Expert opinion: Regulation of all crediting subjects by the National Bank is normal practice, but it is important “not to throw out the baby with water”

Date: 11:39, 05-07-2019.

Almaty. July 5. KazTAG - Tulkin Tashimov. Regulation of all crediting subjects by the National Bank of Kazakhstan is a normal practice, but it is important “not to throw out the baby with water,” said Arman Beisembayev, head of FXPrimus analytical department.
“Regulation can be introduced at any time, but it is important "not to throw out the baby with  water ”. We have pity practice, when regulation leads not to balancing and streamlining of the process in any industry, but to its direct suffocation, if not to say, destruction. If this practice continues, we will see a massive closure of pawnshops, microfinance organizations with the likelihood of disappearance of their whole industry, and naturally it is a disadvantage for the entire economy”, said Beisembayev to KazTAG commenting on the planned  introduction of regulation of all lending entities, including credit unions, pawnshops and online lenders by the National Bank.
In general, the expert continued, it is a right idea.
“Especially in view of the recent measures to repay consumer loans, there is an urgent need to raise the quality requirements for borrowers. The dark practice of giving loans to people with low income continues these days, although in 2008–2009, loans that were uncontrolledly provided to everyone aggravated and deepened the crisis," he said.
To the question of whether consumer loans are a powerful stimulus for Kazakhstani economy growth, the speaker replied “they may be.”
“In fact, at the stage of economic growth, consumer loans issued in large volumes without analyzing the quality of  borrowers supported demand for a short period of time and contributed to economic growth. And therefore an illusion of general welfare is created. However, a social bomb is planted under the economic growth, which explodes as soon as any serious cyclical recession occurs, as it usually happens every 5-6 years - the level of defaults grows up, banks suddenly find themselves on the verge of collapse, tension increases in society, as a result, the Government has to support both borrowers and banks to avoid total economic collapse. On the one hand, it cultivates “trained helplessness” among borrowers and irresponsible financial behavior of the banks," said the expert.
In his words, since the last global financial crisis of 2008 technologies have gone far ahead and new technologies appeared for issuing loans, such as, for example, microcredits, which until recent time had been out of the regulatory field or were very poorly controlled.
“The main client base of such companies is borrowers with a bad credit history, who have already been closed access to banks. This is another potential bomb that can explode if necessary measures are not taken," he said.
When asked how banks will compensate for the losses they will face following tightening of regulation by the National Bank, the speaker replied that "so far by no means."
“Right now, there are no products that could compensate for the losses caused by tightening of consumer lending. We are a country that exports raw materials and imports everything else, where banks are focused on supporting the consumption of imported products. Banks should be a key element in the investment process and create added value through business lending - this is a potential resource that could compensate for the losses. However, they are not in a hurry to use this resource, - according to the latest data, the share of business lending in the banks' portfolios is not higher than 10%, - I believe that the reason for it, first of all, is  the institutional risks, ” said Beisembayev.
In his opinion,  introduction  of the ban on  accrual of penalties, commissions and other payments related to the issuance and servicing of loan on unsecured consumer loans to individuals with overdue over 90 days, at first glance, is a good measure.
“But this is again only a half-measure with far-reaching consequences. Changes are needed that lie much deeper than a direct ban on banks from receiving a risk premium from overdue loans. It is necessary to create essentially new legislation that will allow banks keep a dialogue with the borrower and in a reciprocal mode to resolve the problem of nonpayment through restructuring, refinancing, deferred payment, or, through an individual's bankruptcy procedure. And this requires appropriate changes in the tax legislation, " he said.
Answering the question if  government regulation and business freedom  are compatible, the interlocutor said that “it is an incorrect postulate”.

“In the best practices of developed states, there is no degree of regulation in certain areas that we have. For example, the domestic stock market is extremely regulated, as a result - we have its practical absence. Therefore, the question is in the adequacy of this regulation. Direct bans is the way to nowhere. If a ban is imposed, an alternative option should be immediately proposed, which must be developed before the ban is imposed, that is, a different way of solving the problem should be proposed, which should take into account the interests of all parties involved," he said.
In his opinion, the ban on the accrual of penalties and fines for overdue loans will only strengthen the requirements for the quality of borrowers, as banks lose their risk premium.
“And excessive regulatory pressure can squeeze out many relatively good borrowers and isolate them from possibility of lending, and it will deprive banks of some clients and profits,” concluded Beisembayev.

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