Banking & Financial Services Committee Meeting with Representatives of the National Bank of Ukraine
On June 22, the Chamber Banking & Financial Services Committee meeting took place with the agenda focused on the following issues:
1. The initiative of the NBU to introduce additional restrictions for the formation of banks’ reserves, namely proposals for 100% redundancy of loans in arrears for more than three years and the de facto ban on the formation of reserves in accordance with the rules of the International Financial Reporting Standards. These novels of the NBU were presented by the Draft Amendments to NBU Resolution #23 “On Approval of the Procedure of Forming and Use by the Banks Ukraine of Reserves for Compensation of Possible Losses on Active Banking Operations”.
The short but capacious report on this issue was made by Mr. Ruslan Leshchenko, Head of Risk Management Department, Pravex-Bank. Mr. Leshchenko briefed committee members with the content and essence of the draft amendments to Resolution #23, and proposed possible ways of improvement.
The NBU proposed draft amendments to the rules of the provisioning (famous NBU #23) caused frank astonishment and incomprehension in many members of the Committee. In particular, many banks have in their loan portfolio the significant amount overdue (or restructured) loans, which most probably can be returned by borrowers in full or in part even though formally the delay current payments (over 3 years). There is a high probability of meeting the requirements of banks by debt collection from borrowers on loans that were secured by collateral, mortgages and other forms of protection, even after three years of delay current payments on loans. Therefore, the proposed changes actually discriminate against banks as required to form reserves for operations that can with large probability still be positive.
During the discussion, the members of the Committee noted that possible alternative ways of evaluations of specific loans to provisioning can be qualified assessment of existing loans and security, taking into account the market value of collateral, the presence of guarantors and other specific circumstances of the borrower, which must be taken into account in a particular situation evaluation of the loan portfolio for the purpose of provisioning. Therefore, the NBU proposed changes on provisioning require revision and improvement in order to take account of the actual situation in many banks.
Action: According to the Committee's decision, the proposals will be developed thorough explanation of alternative amendments to the Regulation #23 and such alternative explanation and changes will be submitted to the National Bank of Ukraine with the comparative table. Mr. Ruslan Leshchenko agreed to prepare a first draft of the alternative explanations and amendments to the Regulation #23 on the provisioning, which will be approved by the Committee and submitted to the NBU.\
2. Ukrainian legislation on the payment systems and electronic money, its approximation of to the requirements of the European Union.
The short but detailed report on the regulation of payment systems, electronic money in the European Union and approximation of Ukrainian legislation to EU requirementswas made by Mr. Maksym Hlotov, Associate, Baker & McKenzie. Among other things, Mr. Maxim Glotov reported on the current status (and ambitious of implementation by the the end of 2016) of the EU Directives and regulations in the Ukrainian legislation regulating on the payment systems and electronic money.
Action: At the beginning of 2015, the Committee decided on a permanent basis to begin discussion of EU directives and regulations that need to be implemented in the Ukrainian banking and financial legislation under the Association Agreement between Ukraine and the EU. Adaptation payment standards and rules of e-money is one of the main priorities for the implementation of such legislation. Conceptual proposals for the necessary amendments to Ukrainian legislation proposed by Mr. Maxim Glotov will be finalized in Position Paper with a comparative table and submitted to the National Bank of Ukraine and other responsible authorities.
3. Write-off of the bad debts, problems of electronic VAT administration and taxation of financial institutions.
The short and effective presentation on issue of write-off of the bad debts by banks was made by Mr. Vadim Kononenko from the Bank Credit Agricole.Mr. Vadim Kononenko said that the issue of writing-off bad debts arose again as result of the amendments to the Tax Code of Ukraine, which actually returned taxation of writing-off bad debts to the tax rules that existed before 2008. Namely, the write-off of the bad banks debts for the tax purposes was virtually impossible or so difficult that banks have very limited opportunities for such write-offs of bad debts. This situation of discriminatory and restrictive tax rules significantly complicate the improvement of capitalization for many banks and worsen currently difficult situation. Therefore, the position of the Ministry of Finance of Ukraine that triggered the return to the tax rules of bad debts that existed before 2008, remains unclear. Moreover, since the resolution of this problem until 2008 was insisted by international lenders (IMF etc.) and it was resolved effectively, a return to bad debts tax rules that existed before 2008, created a situation that international creditors and Administration of the President believes that the problem no longer exists because it has been resolved in 2008.
The changes to the tax rules of bad debts that existed from 2008 to 2014 were made to stabilize and improve capitalization of Ukrainian banks. So surprising is the position of the Ministry of Finance on the preservation of the Tax Code norms, which are discriminatory and restrictive for the activities of Ukrainian banks.
Action: All the proposals were generally supported by the Committee Members and will be presented by Mr. Kononenko during the meeting with Ms. Olena Makeeva, Deputy Minister of Finance, on June 25, 2015.
4. Proposals for the taxation of stock market.
The short and inspirational presentation regarding taxation of stock market was made by Mr. Dmytro Leonov, Chairman of the Board, Ukrainian Association of Investment Business. First, the introduction by the year higher rates of taxation of passive income individuals actually led to the destruction of basic formation potential domestic investors in Ukraine. The rates of taxation of investment income should be at least basic or event preferential. Second, the introduction of a tax on the income arising from the revaluation of financial assets and the exchange differences arising as a result of the devaluation of the hryvnia, has led to tax virtual (not actually received) income. This virtual income tax should be abolished. Third, the current practice of introducing taxes on turnover of financial assets actually prevented efficient operation of institutional investors and portfolio investment in general.
On behalf of the Ukrainian Association of Investment Business Mr. Dmitri Leonov suggested solutions solve a number of conceptual shortcomings of the Tax Code on taxation of the stock market: tax on the sale of treasury securities, cancellation of powers of tax authorities to approve legal acts of the SSMNC, taxation of private pension funds as non-profit organizations and other.
Action: Proposals of Mr. Leonov were generally supported by the Committee Members and will be supplemented by the Committee before sending to the state authorities.
5. Pledge of shares, improvement of the currency legislation, protection of the creditors’ rights.
The short and fascinating report on amendments to the Ukrainian legislation on the improvement of the pledge of shares in limited liability companies, mortgage rights on funds in foreign currency on bank accounts and other rights protection of creditors were presented by Mr. Olexiy Soshenko, Counsel, Clifford Chance. In particular, on issues related questions of collateral funds in foreign currency accounts in Ukrainian banks Olexiy Soshenko presented draft amendments to the Decree of the Cabinet of Ministers of Ukraine #15-93 «On Currency Regulation and Currency Control". The report of Mr. Soshenko gradually moved into active discussion among the Committee members on technical issues of collateral in the shares of LLC and other issues of this mechanism to ensure in practice of the banks. Committee discussed the most controversial aspects of the proposed changes.
Action: The proposed changes to the legislation on pledge of shares in limited liability companies, pledge of the rights of the funds in foreign currency in bank accounts and other amendments to several laws to protect the rights of creditors and investors, which were presented to the Committee members, in general, were supported by experts of the Chamber member-companies.
Following the meeting, all comments will be included in a Draft "On Protection of Creditors’ and Investors’ Rights", and the Chamber will continue to work on the draft documents to submit full Draft Law to the Parliament.
6. Improvement of protection of consumers of financial services.
The short and capacious report on the new Draft Law #2456 “On Amendments to Some Legislative Acts of Ukraine regarding Improvement of Protection of Consumers of Financial Services” was made by Ms. Yulia Vitka, Head of Legal Department, USAID / FINREP. The Draft Law was presented by Ms. Vitka as the most fruitful compromise settlement of the issue of consumer protection in financial services. It was also noted that the law should be adopted almost the same time as the law on the protection of creditors / investors.
Action: Generally this Draft Law is a compromising bill, which in best scenario will be adopted nearly at the same time as the Draft Law on protection of creditors’ / investors’ rights. The Committee decided to carefully review the proposed legislation and submit the relevant amendments by the first reading in Parliament.