Analysis and assessment of the loan portfolio quality in Kazakhstan banking system

Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016

Authors:
Trofimova Yulia, Kazakh American free university, Kazakhstan
Popov Alexander, Kazakh American free university, Kazakhstan

Today's rapidly changing internal and external environment of the second-tier bank operation increases the need for theoretical understanding of the loan portfolio quality management, for the search of new approaches and tools to work with the borrowers. To do so, it is necessary to explore the specifics of the environment in which the banks function and render lending services and analyze the nature and content of basic definitions: "bank loan portfolio", "bank loan portfolio quality", "loan quality" and others.

In the scientific literature offers a variety of definitions of the loan portfolio and a variety of scientific approaches to defining its structure and place in the banking system.

"Portfolio" (from the French Feuillet – a sheet, and porter–to carry) is a set of different types and forms of financial and economic activities and corresponding objects, documents, orders, monetary funds. Strategic management theory defines a portfolio as "a set of independent business units belonging to the same owner" [1, p. 18].

Banking sector plays an important role in the economic development of the country. This role is determined by the ability to establish a channel of uninterrupted flow of temporarily free funds into the sector of economy, which requires significant capital investment for the modernization of its fixed assets and to overcome a crisis and achieve sustained economic growth. Speaking about the role of the banking sector in the economy of the country, we should be note a decrease in the share of bank loans in the country's GDP. By the end of 2015, this index was lower than that in pre-crisis 2005. We believe that this decline is caused by many external and internal factors, which include the devaluation processes, lack of funding, increase in non-performing loans, external liabilities and many other economic and political factors. Among qualitative indicators of decline in the share of credit portfolio there is economy diversification can unbalanced lending.

Bank lending as a source of investments into fixed is very low - about 5-6%. However, the amount of annual investments increases: in 2015 it amounted to 7 trillion tenge. Mainly, companies use their own funds, whose share in total investment also increased to 58% in 2015. At the same time, the share of annual government subsidies remains at the same level - about 18-22% [2].

The sum of loans to the economy, issued by banks over the period from 2005 to 2015 is 75.7 trillion tenge.

After several years of decrease in the overall amount of loans caused by the mortgage-lending crisis, beginning with 2011, there was a positive dynamics of growth of bank loans. Oil overproduction crisis, which started in 2015, makes its own adjustments, which will directly cause reduction in lending in short and medium term.

The loan portfolio of issued credits is characterized by an increasing concentration of non-manufacturing sector, characterized by a high turnover, mainly in trade and services, and bringing quick and high returns, but not participating in production and not contributing to real GDP growth. The share of lending to the real sector decreased from 42.8% in 2005 to 32.1% in 2015, mainly due to the reduction of borrowing in the construction industry after the mortgage crisis. In this analysis, the real sector includes industry, agriculture, construction and services that aid real economy development - transport and communications, in particular.

An important, but negative parameter is a short-term funding of the real sector, which is insufficient for maintaining a full production cycle and can result in slowing down or suspension of production. The banking sector is aimed at a quick return on investment. The amount of loans in the industrial sector has a cyclic trend, and the structure of the loan portfolio in the manufacturing industry has varied, which is associated with significant changes in the sectoral structure as a result of the implementation of various economic reforms. A significant reduction was observed in metallurgy, which is the largest sector of the economy with huge production complexes represented by monopolistic companies under foreign control. Mechanical engineering and chemical industry, on the contrary, significantly increased their share in the total amount of lending, mainly in the sector of the chemical production.

The analysis of the use of loan funds since 2005 reveals the fact that more than a half of the borrowed funds is used for financing working capital, which at best indicates business expansion, and at worst - refinancing of existing problem loans. The share of loans for the purchase of fixed assets reduced from 6% in 2005 to 3% in 2015. Industry surveys conducted in a number of industrial sectors reveal that depreciation of fixed assets is relatively high; therefore we assume that the update is carried out either in an ill-timed manner or at the own expenses of the enterprises.

Weighted average interest rates changed cyclically in accordance with the demand for borrowed funds with consideration of changes in the amount of issued loans. During the crisis, banks, instead of easing the debt interest burden on borrowers, increase interest rates for granted loans, thereby forcing economic agents to issue loans at even higher cost. The most attractive sector for the banks to get an interest margin is a non-productive sphere (16.6%) and trade (12.6%). Due to the high agricultural risks, the weighted average rate in agriculture is 13.2%, followed by construction (12.4%), transport (11.5%) and industry, and communications (11.2%) [2].

At the end of 2015 the total loan portfolio of second-tier banks of Kazakhstan increased by 4.7% to 12.67 trillion tenge. At the same time, the amount of loans to legal entities showed a higher growth (5.2%) than the amount of loans to individuals (3.7%). A previous year saw the opposite situation: with the overall growth of the loan portfolio by 7.2% in 2015, the amount of loans to businesses grew by only 5.6%, the amount of loans to the population - by 10.7%.

Industry statistics also shows a faster growth of lending to enterprises. The loan portfolio in the non-manufacturing sector (including consumer loans, loans to individual entrepreneurs and service companies) decreased over the year by 5.6%, and its share in the amount of total second-tier bank lending fell from 50.9% to 46.9% [3].

At the same time, bank financing of mining industry increased by 52.8%, communications sector - by 41.1%, the transport sector - by 40.2%, agriculture - 35%, the amount of loans to the manufacturing industry and trade increased by more than 9.3%.

Besides the non-production sphere, another industry, where bank credit portfolio decreased, is the construction (-13.3%). However, this is more likely due to the fact that in 2015 the developers, received a significant state support on more favorable terms.

The information on second-tier bank loans at the end of December 2015 is provided in Table 1.

Table 1. Second-tier bank loans as of December 2015, bln. tenge [5]

Industry

Total

Growth to the total

Share of the total loan in Kazakhstan, %

12.2015

12.2015

в bln. tenge

%

12.2015

12.2015

Kazakhstan

12 674,2

12 106,1

568,1

104,7%

100,0%

100,0%

Other (non-productive industry, entrepreneurial activity )

5 938,7

6 158,6

-219,9

96,4%

46,9%

50,9%

Retailers and wholesale traders

2 645,7

2 419,9

225,8

109,3%

20,9%

20,0%

Processing industry

1 037,8

948,3

89,5

109,4%

8,2%

7,8%

Construction

991,7

1 143,6

-151,9

86,7%

7,8%

9,4%

Agriculture, forestry and fishery

653,6

484,1

169,5

135,0%

5,2%

4,0%

Transport and warehousing

609,2

434,4

174,8

140,2%

4,8%

3,6%

Mining

456,3

298,6

157,7

152,8%

3,6%

2,5%

Other industries

204,6

121,7

82,9

168,1%

1,6%

1,0%

Information and communication sectors

136,7

96,9

39,8

141,1%

1,1%

0,8%

Analyzing the data in Table 1, we can be conclude that the amount of loans granted by the second-tier banks of the Republic of Kazakhstan in 2015 increased by 568.1 billion tenge or by 4.7%, with the largest growth observed in mining - by 157.7 billion tenge or 52.8%; transportation and warehousing - by 174.8 billion tenge or by 40.2%; agriculture, forestry and fisheries - by 169.5 billion tenge or 35%; other industries - by 82.9 billion tenge or by 68.1%. In the non-manufacturing sector and individual entrepreneurial activity in 2015, there is a decrease by 219.9 billion tenge or by 3.6%., while their share also decreased from 50.9% in 2015 to 46.9% in 2015.

The most noticeable trend in lending by regions is a swap of the two capitals (Table 2).

Analysis of the data in Table 2 shows that the share of Almaty in total loan portfolio declined over the year from 57.1% to 53.3%. At the same time, the share of Astana increased from 13.4% to 17.9%. In total, the share of the two metropolitan cities in creased over the year from 70.5% to 71.2%.

Table 2. Second-tier bank loans in the regions of the Republic of Kazakhstan at the end of the period (December 2015), bln. tenge [3]

Regions

Total

Growth to the total

Share of the total loan, %

12.2015

12.2015

bln. tenge

%

12.2015

12.2015

Kazakhstan

12 674,2

12 106,1

568,1

104,7

100,0

100,0

Almaty

6757,1

6 908,0

-150,9

97,8

53,3

57,1

Astana

2 269,8

1625,3

644,5

139,7

17,9

13,4

Karaganda

427,8

433,1

-5,2

98,8

3,4

3,6

SouthKazakhstan

402,0

405,1

-3,1

99,2

3,2

3,3

East Kazakhstan

376,1

384,6

-8,5

97,8

3,0

3,2

Atyrau

340,1

312,7

27,5

108,8

2,7

2,6

Aktyubinsk

326,7

291,5

35,2

112,1

2,6

2,46

Pavlodar

319,4

303,7

15,8

105,2

2,5

2,5

Kostanai

271,6

268,9

2,7

101,0

2,1

2,2

Mangistau

229,9

238,3

-8,4

96,5

1,8

2,0

West Kazakhstan

195,7

187,8

7,8

104,2

1,5

1,6

Akmola

179,9

155,7

24,2

115,6

1,4

1,3

Almaty region

169,0

168,6

0,5

100,3

1,3

1,4

Zhambyl

154,7

160,4

-5,7

96,4

1,2

1,3

Kyzylorda

149,9

148,9

1,0

100,7

1,2

1,2

North Kazakhstan

104,4

113,7

-9,4

91,8

0,8

0,9

Analysis of the data in Table 2 shows that in 2015 the volume of loans issued in the capital increased by 644.5 billion tenge, gaining almost 40%. Good growth also is also observed in Akmola region - 15.6%, which took the whole Astana agglomeration to the leadership position in terms of credit growth.

Analyzing the current state of security for the repayment of bank loans, we should note that in the Republic of Kazakhstan there is a variety of ways to ensure the completeness and timeliness of lending money return: mortgage, insurance, guarantees, etc. The share of loans secured by pledge of various types of property and rights comprises more than 50% of all secured loans. The main share among other types of loans belongs to loans issued under the guarantee of the third parties - 26.8% and insured loans -10.2%.

The most significant problem of the banking sector is the poor quality of the loan portfolio (Table 3). Therefore, much attention is paid to competent and effective management of the total loan portfolio of the banking system as a whole, and individual commercial banks in particular. One of the key issues of “The concept of development of the financial sector of the Republic of Kazakhstan until 2030” is the further development of the banking sector through solving the existing problems of high levels of non-performing loans and a shortage of long-term funding sources, which provide a disincentive for banks' credit activity [3, p. 63].

Table 3. Quality of the loan portfolio of the second-tier banks in the Republic of Kazakhstan [3]

Indicators

01.01.2013

01.01.2014

01.01.2015

01.01.2016

Bank loans including:

100

100

100

100

Loans for which there is no outstanding debt

66,9

65,5

72,3

84,3

Loans with 1 to 30-days past due payments

1,8

1,6

2,5

4,3

Loans with 31 to 60 days past due payments

1,1

0,7

1,1

1,4

Loans with 61 to 90 days past due payments

0,4

1,1

0,5

0,8

Loans with over 90 days past due payments

29,8

31,2

23,5

9,2

Analyzing the data in Table 3 we can conclude that over the recent years, starting with 2013, the share of non-performing loans (categories 4 and 5) in the loan portfolio of banks reduced significantly (from 30.2% in 2014 to 10% in 2015). This is evidence that the potential of the banks 'classic' tool to improve the quality of assets, such as debt restructuring and other measures of the National Bank are used effectively. During the studied period there is an increase in the share of loans for which there is no outstanding debt from 66.95% in 2013 to 84.3% in 2015. We should also note that the improvement of the quality of the loan portfolio during the year 2014-2015 was due to loan restructuring performed by the second-tier banks.

Thus, summarizing the results of studies made by various well-known scientists, we can conclude that the loan portfolio is a system of socio-economic and financial relations established between the bank and its clients, providing the return of loan debt in the form of credit assets of the crediting organization, on the basis of risk, profitability, liquidity and purposive nature. It is believed that the basic quality of the bank loan portfolio is determined by its ability to provide the highest possible loan interest yield at acceptable levels of liquidity and credit risk. In assessing the quality of the loan portfolio, we suggest differentiating between such concepts as "current" (satisfying the criteria of liquidity, profitability, risk) and "perspective" (including an additional criterion - purposefulness) quality of the loan portfolio. The former is more acceptable under conditions of the post-crisis development, when the most pressing need is restoration of the activity scope and the main financial indicators of commercial banks, while the latter reflects the long-term goals of lending activity of the banking system.

Commercial banks credit portfolio quality management is a subsystem of bank management, functioning to ensure minimization of the credit risk of the credit institution by means of a set of measures allowing to provide a compromise between risk, liquidity, profitability and purposefulness of the bank credit operations. This is a complex multifactorial process, which involves identifying criteria of the loan portfolio quality; adherence to the basic principles of loan portfolio quality management and additional principles of its formation; consideration of macro- and micro-economic factors affecting the criteria of the loan portfolio quality.

The purpose of quality management of the bank loan portfolio is to organize the effective lending to borrowers, i.e., to ensure minimum credit losses, required bank reserves liquidity, satisfying the requirements of the National Bank of Kazakhstan; a return on credit operations in the amount stipulated by the contract, compliance of the bank operations with the state economic policy, etc. The effectiveness of the loan portfolio quality management depends on the competent organization, which systematically takes into account all factors influencing this process, that comply with the loan laws, the methods and principles within the existing scientific concepts, formed on the basis of the existing bank management paradigm.

REFERENCES

1. Beloglazova G.N., Bankovskoye Delo: Roznichnyi Biznes [Banking: Retail Business]. – KNORUS, 2010. – 411 p.

2. Shapkin A.S., Ekonomixheskiyei Fi-nansovye riski: otsenka, Upravlenie, Portfel Investitsiy [Economic and Fi-nancial Risks: Assessment, Manage-ment, Investment Portfolio]. – 9th edi-tion. – М.: Dashkov and Co, 2014. – 543 p.

3. Analiz Bankovskogo Sektora Respub-liki Kazakhstan za 2015 god [Analysis of the Banking Sector of the Republic of Kazakhstan for the year 2015]. Re-trieved from http: // rfcaratings.kz/ wp-content/



Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016

  
Main
About journal
About KAFU
News
FAQ

   © 2017 - KAFU Academic Journal