Economist: "Smoke Screen" Hides Serious Problems of Banks in Belarus

Two main "pain points" of banking assets are named.

A smokescreen has formed around the banking system, inside which it is becoming increasingly difficult to understand what is happening in reality.

Dzmitry Kruk, Senior Researcher at the BEROC Center for Economic Research, shared this opinion in the analytical brief “Financial Sector: Statistics, Facts, Problems, and Prospects.”

Official "image"

He states that if you look at the official statistics in the second half of 2020 and early 2021, the situation in the financial sector should be called good or at least satisfactory. The amount of non-performing assets has remained practically unchanged since April last year. Capital adequacy indicators, the ratio of economic and available capital indicate complete protection from unforeseen risks. And the situation with the state of banks' liquidity is acceptable.

As Dzmitry Kruk notes, if we are content with these data, we can conclude that everything is fine in our credit and financial system. But this is in stark contrast to the many observable facts and evidence, as well as statistics on other spheres of the economy.

Destabilizing factors

One of the most striking examples that show that not everything is going well is the financial situation of the corporate sector, especially state-owned enterprises, which has significantly weakened over the past year. Against the background of chronically high debt burden and low security of their own working capital, many of them are experiencing serious difficulties in fulfilling their obligations. Every day, the number of regulations on the basis of which various tools of support from the authorities are used increases. All this was bound to affect the quality of the bank's assets.

The economist recalls that last year the solvency of firms and the quality of debts were affected by another destabilizing factor - the depreciation of the ruble. However, in the indicators characterizing the credit risk of banks, one can observe only a faint "trace" of this trend.

Additionally, there was a serious blow for banks to the state of liquidity, especially foreign exchange, in the form of an outflow of funds from deposits of individuals in the equivalent of almost $ 2 billion, including $ 1.7 billion in foreign currency (since the beginning of 2020).

Changing counts

“The question arises: what is the reason for the discrepancy between the “big image” resulting from banking statistics and the available evidence from other areas? The answer to this question is related to the methodology for calculating the corresponding statistical indicators,” Dzmitry Kruk writes.

He explains that in 2020, procedural concessions were introduced for banks when calculating several key indicators. Thanks to them, banks were able to ensure compliance with regulatory requirements for these indicators without sudden gestures in the management of their assets and liabilities.

The situation is similar to the assessment of the liquidity coverage indicator. When calculating it, banks can take into account the irrevocable credit line of the National Bank - that is, funds that they can potentially receive, but which, de facto, they may not have.

Reality correction

According to Dzmitry Kruk, such procedural indulgences significantly affect what we see in statistics. If they operated only for a short period, then one could treat them as technical. Like, soon everything will return to normal, and we will see an adequate picture. But, turning into new normality, such indulgences create a problem on a larger scale than the one they are intended to solve.

“Statistical indicators, which are already imperfect, are less and less representative of the picture they are intended to display.

Let me give you an analogy. Imagine that during the period of COVID, a norm is established that people with hypertension are no longer considered sick. Well, or in case of some kind of force majeure, a flat tire in a car is no longer considered a flat tire, and burned-out headlights are allowed to be considered working. You can find a justification for this: now is not the time to pay attention to such little things and bear the costs associated with their elimination. But a person can still die from hypertension, and a flat tire and inoperative headlights can cause an accident!

As a result of the use of procedural indulgences, today a smokescreen has formed around the banking system, inside which it is becoming increasingly difficult to understand what is happening in reality. This is becoming another factor in the weakening of confidence in financial intermediation in the country, while the banking system, according to economic logic, should be a bulwark of such trust,” Dmitry Kruk notes.

Reality

As the economist notes, in 2019 and early 2020, data from international rating agencies (more recent data are not yet available) showed: the share of de facto problem assets in systemically important Belarusian banks is high and is mainly in the range of 8-14%. This proportion of bad assets is cause for concern.

Representatives of the National Bank announced that the volume of potentially problematic debts of the public sector is estimated at about 14% of GDP. This is about 21 billion Belarusian rubles or about 22% of the corporate sector credit debt. Surely a significant part of this amount falls on the debts of state-owned enterprises not to banks but the budget. However, banks are the ultimate holder of a part of the public sector debt, which is registered in the budget, and these problems undoubtedly affect them.

If we talk about the state of liquidity, then there are also many signs that the situation is far from cloudless.

Finally, in recent months, inconsistencies have arisen in various statistics on the operations of the National Bank with banks. This suggests that in addition to the relevant transactions, information about which is publicly disclosed, some other mechanisms for providing liquidity to banks are involved. If this assumption is correct, then such mechanisms are most likely needed to stabilize the liquidity of individual banks.

“To summarize the above, I will undertake to assert that the situation in the banking system is tense. The pain points are the same: asset quality and liquidity. But how tense it is - the smokescreen hides from us,” Dzmitry Kruk states.