Banks of Armenia are successfully managing their risks

Interview of Chairman of the Central Bank of Armenia Artur Javadyan with ArmInfo news agency.

Mr Javadyan, the IMF representative to Armenia has recently said that the Central Bank of Armenia (CBA) needs to give up the currency corridor as the exchange rate has exceeded the 360-380 AMD/1USD fixed in March, and to set the Armenian dram free. Do you think the IMF proposal is grounded?
First of all, I’d like to recall that the CBA conducted no policy of currency corridor. As regards the 360-380 AMD/1USD exchange rate, this is the assessment of the balanced level of the exchange rate for 2009, which was pointed out by specialists of both IMF and CBA. As regards the currency policy conducted by the CBA, there may not be two opinions here. The currency policy being currently conducted completely meets our previous statements. I will only stress that IMF specialists have officially stated for many times that they agree with the currency policy conducted by the CBA.

The preliminary exchange rate in the budget for 2010 is fixed at 376 AMD/1USD. Nevertheless, many experts think that the USD exchange rate will cross the 400 AMD threshold in early 2010 already. What is the CBA forecast for 2010, if not by figures, then by trend at least?

Let me remind that the Central Bank gives no forecast of the exchange rate in domestic market. Therefore, I’ll abstain from any forecasts of Armenian dram for 2010 this time as well.

How did the commercial banks perceive the CBA decision on restriction of the currency position at 7% level? Is the CBA going to take stricter steps to prevent speculative impacts on the currency market by some participants?

It’s no secret that under the crisis conditions in case of slowdown of the growth rates of provision of crediting, the idle funds (cash funds, nostro-accounts, etc.) considerably increase in the banks. This may lead to speculative phenomena in the currency market. The CBA Board decision on restriction of currency positions in banks aimed to restrain possible speculative phenomena in the currency market, as well as currency risks in the banks. Nevertheless, it should be noted that before this decision was taken the currency positions of most of the Armenian commercial banks had been in the limits fixed by the CBA Board (7%). In this respect, the decision taken caused no serious problems among the banks and had no negative responses. At present the Central Bank envisages no further stiffening, however, the speculative currency phenomena, in addition to other problems, are constantly in the focus of the CBA attention, and the latter will interfere in the situation within the limits of its power if necessary.

There is an opinion that the financial crisis may cause decline in the number of players in the banking market: mergers and take-overs. Won’t these possible developments create a situation in which the competitive environment in the market will suffer from the decline in the number of players? May one specify the optimal number of banks for such a country as Armenia?

The Central Bank has received no official information concerning amalgamation of the acting banks. However, amalgamation is not ruled out in the near future as the topic on possible amalgamations is actively being discussed outside the Central Bank. The competition among banks will not decrease as a result of amalgamation of the banks, consequently, their enlargement. Moreover, enlargement of big banks may even intensify the competition. The Central Bank has conducted no assessment on the optimal number of banks, therefore the CBA policy, being liberal from the very beginning, creates equal conditions for all investors entering the market, and the CBA is not inclined to restrict the entry of potential investors to the banking market.

How do you assess the activity of commercial banks in the sphere of risk management against the background of the crisis?

The risk management is on quite a high level at present, and the fact that in the conditions of crisis the bank risks are within the limits of management, is evidence of this. At present the level of adequacy of the capital in the Armenian banking system is 28,4%. This exceeds the minimally admissible level 12%. The normative indices of the current and overall liquidity are: 34,6% and 143,6% respectively against the floor limits 15% and 60%. The open foreign currency position is just 0,4% out of the capital. Despite a little worsening of the quality of credits over the current year, in particular, reduction of the share of "standard" credits in the credit portfolio from 95,6% to 92% since the beginning of 2009, this index is inflexible and higher than in the banking systems of other countries. According to our assessment, even in case of the stress scenarios no one of the Armenian banks will come across the problem of liquidation and will not suffer of the risk of non-solvency. To note, introduction of the principles of corporative management in the banks in 2005-2006 much contributed to rising of the risk management (according to the amendments to the “Law on banks and banking activity”). Nevertheless, the banks still have to improve the system of risk management.

Over the recent period the share of credits provided to small and medium business and agriculture has increased in the structure of credit portfolio of the banks. Don’t you think that this one-sidedness may reduce the degree of portfolio diversification, and, as a consequence, raise the level of risks?

In 2009 the banks directed the credit resources mostly to the sphere of small and medium business and agriculture. Under the financial and economic crisis conditions, development of these spheres is of much significance from the viewpoint of activation and growth of economy. In its turn, this will contribute to further development of the banking system. At the same time, crediting of small and medium business and agriculture in 2009 is not capable to raise the rate of the credit portfolio concentration. On the contrary, the rate of concentration in the banks has considerably fallen as before 2009 the biggest share (27%) in the credit portfolio of the banks fell on consumer credits, and by the end of III qt 2009 the share of consumer credits made up 20%. The market concentration index of Gerfindal-Girshman (which ranges from 0 to 1, the closer to 0, the lower the concentration rate) for the credit portfolio of the banking system in early 2009 was 0.165, and in late III qt 2009 – 0.142. This demonstrates the high level of portfolio diversity.

The terms of provision of the Russian stabilization loan are much more attractive for the credit market participants than those of the loan provided by the World Bank. Isn’t the Central Bank going to revise with WB the terms on this credit, which is actually “non-working”?

At present the terms of crediting within the frames of the Russian loan for economy stabilization and the WB loan for small and medium enterprises (SME) do not differ much. To note, as a result of work held with the World Bank, the CBA has already introduced a number of important improvements in SME crediting programme, particularly, the interest rate has been equated with the Russian stabilization loan rate, a number of requirements have been liberalized (for instance, the requirements to borrowers in case of purchase out of proceeds of credit). Under the WB programme on SME, 8 commercial banks have been selected, 6 of them have already placed a total of 2.5 bln AMD.

What is the reason of the CBA possible decision on stage-by-stage raising of the minimal threshold of authorized capital of credit companies from the present 150 mln AMD to 1 bln AMD before 2012?

The CBA Board has taken no decision on stage-by-stage raising of the minimal threshold of authorized capital of credit companies from the present 150 mln AMD to 1 bln AMD at present. The issue is currently being discussed with CBA specialists and Union of Credit Companies of Armenia.

Some standstill is observed in the capital market today. What measures will and should be taken to “enliven” the market?

The capital market was activated in 2007 when a number of issuers came out with public offering of their bonded debts. Later this activation declined due to the financial crisis as capital markets are very sensitive to such kind of phenomena. Despite this, in late 2008 and over 2009 Araratbank and Artsakh HPP organized initial public offering (IPO) of their shares, which may be considered a brave step in the conditions of crisis. To activate the capital market, the CBA is cooperating with NASDAQ OMX and implements joint programmes on improving infrastructure, creating new financial tools, raising the population’s financial awareness and raising the quality of services provided by financial institutes. In addition, we initiated tax remissions that have already come into force for the companies listed at the stock exchange. A number of companies with state participation in capital will shortly be privatized via the stock exchange. I think that alongside with the decrease of crisis phenomena, these measures will contribute to further activation of the capital market in the country.

Thank you for the interview