatBank is just the first sign. The problem is relevant for bigger financial institutions that are active in the retail segment. However, for PrivatBank, due to the extent, the solution to this problem is more urgent. As of 1.09.2018, the portfolio of toxic personal loans in the bank has already exceeded 80 billion UAH (60 billion UAH of which – off-balance sheet debt). Debts not only formed after the nationalization of the bank but also due to the fact that loans from residents of the occupied and annexed territories, agreements with signs of fraud and bankruptcy, loans from non-residents and the deceased were not restructured. Unfortunately, the problem of these commitments is unlikely to be solved in the near future.
But for the rest of the customers, the bank has prepared a lot of restructuring proposals. In particular, the bank is ready to “forgive” all fines and penalties to the borrowers with debts without collateral, if a person agrees to return the body of the loan and interest on it in one payment.
Example 1: The total amount of customer’s debt is 30,759 UAH (body – 11,639 UAH, interest – 2012 UAH, fine – 15527 UAH, penalty – 1581 UAH).
The Bank will offer the client several options for the restructuring: one payment, within 3 or 6 months, during a year or two.
The most profitable is the offer of repayment in one payment, but even if the debt is repaid within 3 or 6 months, the amount of “forgiveness”, in our case 17751 UAH, will not decrease – penalties and fines will not have to be paid by the client. However, if a person chooses “longer” options for restructuring, the amount of forgiveness will start to decrease (up to 14491 UAH for the annual program and up to 10864 for two years), and the debt itself – to grow, because under the terms of restructuring, the clients will be offered an interest rate from 13 to 16% annual in UAH and 0.01% annual in US dollars and euros.
This example already shows that it is clear that the bank consciously motivates clients to resolve their debt issues as quickly as possible so as not to delay this issue. Motivation is clear, even if one agrees to restructure, in a year or two one’s financial situation may worsen and he or she may again stop paying the debt. Unfortunately, the general economic situation, despite the declared stabilization, does not guarantee the bank stable client payments within a year or two, so the bank does its best to ensure, that during the next six months most of the restructuring programs will not just begin, but also come to the end.
However, the bank offers somewhat better restructuring conditions to small and medium-sized business, than to ordinary citizens, perhaps because of the fact, that some of the loans to small business have collateral, and because of the fact, that Ukrainian banks, in general, tend to trust entrepreneurs more, than individuals, even if it’s a microbusiness.
Example 2: for a small business, the total debt of which is almost 500 thousand UAH (the body of the loan – 62500 UAH, interest – 162238 UAH, commission – 28437 UAH, fine – 244032 UAH), the bank will offer to return only the body of the loan – 62500 UAH, having forgiven all the interest, commission and fines.
Once again, this most advantageous offer will only work if the debtor agrees to pay it back to the bank in one payment and the longer the term of the restructuring is, the smaller the amount of forgiveness and the higher obligatory payments of the clients. In particular, in the case of an annual restructuring program, the amount of the repayment will be 127707 UAH, and the amount of forgiveness – 369500 UAH. And if the client decides to return the debt within two years, the amount of forgiveness will be 326021 UAH, and the client will have to return 171176 UAH.
For the clients, who took loans in foreign currency, it is almost 56% of all retail loans, the offers will be somewhat different, because of the currency risks of the restructuring program.
Example 3: the debt of an entrepreneur without collateral is 15,615 USD (the loan body is 2,851 $, the interest is 12764 $). If the client agrees to return the debt in one payment, the amount of his payment will be 1996 $, that is, less than the existing debt on the body of the loan. The amount of forgiveness will be 13619 $.
But taking into account currency risks, with a longer term of restructuring, the conditions are not so attractive. If the client agrees to restructure this debt for six months, he will have to return the bank 2566 $, and the amount of forgiveness will be 13049 $. If the client chooses a two-year restructuring plan, the amount of forgiveness will decrease to 12,126 $, and the client will have to return the bank almost 3,500 $, that is, not only the body of the loan but also a part of the interest.
It is also worth remembering, that if a bank “forgives” a part of the debt (as in our third example) to the client in the course of the restructuring, the client will have to pay the tax on the profits received as a result of this forgiveness. It is clear, that this profit is elusive, and the person himself has never held these funds in his hands, but in accordance with the legislation, he has to pay the taxes. But if it comes to forgiveness of any commissions, interest, penalties, or other charges to the body of the loan, then it is not necessary to pay taxes.
In total, PrivatBank has prepared 47 options for restructuring and each borrower will be offered several products for choice. But the general logic is that the “shorter” the option offered by the bank, the more it is beneficial to the borrower. And if clients for objective reasons cannot deal even with a half-year restructuring program, then the best way out for them will probably be to refuse the restructuring at all.
Of course, loans have to be returned, but often, especially during the crisis, people become debtors as their financial capabilities are fundamentally changing. For example, they lose their jobs, they have to spend all their money on treatment, or they have to keep an additional number of unemployed (for example, relatives – internally displaced persons). If the financial situation of the family after that remains limited, long-term restructuring programs will increase the debt burden on the family budget, once again having a negative impact on the level of family income. At the same time, small borrowers are not in danger in case of refusal of loans’ maintenance. Yes, they automatically lose the opportunity to get another loan in the bank, which they already owe money, but another bank will likely give them a loan. It happens because only people with a debt of 100 minimum wages (currently 373000 UAH) are added to the general register of unscrupulous borrowers. The majority of individuals-borrowers have much smaller debt. The bank will probably try to get the debt through the courts, but once again it will be interested primarily in substantial debts, especially when it comes to PrivatBank. Currently 78% of all financial claims in the country – are the claims of PrivatBank, on which the bank spends a lot of time and money. Therefore, first of all, it tries to get bigger debts or collaterals, not worrying about personal loans of 5-10 thousand.
Since now, even before the restructuring begins, PrivatBank realizes that it does not expect to return more than 20% of its debts in its course. Actually, this is not the goal. For the bank, further fines and penalties’ write-offs will be more significant, which at present exceed the customer’s debt and substantially damage the financial indicators of the bank. In addition, in the course of the restructuring, the bank wants to transform all foreign currency loans in UAH in order to reduce the risks associated with the devaluation of the hryvnia. That is, the financial institution wants not to return its money, but to set the system of personal loans, clearing this portfolio from excessive liabilities and unnecessary risks.
All debts, which PrivatBank will not be able to return during the restructuring, will most likely be written off. Of course, debtors who “hold back” before this write-off will forever remain in the bank’s database as unscrupulous borrowers and will not be able to rely on its credit services for a long time, but they will no longer have to repay their debts. At present, the bank says, that the final decision on the cancellation will be based only on the results of the restructuring, that is, six months later, and only on condition, that such a mass forgiveness will be met by the Ministry of Finance of Ukraine, that is, the main shareholder of PrivatBank. But it is unlikely, that the Ministry of Finance will object to a step, that will significantly improve the financial reporting of the state bank, without causing any damage to it, since all loans, including long overdue, in PrivatBank, are 100% reserved and such mass write-off is not only possible but also “painless” for the financial institution.
By Valentyna Yushchenko