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Restructuring of Local Debts by Ukrainian Banks

Date of publication: 1 October 2010

Source: The Chambers Magazine, Central & Eastern Europe

Starting from autumn, 2008, most of the Ukrainian banks had been suffering big problems with liquidity because of a combination of factors, including significant withdrawal of funds from current accounts and deposits by individual and corporate clients and devaluation of the Ukrainian hryvnia, which had substantially lost its value against foreign currency. The banks that had the biggest problems were local retail banks. UAH 1.8 billion was withdrawn from deposits and current accounts in one of the largest Ukrainian banks in October 2008 alone. The banks were not able to prevent the withdrawal of funds, due to statutory provisions which require banks to refund deposits to individuals on demand even before the due term. Some banks lost access either to the inter-bank funding markets or international capital markets, further restricting their ability to source funds to operate their businesses.

In autumn 2008, the National Bank of Ukraine granted short-term (mostly one-year) refinancing loans for the total amount of almost UAH37 billion to 88 Ukrainian banks, but even such big sums did not prevent some banks from falling into insolvency.

Loans for the total of billions of hryvnias became due in 2009 and the main efforts of Ukrainian banks were focused rather on restructuring of their foreign and local indebtedness, than on working with bad debts or business development. Thanks to foreign advice it was quite clear to the banks how to restructure their debts before international investors, and how to prolong the loans granted by the National Bank of Ukraine; but banks faced the need to make new agreements with Ukrainian individual and corporate clients, which proved challenging because of a lack of trust in the banking system and a legal vacuum.

The National Bank had taken temporary administration of 15 Ukrainian banks (as on 01.05.2009), and placed a moratorium on them, meaning they did not have to refund deposits for a period of six months.

Nevertheless, the moratorium passed quickly and it was still necessary to restructure debts.

Different banks used different methods to persuade their clients to maintain their deposits, but the main argument was that almost nobody would like to go through threestage court proceedings against banks, spending a lot of time and/or paying large sums of money to lawyers. Of course, banks also provided some economic motivation, such as partial refunding, crediting deposits with past due interest, higher interest rates and better terms for other banking products.

Some banks tried to agree on partial refunding of deposits by means of transferring property received by banks as security under loan agreements, but few succeeded because of complicated enforcement procedures against mortgaged property and a significant drop of real estate and land prices.

The terms of restructuring were not public and thus, despite most of the banks setting their own internal restructuring programs, clients may have received very different terms of restructuring. The major legal schemes which had been used to fix restructuring were (i) signing new deposit agreements with increased sums of deposit (provided that it was decreased if there was a partial refunding or increased, if past due interest was also deposited) and fixed terms of refunding (despite it still being prohibited by law to refuse individuals in their request to refund a loan, even if such request is made before the due term), (ii) prolongation of deposit agreements and

amending the terms of such agreements in respect of the sum of deposit (provided that it was decreased if there was a partial refunding or increased if past due interest was also deposited), extending maturity dates and increasing interest rates, (iii) novation (or partial novation) of deposit to the current account, which was often used by the banks which had been placed under temporary administration.

Despite restructuring of local debts being quite a new challenge for Ukrainian banks, some of them acted very successfully. Nevertheless, banking legislation in Ukraine still needs to be modified in order to set strict rules for such restructuring.