A Review of the NCPT Initiatives on Banks: Base Rate, Taxes, Provisions

Note: October 2020, a review of the initiatives of the National Council of Public Trust (NCPT). At the time, the author was Chairman of the Management Board of Bank CenterCredit.

I have read the NCPT's initiatives on the banking sector. Most of them are clearly controversial and, in essence, will not lead to anything good.

Let me go through them one by one.

1. Cutting the base rate. If the base rate is to be cut, it should certainly not be done in order to reduce borrowing costs. Under inflation targeting, the base rate is a tool for managing inflation, while the actual lending rate is determined by the level of inflation. The higher the inflation, the higher the cost of nominal funding. So to bring lending rates down, we need to fight inflation, which will in turn prompt a lower base rate. In Kazakhstan, the problem is largely one of interest rate subsidies. Subsidies push rates down, which increases demand for subsidized funds, which expands the money supply and fuels inflation. Higher inflation holds back cuts in the base rate and does nothing to encourage lower market interest rates. I believe that to achieve a general reduction in rates, we need to start by reforming the subsidy system.

2. Exempting income on corporate loans from income tax. Any tax or fiscal incentives, apart from creating distortions, will achieve nothing in the long run. Rates will not fall as a result; banks will simply receive a tax break. It will also give rise to various tax optimization schemes, since interest on loans is already deductible for corporate income tax (CIT) purposes. The problem with corporate lending is not loan rates but high risks. IFRS 9, regulatory provisions, difficulties in defining liquid collateral, the absence of uniform court practice on debt recovery, complicated bankruptcy procedures, high state duties on recovery claims, a law on notarial writs of execution that does not work, and another dozen problems I could list all need to be solved before banks can lend to corporate business. Risks must be addressed first, and only then the question of rates.

By way of addition: in Kazakhstan, income from bonds is not subject to CIT, yet this has neither reduced bond yields nor increased issuance. On the contrary, over the past 10 years the market for private corporate bonds has died. The whole issue is precisely risks, not taxes.

3. Allowing deductions only for bad debts. This would bring corporate lending, where risks are assessed individually, to a complete halt. We live in a world of IFRS, where credit losses are calculated mostly on an expected-loss basis. This would create large differences between tax and accounting treatment, which would discourage lending. Moreover, the regulatory approach is even stricter than IFRS 9, so the gap between tax provisions and regulatory provisions would be wider still. To avoid having to create provisions, we need to eliminate institutional distortions, build a functioning market for the sale of problem loans, make the securitization law work, shorten the time needed to foreclose on collateral, simplify the assignment of claims on loans, and so on.