Friday, April 29 2011 14:09
Subsidizing agricultural loans a drop in the ocean
Interview with Ararat Ghukasyan, Chief Executive Officer of Byblos Bank Armenia
Recently the Government of Armenia has allocated 250 mln drams for subsidizing the interests on agricultural loans. The government funds will allow reducing 4% the interests on loans provided to farmers and 6% to 200 especially vulnerable communities. Three banks are involved
in the program: ACBA-Credit Agricole Bank, Ardhsininvestbank and Converse Bank. Experts say that just subsidizing agricultural loans is not sufficient to promote the sector; there are also other serious problems that need solution, otherwise, the government program will face a stalemate soon after the start. Ararat Ghukasyan, Chief Executive Officer of Byblos Bank Armenia shares the bank’s plans and views on the given program with ArmInfo.
Byblos Bank Armenia provided 1.6 bln drams agricultural loans as of Jan 1 2011 (7% of total loan portfolio of the bank) and took the 8th position in the banking system in terms of the given indicator. What do you think of government subsidies of agricultural loans? Will it promote the sector or more serious steps are necessary?
Our bank deals with enterprises processing agricultural products and not with farmers. As an expert I think that the given government program will settle certain problems. But it is temporary and partial solution to the problem.
I think that more serious reform is required in the agriculture sector: development of production of natural primary products into agricultural industry, upgrade of innovative and technical equipment of farms, and introduction up-to-date methods of farming to local farmers. Our agriculture is far from international standards. It is necessary to settle these and other problems, otherwise the government program will face a stalemate. Three banks have joined the program. To attract more banks it is necessary to make this field of activity attractive for them.
We can see low financial discipline, low pledge liquidity and high risks in the sector. There is insufficient knowledge for development of the agricultural sector.
From the viewpoint of a creditor-bank, will these subsidized 4%-6% contribute to development of agriculture?
For that purpose the bank and the farmer must speak the same language. Pledge liquidity is one of the most important tasks. Once banks studied creation of a National Investment Fund by the Government for forced sale of collateral (like a credit mutual investment fund operating not on the budgetary funds). Banks have no right to enter that fund. The technology is as follows: the fund repurchases the collateral of an overdue loan from the bank for a market or discount price and resells it. This will inspire banks with confidence that pledge liquidity is high and they can actively lend. This scheme is practiced in many countries. The government involvement is not a necessity, but desirable for more efficient management.
There are many lands and buildings in the country that are not subject to sale. So, they can be transferred under management of a structure that would use it with profit and for common purpose. Housing is inaccessible to more people in the country. So, one can provide these people with apartments in the initially planned administrative buildings that can be easily and without big expenses turned into residential buildings.
In addition, we must revise the legal system. As long as we fail to win the pledge of a mala-fide borrower by court action within a month, lending will not be active and large-scale.
You have said the situation with accounting in SME sector is not better. How do banks determine the borrowing capacity of SMEs? How does Byblos Bank Armenia deal with SMEs?
Besides the problems with collaterals, there is low financial accounting and planning at SMEs. Certain SMEs use outsource-accounting services, which create optimal difficulties for use when assessing the borrowing capacity of an enterprise.
Before providing a loan we carefully study the activity of a SME representative, whereas there are financial institutions in Armenia that provide loans to the given sector only subject to registration and pledge irrespective of the financial state of a future borrower. We also take collateral, but it is more important for us that a borrower experiences no difficulties when repaying the loan. One of our bank’s criteria of lending is at least 2 years of working experience and profit. Such survey of potential borrowers impedes the growth of the loan portfolio, but ensures stable growth and guarantees timely and uninterrupted repayment of a loan. The same applies to retail-loans. We never provide a mortgage loan if the incomes of a borrower are not stable or low even if the collateral exceeds the loan for manifold.
What is the reason of deterioration of the quality of SME finance portfolios of banks if the sector was funded mostly at the expense of external borrowings (including the WB loan and the Russian stabilization loan)?
The reason is the economic situation in Armenia where the field of activity and incomes of SMEs decease making them less solvent.
Nevertheless, foreign donors keep providing funds for on-lending to SMEs. Why banks take such heavy burden of interest rates?
Foreign investment is the only way to retain the given sector which is a source of jobs, diversity and flexibility of economy and diversification and decentralization of risks. Indeed, foreign borrowings are cheaper, but if a bank keeps doing on these funds only, it will be an investment fund rather than a bank.
We reduced interests in October 2010 proceeding from market trends. Raising funds from the internal market will create a stable base of long-term growth of customers and make it possible to sell also other products to these customers. It is necessary to retain the balance between external and internal borrowings.
However, from the viewpoint of banks, deterioration of quality of SME lending affects their balance…
It is the problem of banks. They should take measures to manage risks adequately when funding SME.
However, if banks assess risks very adequately, they will just avoid funding SME. A vicious circle…
The share of non-performing loans in our bank is 3.6%, which is a good indicator considering that the share of SME in total portfolio of the bank is 30% with a perspective of growing to 40%. We will attract new customers and explain to the existing borrowers that they should not enter fields risky for them. A typical problem of local SMEs is that they try to get into other our niches as soon as they start growing. However, if these niches do not contribute to enlargement of their business, problems will be inevitable. In addition, SME much depend on big companies and their business plans begin to fall as soon as the price policy of big companies fluctuates.
The interest rate margin fell from 8.4 to 6.7 points in a year. What does Byblos Bank Armenia do in such cases?
We generally try to retain the margin through cutting expenses. Non-interest expenses in the banking system are below 4% in average (in such conditions banks ensure long-term development), this means that to get profit it is necessary to fix the lowest interest of on- lending at the level of the interest the funds are raised plus those 4%. It is wrong focusing on the rates of time deposits, there are also other types of fund raising, for instance bank account where the interest rate is lower. The banks having no large branch network or not having branches work with big corporate customers only and can afford 2%-3% margin. But a bank with a developed branch network will not work at such margin, because branches is not just comfort, it is also expenses.
What are Byblos Bank Armenia’s plans for branch network expansion?
We will open a branch in Vanadzor in a month. Simultaneously, we are negotiating for acquisition of a territory for a new branch in Yerevan (on Komitas Ave). I am more committed to expansion into regions. In line with the strategic plan of the bank for 3 years we are going to open at least a branch in a year. We could open more branches, but we prefer the model of grounded growth when risks do not hit profits.
What do you expect from that model: increase of interest or non-interest incomes?
The ratio of interest and non-interest incomes in an ideal bank is 50/50. Our bank is far from an idea as the share of interest incomes is prevailing. We will keep increasing the loan portfolio at the same time focusing on increase of non-interest incomes (including commission fees), which requires additional branches and new products and services. In 2011 we will fully revise our card business to make our cards adequate to market requirements. For instance, we will turn our overdraft cards into cards with recoverable limit, postpone payment, and launch internet-banking. Byblos Bank is a universal bank and focuses on equal development of the retail and corporate niches in all the 12 countries it is represented.
What are the forecasts of the bank’s strategic plan?
We are going increase the loan portfolio to 30 bln drams versus 16 bln drams in 2010. Foreign exchange loans in the portfolio make up 62%. In 2011 we are going to disburse the 4% mln received from EBRD. We have fully disbursed the 4% mln received from OFIC in 2010. The bank is negotiating for additional credit resources with EBRD, DEG and IFC for on-lending to SME mostly.
The share of SME is total loan portfolio must be retained at 30%. We plan to increase assets to 41 bln drams. In Q1 2011 we ensured growth of assets, raised funds and credit exposure.
Time deposits of the bank grew in 2010 as personal deposits with the bank grew 68%. Time deposits are normally diversified: loan and foreign (Diaspora) depositors. The interests on deposits raised from abroad are lower than from residents. Foreign currency deposits in the time deposits portfolio totaled 80%. We more aggressively raise deposits in terms of the national currency for 11.5% annual interest. Maybe we should have been set a higher interest for comparison with our rivals, but our customers understand that the point is not only the interest but also high quality of service. The interest on foreign currency deposits is 7%, which may be reduced depending on the market developments in late 2011.
No capitalization is planned in 2011 as the existing capital is enough for the bank to achieve the goals set. If necessary, the shareholders, Byblos Bank SAL (65%), EBRD (25%) and OFID (10%), are ready to replenish the capital of the bank. As for the profit, we do our best to outstrip last year’s indicator.
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