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Toxic Bank Assets Pose a Threat to the Entire Economy

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Toxic Bank Assets Pose a Threat to the Entire Economy

In 2016 the rapid growth of toxic bank assets has become a new challenge on the economic agenda of Belarus.

Within five months they doubled - from Br27.7 to 51.5 trillion. Gradually it becomes a problem of the entire national economy.

The current explosion of toxic assets is caused by several factors. First, the recession of the economy in 2015 and difficulties in loan services of companies. Second, the increase of borrowed funds in passives of many companies and, therefore, the overall level of the credit load. Third, the real cost of borrowings remains consistently high.

Trying to reduce the real cost of credit resources, many companies shifted to foreign currency borrowings and faced the opposite effect in the result of the devaluation of 2015. Negative consequences of directed loan distribution affected the growth of toxic assets as well.

It is assumed that bad debts have reached the bottom and gradual toxic assets stabilization is possible. However, in my opinion, the situation is not so rosy. It is likely possible that the available statistics do not fully reflect the situation. State guarantees "veil" the quality of assets. If any exist, assets do not belong to toxic ones although the state of borrowers can be precarious.

Since last year de jure the state has also started to "slow down" growth of toxic assets, buying them from commercial banks at the expense of its own bonds. In addition, in some cases asset quality may be overstated due to pledges at book value. And banks themselves may be interested in specific tools to "veil" the actual quality of the assets.

The depth of the recession is not as important as its duration to improve bad debts. In this regard, I think that the problem of debt growth can continue.

There can be various ways to resolve the problem - starting from recapitalization of banks to bankruptcy debtors and enforcement of pledges or restructuring and bankruptcy of the most troubled banks.

In my opinion, it is hard to see ways out clearly without being fully aware of the scale of the problem. The main objective now is to understand how challenging the situation is. De facto, the National Bank has acknowledged the challenge and initiated evaluation procedure of asset quality of banks. I think it needs to be consistent and publish results of the evaluation at least in aggregated form that will provide the necessary ground for confidence-building and the basis for further public debates on how to solve the problem.

Dzmitry Kruk, "Belarusians and Market"

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