Proper economic and legal conditions should be ensured for normal operation of banks

Mr. Ghukasyan, most bankers of the country connect certain hopes with your appointment as chairman of the Union of Banks of Armenia (UBA). What problems will the UBA shortly lobby?

Over the years of its functioning the Union of Banks of Armenia has accurately been observing its main task on protection of interests of its member banks, which expect more active work from the UBA; moreover, in 2010 the Union will become 15 years old. I think over these years the UBA has showed its worth in this field. The goal of the Union is representing the corporate interests of the banks within the frames of changes in the market. Certainly, problems are constantly arising and they are solved depending on the realities of the specific period. Therefore, sometimes decisions were made taking into account the so-called “golden mean” principle.

Today the serious economic downturn and deceleration of the market activation rates are no secret for anybody. Under these conditions the problems that were formerly obscure are getting obvious now. In particular, the opportunities of legislative regulation are becoming more acute as these phenomena have first and foremost affected the banks. If in the leading economies of the world the crisis affected the banking system first, in Armenia it was conditioned by reduction in export volumes and inflow of money. Under these conditions the expectations of the banks have become more intense. For instance, Armenia has had a task to register the movable property for several years, however, it has become more acute now. If the credit recovery rate was high earlier, now it is inadmissibly low because of certain reasons. This creates problems with search and implementation of the pledge. This problem is connected not only with banks, but also other institutions operating in the country. The credit policy of the banks mostly depends on creation of a single database of moveable property. After all, one should not forget that banks are only financial mediators, and proper economic and legal conditions should be ensured for their normal operation.

In addition, there are certain legislative contradictions. In particular, together with the Central Bank and the State Revenue Committee under the Armenian government, we are working at liquidation of the problems with alienation of unscrupulous debtors’ property. Our position is distinct. We have a Civil Code that provides banks as creditors with a right to alienate proceeds from the property of unscrupulous debtors. However, the tax legislation contains two articles hindering this procedure. But if we want to form a competitive banking system and continue raising investments from international financial structures, we should liquidate such uncertainties. Several meetings have already been held to solve this problem, and at present we are expecting to receive a positive reply. We also think that Armenia faces the necessity to create a specialized arbitration which effectively works in various countries of the world.

Mr.Ghukasyan, though some GDP growth is forecasted in 2010, how will this be reflected on the banking system?

An inverse process will start in 2010. Today it is hard to say what stage the crisis is at. And this is natural as economy is a complicated system full of uncertainties. One thing is clear: even under the conditions of the uncertainties formed in the first and second quarters of 2009, the banking system found an opportunity to increase the capital due to its shareholder’s funds, and as a result, the credit portfolio of the banks grew by 10% in the third quarter. This proves that the shareholders believe in the future of banks.

I am sure that the indices of IV qt 2009 are better. In 2010 I do not expect any abrupt improvement of the situation, but there will be no worsening either. In this respect, the psychological barrier is already overcome. In III qt the banking system demonstrated growth in all indices. Only the profit is less than in 2008, but this is natural as in case of economic downturn the banking system as reflection of economy cannot be highly profitable. The most important thing is that the system is stable and provided with resources.

In III qt 2009 the banking system of Armenia had considerable growth in assets, and provision of crediting rose from 60% to 65%, first and foremost, thanks to the governmental policy on attracting foreign stabilization resources. However, the crisis has changed the structure of revenues and expenditures of the banks for the worse; in III qt the growth rates of expenditures considerably exceeded those of revenues. The main reason is the growth of delays. What do you think of that?

The level of capital adequacy plays a significant role for the banking activity. At present banks manage to carry out their obligations on ensuring transparent and sufficient reserving. This does not mean that all these funds were written off as losses In case of reserving, taking into account the formed situation, we accrue relevant reserves that may be transformed into profit if the work is done properly. The important thing is that the banks are so strong that can form these reserves, and we should be proud of this.

As regards the programmes initiated by the government, they have replaced the resources that banks were raising from other private international structures. Taking into account that there is no inflow of these funds to Armenia at present, the government’s decision to provide economic entities with resources via banks is absolutely correct. As professional structures, the banks were able to assume the risks connected with these funds. This is a positive step. As regards the increase in interest expenditures, this is conditioned by the fact that banks deliberately bear costs to ensure more convenient conditions for their clients as banks are long-term economic entities and ready to bear additional costs. The banks could have decreased the deposit rates today as the demand for credit is not big. But this would cause outflow of certain funds from the banking system, and this would not do the citizens good.

How would you comment on the superliquidity of the banks?

The bank liquidity is currently in a very good state. The banks want to have additional reserves to ensure their flexibility as they deal with the population's money. Of course, the factor of shrinkage of the credit market also affected the liquidity growth. The banks my advance proposals, however, the demand for investments is not the same as in 2008. This naturally leads to reduction of crediting, and the uncertainty spoken about so much leads to other understanding of the risk.

Now some changes are being observed in the structure of assets of the Armenian banking system. Since 2003 the growth of yield ensured by the banking system has been by 60% connected with retail, particularly, credit retail. At present this is being replaced by crediting of small and medium-sized enterprises (SME) at the expense of cheap resources provided by the government. The banks implement 95% of crediting at the expense of these resources, whereas retail was credited, first and foremost, with their own resources. Won’t the given reorganization of the assets be a painful process? At the same time, thanks to foreign resources, the banks have started seriously reducing the rates. Can this positive process be called “a fair deviation” from the macroeconomic viewpoint taking into account the existing risks?

Over the past 5-6 pre-crisis years, development of the retail banking has caused big demand as earlier nobody was engaged in this sphere, except one or two banks. As a result of the crisis, the banks naturally started conducting restrained policy. In retail the borrower is an individual. Today, even if some reduction in the citizens’ revenues is expected, the banks should be careful. As regards the change of the crediting structure, this is the Armenian government’s policy – to create stably operating SMEs. The citizens’ revenues will rise and retail will work again via growth of this sphere.

Concerning the interest rates, I think they are not reduced artificially, but adequate to the current reality in our economy. It would be worse if these funds were provided at even lower rates as this would introduce deviations in the system. The current marginal difference of rates between the own and attracted funds is 1-2%. I consider it a normal and quite acceptable margin.

In this context, one can only welcome the fact that having access to cheap “governmental” resources, the banks continue accepting deposits from the population. As you know, their growth has exceeded 35% over a year. May the reason be the fact that being in an uncertain situation, the population and business did not invest their funds in business and preferred giving them to banks as deposits?

This is not ruled out, nevertheless, this is direct evidence of high confidence of people and business in the banking system of the country. And it is the most important thing as proves that our banks are guided not by the short-term, but long-term plans. It is clear that the population expects bigger growth of crediting by banks and that rising of financial mediation will lead to considerable activation of economy. Let’s understand that irrelevant or abrupt rising of mediation will cause bubbles. The banking system of Armenia has always been criticized for the fact that its crediting volumes were small, mediation level was low, and there was no diversity of tools. The system was even blamed for being “orthodox” and out-of-date, but the experience has shown that this meets the state of our economy.

To increase crediting, we should understand and determine what hinders development of business environment and remove these barriers no matter how hard it is to do. For development of retail crediting we should find out how much transparent our personal revenues are and whether they are fixed in the relevant documents. These are the requirements of the time. If we respond to them adequately, we’ll move ahead, otherwise we’ll continue languishing in poverty.

I can’t but agree to you. Tell me, please, as an experienced banker having worked in the system of one of the leading banking holdings of the world and in various countries, do you think the risk management system in the banks meets our risks?

Risk management implies a number of legal acts regulating the internal activity of the bank. The next level is the procedures, and third one – people carrying out these procedures.

I assure you, the current banking system of Armenia has an adequate risk management system which immediately responds to the market signals. Probably, we have no complicated systems based on specialized and very expensive computer programmes that are applied in other countries, but this is not so much relevant for our economy. The point is that today not all economic entities are able to submit reasonable economic projects with correct forecasts of financial flows to the banks. This creates uncertainty for the bank, increases expenditures, and reduces crediting efficiency. Both banking system and bases of the market economy are already formed in Armenia, now we need to raise them to a qualitatively new level. For this purpose the economic entities are to direct investments to formation of normal principles of management, as well as to provide transparent and adequate financial accounting.

The USAID has recently published a report demonstrating that the corporate management level in many banks is far from being admissible, to put it mildly. Surveys and public opinion polls have shown that the formal side of corporate management does not meet its content.

As it is known, the key principle of corporate management at any enterprise is division of obligations of the shareholders and management. If we say that competition in the country's economy is not at a sufficient level, this means that there is no demand for formation of such a link. Relevant requirements will appear in case of stiffer competition among the economic entities, when a manager considering himself a professional finds an owner whom he wants and can work with.

As regards the banking sphere, let me disagree with you. At present there is stiff competition in the banking system of Armenia. The corporate management principles were introduced in our banks several years ago, and the process of improvement is still underway.

I think our economy is at a transient stage, however, the next step envisaging transition to more developed market economy and division of powers is still to be formed. I am optimistic about formation of these principles as I believe that there are all premises for that. The main premise is that our country is not rich in natural resources, consequently, to take hold in the competitive fight not only inside but also outside Armenia, competitive economy and corporate management principles should be formed.

Interviewed by Lilit Aslanyan