Five Reasons Behind the Decline in Business Lending

The chart above shows that if we recalculate the corporate loan portfolio in 2018 prices, we see a 50% decline. This points to problems in business lending. Of course, we need to adjust for loans from other sources, such as foreign financing, the Development Bank of Kazakhstan and other state institutions. But I think that, on the whole, this will not improve the picture.

The first reason I see is the cleanup of the sector and the tightening of borrower requirements under the AQR. In other words, harsh European methodologies, not fully adapted to local specifics, were applied to our realities, and this triggered a response from bankers: a tougher risk assessment system and stricter requirements for borrowers. The AQR is, of course, an important part of the supervisory process and a mechanism that prevents the sector from deteriorating. However, no one is looking at why so many borrowers fail to meet AQR requirements, and these issues need to be addressed by customizing the AQR methodology. Take holding groups, for example, where guarantees on loans between companies are not recognized. Or collateral, which is heavily discounted because there are no statistics on the quality of recovered collateral and on recovery times.

The second reason is the predominance of pawn-style lending: after the AQR, companies are running into a ceiling on borrowing because of a limiting factor, collateral. The requirements for collateral policies need to be reviewed, and the conditions for realizing collateral need to be improved. So far the trend is the opposite: banks have been banned from participating in auctions, and they can take collateral onto their balance sheets only at 75% of the appraised value. Appraisals are always contentious, and recovery takes very long. As a result, banks have become highly conservative about collateral. Many types of collateral are deemed illiquid, for example subsoil use rights, even though the market for such rights is very liquid. Amendments to the Subsoil Code are needed to simplify the procedure for realizing subsoil use rights. Grain receipts, which lost their significance after the fraud cases, do not work at all. Yet grain receipts free of fraud are first-class collateral, but no one is digitizing them or building liquidity in them. There are many such issues that need to be resolved.

The third reason is that alternative lending instruments, such as factoring, leasing, syndicated loans and the like, are underdeveloped. Banks need to be encouraged to enter these niches. Small experiments are now emerging, but this market is not yet fully functioning. The sale of receivables, in my view, is a very interesting market. It needs to be digitized, and that would solve the problem of working capital lending. If a second-tier bank can monitor the supply chain through digital tools, this reduces risks.

The fourth reason is the difficulty of analyzing clients, since borrowers have a large number of affiliated companies that are not legally linked to one another. It is important for banks to know the true financial condition of a holding group, but this is hard to do. This, incidentally, is also a problem for the State Revenue Committee, so holdings need to be regulated and the number of entities subject to mandatory audit increased. Banks also need more integrations with databases so that they can use scoring in decision-making. For example, access to fiscal data operator (OFD) data and to the invoice database would be a great help.

The fifth reason is the lack of competition among second-tier banks. Of the 21 banks, the top 10 account for 89% of all assets, and of these, Otbasy Bank and Kaspi are retail banks. Eurasian Bank and Bank CenterCredit have portfolios dominated by retail, and Citi does not lend at all. That leaves only Halyk, RBK, Forte, Jusan and Bereke. For loans above USD 200 million, only Halyk is left.

Naturally, the high base rate is currently weighing on lending, but this reason is short-term, and in a year, I think, the issue will be closed. There are many other issues that need to be improved in the lending to the economy.

At this point, I would encourage borrowing in dollars: domestic funding costs are fairly low, and given that monetary policy is now built on market principles, the risk of devaluation is not that high.