Why Banks Are Posting Windfall Profits Without Increasing Lending

Government decisions take a very, very long time. Sometimes they are finally adopted only after they have stopped being relevant. That happens too. Every month I look at the banking statistics, and I understand that in six months everyone will be outraged by the high profits of banks, which are not accompanied by any growth in lending to business. This is exactly what is happening, and I wrote about it back at the beginning of the year. More than half of banks' income now comes from treasury operations, which, incidentally, are not subject to CIT. Let me once again set out the main reasons for banks' very high profits this year and, in part, last year:

A ban on paying interest on current accounts. Around 30 percent of all money in second-tier banks sits in current accounts at 0%. The ban was introduced a long time ago; its purpose was unclear, and the banks did not resist. It was meant to fight kickbacks in budget-funded organizations. In practice, second-tier banks are now far more motivated to hold zero balances. Ultimately, with a rate of 16.75% and an effective rate of 20.9%, banks earn colossal sums out of thin air, with no need to invest in the economy. For example, if balances are consistently around KZT 7-8 trillion, the banking system earns KZT 1.5-1.6 trillion a year.

Treasury operations are not subject to CIT, so with a rate of 16.75%, the effective rate for second-tier banks is 20.9% (16.75/0.8). In other words, on top of the base rate the state gifts banks another 5%. This is barely noticeable when the base rate is low, but when it is high, the payoff to banks is very large. To create an incentive to lend to the economy, taking the cost of risk into account, the rate would need to exceed 24%. So one could say that our base rate is not 16.75% but 20.93%.

A 1% cap on dollar deposit rates. Banks take dollar deposits at 1%. Any foreign bank pays 4.3% in dollars on current accounts, and more on securities. As the Fed raises its rate, the arbitrage will only widen. Second-tier banks can therefore place funds through the securities market at far more than 1%, which generates excess profit for them. Indeed, when the Fed rate was 0.25%, dollars were a problem. Now they are a highly profitable instrument.

Tax weeks and the predictable foreign currency sales by the NBK make it possible to guess the dollar exchange rate with a high degree of probability. This lets bank treasuries easily take short or long positions and earn money on them.

These are the main reasons for high earnings without growth in lending. Why lend, if even deposits attracted at 15% bring a risk-free margin of 5-6%, while balances on current accounts yield a 20% margin?

The interest not paid on balances is money belonging to business, individuals and the state budget. The excess income from untaxed earnings is revenue that should go to the country's budget, which is running a severe deficit. The income not received on dollar deposits is income lost by the public, who now have an incentive to move money abroad, as can in fact be seen in the current account.

What needs to be done:

• abolish the ban on paying interest on current accounts

• abolish the tax exemption on income from bonds and notes

• link the cap on dollar deposit rates to the Fed rate

• replace quarterly tax payments with monthly advance payments, following the CIT payment principle

In my estimation, these steps would greatly help the deficit-ridden budget, business and the public.