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| Saturday, April 20, 2024 | |||||||||||||||||||||||
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THE BANKING SYSTEM IN ARMENIA Reprinted from Interfax. Since 1993 when Armenia began forming a banking system the number of commercial banks has dropped more than three times to 20 at present. The Central Bank of Armenia conducted banking reforms aimed at improving and enlarging the banking system. The liquidation of pocket banks and banks engaged in risky activity improved the quality of banking assets, made banks more reliable, and generally strengthened the banking system. The assets of 20 Armenian banks grew 26.7% last year and capital grew 29.4%. Combined profit for 2002 was 4.8 billion dram and 1.8 billion dram for the first half of this year. NUMBER BANKS DOWN THREE TIMES IN 10 YEARS The formation of the banking system began after Armenia introduced a national currency and passed laws in April 1993 on the central bank and on banking. Before that the development of the banking system was not regulated and by the start of 1993 Armenia had more than 70 banks. Most of them have since been liquidated, some went bankrupt or were unable to meet requirements set by new banking laws. Armenia had just 30 banks by the start of last year and eight of them were under supervision. The number of banks dropped to 25 last year and five of them were under Central Bank supervision. Four more banks closed this year and by the start of autumn Armenia had 22 banks with 230 affiliates (a new bank was registered in March). Two banks, Credit-Yerevan and Armsvyaz, were under supervision. Temporary management is introduced at banks under supervision, which functions under a plan for financial rehabilitation approved by the Central Bank directors and governed by the law on the bankruptcy of banks. Troubled banks were liquidated under the first stage of banking reforms aimed at improving and enlarging the banking system. Most of the banks that were liquidated were so-called pocket banks that served the interest of a particular group or corporation and banks engaged in illegal activity. Central Bank Chairman Tigran Sargsian said 95% - 98% of depositors of the failed banks recover their money. The only outstanding problem at the start of the year was the return of money to 68 depositors of Credit- Yerevan, which had more than $20,000 in deposits. Such risks this year will be minimal, he said. This is largely due to a law on bankruptcy specifying that the Central Bank will launch bankruptcy proceedings before a commercial bank is in a risk situation. Identifying these risks on time enables the bank to meet its obligations at least to individuals. The efforts in recent years to liquidate troubled banks has strengthened the banking system, improved the quality of assets and services, and made banks more reliable. The banks that exist today are transparent in terms of assets and liabilities, and their activity is monitored by the Central Bank of Armenia. The banking system has reached a new level amid a drop in inflation and interest rates, economic growth, and a stable currency. The biggest problems now are the small size of the banking system and slower reforms in the real sector than in the banking sector. The banking system is more developed than other sectors in Armenia, which creates certain problems in its development. The share of capital of Armenian banks in GDP at the start of this year was 3.1% and the share of assets was 16.8%. The banking system is small because not all cash flow passes through the banking system. Armenia has a large shadow economy, so much of the real sector prefers to work with cash. Financial discipline in accounting is lacking, resulting in a lack of transparency in the real sector. Banks can operate only with open and transparent enterprises, so in order to expand the banking system these problems must be resolved, which would accelerate reform in the real sector. This is one of the most important tasks for the banking sector at present. Armsberbank is the country's biggest bank with about 100 affiliates. Other leading banks include Armagrobank, Armeconombank, HSBC- Armenia, Bank for Farm Assistance, Ardshinbank, Yunibank, and Armimpexbank. Non-residents own six commercial banks, two of which have 100% Russian capital. Non-residents accounted for 52.9% of the charter capital in the banking system at the start of the year. RRC, the Armenian research and rating center, published a rating of the country's commercial banks based on financial reports. The banks were divided into three groups - A, B, and C. The rating as of January 1 follows:
* - The Central Bank of Armenia in March 2003 declared Gladzor Bank insolvent and appointed temporary management, after which the bank was registered as a lending organization. ** -Liquidated BANKING LAWS VERY EFFECTIVE Armenian banking laws establish strict controls and licensing for banking activity. The laws are effective both in terms of tight controls and in creating favorable conditions in which to do business. The Central Bank has passed several regulations that have helped increase confidence in banks and make risk management more effective. It has defined regulations on bank secrets, asset classification, and formation of loss reserves, currency controls and regulation, accounting standards and prudential regulations. It has also created the conditions to reorganize small banks as lending organizations. This is appropriate for banks that will be unable to meet the capital requirement of $5 million that takes effect July 1, 2005. The capital requirement is currently $2 million. The Central Bank has formed a credit register and deposit insurance system. The deposit insurance system will be introduced in 2005. Banks are currently forming the guarantee fund, contributing 2% of deposits by individuals on a quarterly basis. The deposit insurance sum was stipulated at three times the per capita GDP. Per capita GDP in 2003 is projected at $750, so the amount contributed on hard currency deposits will be 1 million drams and 2 million drams for accounts in the national currency. The difference stems from the aim to expand deposits in drams and limit the dollarization of the economy. The credit register was launched in January to provide commercial banks and lending organizations information on borrowers. It will record all loan operations exceeding 2.5 million drams. Armenian banks in the first two months of the year provided information on the types of loans provided and other forms of lending. The credit register began providing information in April on banks and borrowers and periodic information on banks and all borrowers. Any individual or enterprise that has been included in the credit register by a bank or lending organization can receive information from the bank or the register. Banks can receive information from the register only regarding individuals or enterprise to whom they plan to provide loans or have already received loans. The credit register includes a white' and black list, with the latter including information on unreliable borrowers. The credit register thus helps banks identify risky borrowers, provides information on their obligations, and avoid lending to borrowers that have past due debt. The Central Bank has designated several programs as priorities at present, including the introduction of uniform regulation, corporate management in the banking system, and developing mortgage lending. Under the plan for uniform regulation the process will be combined with the securities commission and the commission in charge of insurance and pension funds. The Central Bank considers this necessary at this time and reckons it will facilitate reforms in the banking and other financial sectors. Regulatory functions will be spun off from the Central Bank in 2005 and a consolidated regulatory system will be formed. The concept of regulation in the banking system currently relies on an evaluation of the effectiveness of internal risk management systems. The corporate management system would eliminate the risks associated with bank management. The board of directors would be given a larger role and greater responsibility for bank activity. The board will no be able to influence working decisions made by bank management. The bank board would include a minimum of five and at most nine members. Bank executives and other employees would not be eligible for seats on the board, in which independent representatives must account for 20%. Certain requirements will apply to the professional qualifications of board members and the concept of independent members will be introduced. The functions of internal audit and its place in bank management will be clarified. Armenia will make amendments to the Civil Code, court practice, Real Estate Register and Property Appraisal Institution to accomplish these changes. ASSETS OF 20 BANKS UP 26.7%, CAPITAL UP 29.4% IN 2002 Armenia had 25 banks with 231 affiliates at the close of 2002 and five banks (Credit-Yerevan, Credit-Service, United Bank, Armsvyaz, and Ardshinbank) were under supervision. RiA Bank lost its license last year, Lend, Trust, and Akunk were liquidated, and Ardshinbank and Adana were placed under temporary administration as they planned to merge. The retained earnings of commercial banks last year grew 4.3 billion drams to 4.8 billion drams, according to the Central Bank. The capital of the banking system shrank by 7.2 billion dram, while it grew 29.4% for 20 functioning banks. The combined capital of the banking system at the end of 2002 totaled 42.1 billion dram, or 3.1% of GDP (2.8% of GDP in 2001). The increase was the result of a significant increase in charter capital and profits. Charter capital grew as banks worked to meet the capital requirement of $1.650 million effective July 1, 2002. The liabilities of the 20 operative banks grew 26.1% last year to 186.5 billion dram. The liabilities of the entire banking system increased 12% in the period. Heavy activity on the interbank currency market increased the funds received from banks by 25.7%. Deposits by individuals grew 21.4% and deposits by enterprises grew 12%. Deposits by individuals grew due to an increase in personal incomes and increased confidence in banks. The increase in available capital at enterprises caused them to put more money in banks. The assets of all Armenian banks had grown to 228.6 billion dram or 16.8% of GDP by the end of 2002, up 21.1% from the start of the year. The assets of 20 banks grew 26.7%. This was due to a rapid growth (28%) in current assets, which increased their share in total assets by 0.3 percentage points to 55.3%, and an increase in liquid assets and the loan portfolio. The quality of the loan portfolio increased in the past year. The prolonged or past due loans dropped by 43.4% to 6.1 billion dram, with past due down 13% and prolonged down 51%. The loan portfolio of 20 Armenian banks grew 26.2% last year. Most of the loans were made in hard currency. The share of loans in the national currency grew from 11.1% to 18.1% as these loans grew faster than hard currency loans at 98% compared with 10%. The loans were made mainly to enterprises in trade (18.1 billion dram), agriculture (7.8 billion dram), energy (10.1 billion dram), and the food industry (1.8 billion dram). FIRST HALF PROFIT TOTALS 1.8 BLN DRAM The Armenian banking system closed the first half of this year with profit of 1.765 billion dram. According to the Central Bank, 14 of the 20 viable banks closed the period with a profit of 2.9 billion dram and six closed the half with losses of 1.1 billion dram. HSBC Bank Armenia, Inekobank, and Armeconombank reported the highest profits for the period. The assets of viable banks grew 7.8% in the period to 257.9 billion dram amid an increase in lending and investment in government securities (GKO). Significant changes took place in lending. Lending to industry dropped 15% while lending to the consumer and financial sectors, agriculture, and trade increased. Lending as of July 1 totaled 85.5 billion dram, including lending to the economy of 58.3 billion dram. The amount of prolonged and past due loans shrank in the period. The biggest lenders are Armsberbank, Converse Bank, and Artsakhbank. The biggest lenders to individuals were Bank for Farm Assistance, Armeconombank, and Converse Bank. COMPOSITION OF LENDING BY COMMERCIAL BANKS (BLN DRAM)
Source: National Statistics Service of Armenia
Source: Central Bank of Armenia Investment in GKO by the start of July had reached 26.4 billion tenge. The combined capital of the banking system increased by 25.3% in the first half of the year to 47 billion dram. According to the Central Bank, all banks monitored by the Central Bank had met the capital requirement of $2 million. Five had met the capital requirement that takes effect in July 2005 of $5 million, and two of them had capital exceeding $7 million. This increased to some extent due to the opening of a new bank - Ardshininvestbank, and as the capital requirement was increased to $2 million. The Central Bank of Armenia registered Ardshininvestbank with 100% Russian capital in March 2003. It has charter capital of $5 million. Bank for Farm Assistance had the largest capital or 5.1 billion dram and charter capital of 1.3 billion dram. The liabilities of 20 Armenian banks had reached 211 billion dram by July 1. Turnover on plastic cards issued by Armenian banks totaled 24 billion dram in the first half of the year, up 61% from the same period last year. This was due to a 58% increase in the number of plastic cards issued. By the start of July about 34,300 plastic cards had been issued, including 17,100 ArCa cards, 7,500 Visa cards, 418 MasterCard, and 9,300 other cards. The capital, charter capital, profit, deposits, and clientele of Armenian banks are expected to increase significantly this year. Central Bank Chairman Tigran Sarkisian said capital will grow as banks meet the new requirement, which will result in increased charter capital and profit. Liabilities, including deposits, will increase as the clientele grows. According to Central Bank forecasts based on the development programs for 19 viable banks, the assets of the banking system will grow 14.9% this year to 259.8 billion dram on January 1, 2004 and 309.2 billion dram one year later. Capital will increase by 28.6% to 52.9 billion dram this year. The profit of 19 banks is projected at 5.7 billion dram this year. Most of it will be used to increase capital. Lending to the economy is expected to increase 23.9% to 98.9 billion dram this year. This article was written by the Interfax Center for Economic Analysis. E-mail: air@pm.interfax.msk.su World Bank Armenia Report
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