Thursday, November 14 2013 14:33

Samvel Chzmachyan: Everything’s relative in the world, even so more in today’s turbulent times

ArmInfo. Armenia’s banking society is experiencing hard times and post-crisis recession now. Banks accumulate hyper-liquidity, as they face difficulties with management of liquid funds and low yield. Not to lose their high-level reliability, banks should carry out a well-coordinated work lobbying for their corporate interests and counteracting some practices that foster the growth of the crisis-induced non-performing assets. A few months ago, one of the most experienced bankers in Armenia, Mr. Samvel Chzmachyan, was elected as Head of the Union of Banks of Armenia, the only organization lobbying for the interests of banks in the country. Mr. Chzmachyan, kindly agreed to answer the questions of ArmInfo News Agency.

Mr. Chzmachyan, you are widely regarded as a doyen of the banking society, as you witnessed and participated in the uneasy period of establishment of Armenia’s banking system. This is not just the market, but regulatory measures that has gradually strengthened the system, upgraded its reliability and the people’s trust in banks. Now, when you head the Union of Bank and try to turn it into an even more powerful lobbying organization, what problems do you face? The Central Bank will probably keep tightening the regulatory framework for banks to leave it solvent. On the other hand, these measures may restrict the key mission of banks: effective mediation and redistribution of free funds for economic growth…

Well, you are quite right. The banking system is in an uneasy situation now. The world experiences post-crisis difficulties, even the USA. And you know what may all this lead to. I don’t want to scare anyone, but the world may face a new even more powerful wave of financial crisis, a true chaos. Nevertheless, “if you’re drowning, you’re on your own.” In this light, we must be cautious and take all the necessary steps to keep our country as far from the global financial shocks as possible. Of course, we have some ‘advantages’ – the Armenian economy is not fully integrated into the world economy – and we manage to overcome the global financial shocks will less losses. However, these ‘advantages’ are also disadvantages, as our banks accumulate surplus liquid funds, which help them survive in crisis, on the one hand, and restrict their activity in the market, on the other hand.

In 2008-2009 the banking system of Armenia overcame the first wave of crisis relatively easily. There were losses, indeed, but not so big. The so-called insufficient integration into the world financial system helped the banking sector of Armenia overcome the crisis without tangible losses, but the insufficiently developed economy, insufficiently diversified real sector negatively affected the GDP. The banking system of Armenia will not be able to manage relative risks unless the real sector recovers. As you know, everything is relative in the world, even so more in today’s turbulent times.

I do not think that tightening of the regulatory framework and the monetary policy is a sincere desire of the regulator. The Central Bank was and should further remain the very powerful regulatory factor guarding the financial system against the temptation to underestimate risks for highly profitable operations, something that is characteristic to any banking system. Actually, the Union of Banks of Armenia and all its members fully support the Central Bank’s policy, at the same time realizing that such policy aims to prevent undesirable, dangerous influence of some external factors and threats on the financial market. Therefore, the heads of banks should try to upgrade the awareness of their shareholders not involved in the banking activity of the above risks. That is why, probably, our Central Bank so carefully tries to bring the regulatory framework and procedures in line with the international standards and the standards of risks management, first.

Do you mean Basel II and now already Basel III principles?

Sure, these are very important decisions regulating credit risks that even more increase in the periods of financial crisis. It is necessary to give proper respect to the Central Bank for its truly democratic decisions. The regulator timely and cautiously notifies the sector of all the anticipated decisions, conducts consultations and discussions on the most acute issues, and gives enough time for fulfillment of the decisions and adjustment to them. Banks, that are, actually, subsidiaries of international financial holdings, join these tasks and share their foreign experience gained in the more developed global markets with us. Therefore, we have always considered the CB not just as a regulatory body that controls the sector and sometimes imposes tough sanctions, but also a reliable partner for an argued dialogue.

The CB passed a range of post-crisis decisions to toughen the standards for reserves and the currency position. All this was important given the sharp devaluation of the national dram in 2009. The CB took such actions anticipating possible second wave of the crisis that may originate from the sovereign debts of developed countries. The recent budget crisis in the USA showed that the problem is deeper that it could seem. Everything is possible. However, many experts say that the country’s economy “forces itself into a corner” toughening the monetary policy. They think that lack of inexpensive resources hinders economic growth. Prime Minister Tigran Sargsyan has also made such statement lately, actually criticizing the CB for increasing the base rate to 8.5%. It was again reduced to the level of 2011 (8%) few days ago, but experts still believe it is too high. What do you think?

As I have already mentioned above, the CB’s policy aims to protect the system against a more severe crisis. Nevertheless, it seems to me that the CB’s regulatory policy is aimed mainly at increasing reserves. I think no banker will dispute that fact. Naturally, as a banker with 40 years of experience, I am not happy with such restrictions, but I realize the risks and challenges the country is facing today. As for the possibilities to soften the monetary policy, reducing the refinancing rate, as bankers, we advocate for easier management of funds in the market and for accessibility of these funds.

However, we realize that the base rate is a subject of permanent dispute and ‘conflict of interests’ of the Government and the CB and not only in Armenia, but generally in the world. The financial and economic authorities of Russia and the CIS countries discuss this issue. It is not a secret that after rather hot debates, Europe has reduced the rate to the unprecedented low level of 0.25%. Earlier, the US FRS reduced the base rate to 0-0.25% despite hot debates. In Armenia, we have quite different situation and quite different risks. In Armenia, bankers do not adopt macroeconomic decisions. Economists know that growing rates negatively affect domestic demand, consumption and investments, and create more inflation risks. I think, the CB and Government are in constant dialogue with each other to find the most rational and efficient solution to the issue.

Let us study the problems of the so-called ‘second echelon.’ I mean the domestic issues that hold the bank from operating in the imperfect legal system or insufficiently developed market infrastructure, for instance.

We discussed this problem with you some 10 years ago. We discussed it also before the crisis and now it is still relevant. However, I would not call them “the problems of the second echelon,” at least, not for the Union of Banks. Our organization builds its everyday activity on these very tasks. Helping the local banks to settle their problems, we pave the way for the entire banking system, create precedents, and seek long-term comprehensive solutions. Occasionally, we settle problems independently. Sometimes, we do it with help of the Central Bank. Over the last years, much has been done in the judicial and banking system. We can see that the culture of legal procedure has significantly improved in the country. Banks have become more cautious with legal risks when making contracts. Unfortunately, we have not yet settled the problem with the terms of the court decisions on the cases of banks against defaulters. Sometimes, it takes years before the court adopts a decision on a case. By the time when the court adopts a decision, mortgaged assets devaluate and banks suffer losses, classify loan-default, and write-off assets at the expense of profits. I don’t mean that the judicial system must indulge banks, but they must understand that banks deal with money of depositors and the terms of judicial decisions must be strictly regulated.

There are also other issues, particularly, the relations of banks and the government departments. Quite recently, a local bank and an organization providing public services had a conflict over certain “semi-personal, semi-subordinate” relations. The conflict led to losses. The Union of Bank works towards reconciliation the two parties and tries to settle such problems in a consistent manner. No matter what kind of conflict it is, it is a public problem if people suffer from it and cannot receive the necessary public services. The Union of Banks applied to the Public Services Regulatory Committee for strict regulation of such issues. Otherwise, the list of the banks having no opportunity to provide certain public services will grow, which is inadmissible.

It is not a secret that the banking system capital is foreign by over 70% in Armenia. Russia’s share in it is the largest, of course. Russian capital exists not only in the subsidiaries of the Russian banks in Armenia but also in the other ‘resident’ banks. In this light, what do you think of the process of the country’s accession to the Customs Union?

I advocate for the given decision and not because I am a representative of the old generation who received Russian education, lived in the Russian culture, which was dominating in the country. I am for accession to the CU as a financier, which is a profession of rational thinking. The decision is rational because of our general economic field, restoration of the lost ties, and security of our country. The last factor is of utmost importance. Security is above all the other arguments. The country’s security cannot be far from the economic and political relations with its neighbors. From the economic point of view, the CU countries are a huge sales market: Russia, Belarus, and Kazakhstan. It is the most important investment source, at least look at our statistics and foreign trade turnover. In addition, the CU is a tested market. Nevertheless, accession to the CU must not isolate Armenia from European markets. We should not forget also about the Diaspora factor. Nearly 2 million Armenians live in the CU countries and transfer nearly 2 billion US dollars to the country by official data. Due to these transfers, our country partially ensures its macroeconomic stability and effective demand. I would be happy if it were exactly the opposite. Unfortunately, we have no other resources.

Another important factor is the gas price. For us, it is, probably, the key benefit from accession to the CU. Otherwise economy may collapse and the production costs will grow so high that we will not be able to make competitive products in any field. Consequently, banks will share the fate of economy and more Russian banks may enter our market.

Don’t you think that for small Armenia there are too many players in the banking market? You have been asked this question for many times, probably…

I think there are not too many banks in Armenia. They say some 5-6 banks would be enough, but I disagree with such views. Are there any big organizations in the country that our banks fail to serve due to their insufficient capitalization? Development of economy will lead to the necessary processes, amalgamation of banks. Without competition, we would not have a growth of the credit portfolio, margin decrease, intensified bank processes, cost reduction etc. Over the last 12 years, the bank credit interest rate has decreased 2.5-fold. Value of money has tangibly decreased in the country, while the cost of living keeps growing.

Thank you for an interesting interview.

By Emmanuil Mkrtchyan

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