Director of Guarantee Fund: "We do not forgive debts"
Managing Director of the Individual Deposits Guarantee Fund Kostyantyn Vorushylin has told UNIAN about the last high-profile bankruptcies and difficulties in relations with law enforcement agencies, despite which first owners and top managers of bankrupt banks will soon be announced suspicion in criminal cases.
Over a two-year purge of the banking system, the Individual Deposits Guarantee Fund (IDGF) withdrew from the market more than 70 financial institutions. Now it has launched the most interesting stage of the banks’ liquidation – the sale of assets. Within the legal framework, proceeds from the sale of loans and assets of banks should be directed to the payments to the creditors of bankrupt banks, including major investors, the businesses, the Fund itself and the National Bank.
At present, there are 81 banks in the Fund’s management. The total book value of the assets of these banks accounts for nearly UAH 440 billion, however, this does not mean that the proceeds from their sale will be at the same level. For a number of reasons – the revaluation as a result of devaluation, the withdrawal of assets from the banks on the eve of bankruptcy and accounting distortion – the estimated value is several times lower than the book value. The selling price of these assets is often even lower due to the low demand.
Managing Director of the IDGF Kostyantyn Vorushylin, who has held the post since October 2014, has told UNIAN about the latest high-profile bankruptcies, including the fraud involving Mikhailivskiy Bank, the reincarnation of Ukrinbank, and difficult relations with law enforcement agencies. He also shared his outlook for the future of the Ukrainian banking system.
Mr Vorushylin, for almost 2 years you’ve been heading the Fund. What has changed in the system of deposit guarantees during this period, and what are the key achievements and errors of your team?
Today and two years ago – it’s like two different funds. At the moment, the Fund has almost 400 employees. Over these two years, we have returned deposits worth some UAH 80 billion to 1.5 million people.
A definite advantage is the fact that we are fine-tuning the system of the assets sales – we have gone a long path from closed sales to the normal stock-exchange trading. Not to say that there are no errors and we are happy with the result. But at least we are moving in the right direction. The main thing we have managed to achieve is introducing the principle of collective decision-making on the sale of assets. There are no single-handed or backroom decisions as we have switched to public auctions. We have set up a consolidated office.
We have not yet succeeded in making the system of payments to depositors fully automated, without tying these payments to a particular bank. We are working on it. I hope that this year, the test will be passed. We started testing it with the banks, but we lacked the technical capacity and human resources. Today, we have a decent IT-team. And the whole team is good and hard-working.
Can we say that the business process of withdrawing banks from the market is set up in full?
It has long been built, but we want to minimize the cost of this business process. There are 8,000 people still working in 81 insolvent banks today. The amount of work is very large – we have over 100,000 lawsuits across Ukraine, and another 140,000 – at the stage of enforcement proceedings. This means huge labor costs, which do not always give a positive result. Therefore, we can’t rest on our laurels yet and we can’t say everything is perfect.
How can you comment on the recent high-profile bankruptcies of Khreschatyk, Fidobank and Mylhaylivskiy banks? How could it be that after two years of market purge and the adoption of the law on strengthening the responsibility of the owners and management of banks, such a large-scale withdrawal of assets from the banks was possible?
We are faced with a new phenomenon: earlier, the shareholders and top managers of the banks until the end were fighting to save their financial institutions, but in the recent cases, those were planned acts to bring the banks to bankruptcy.
In the case of Fidobank, the act was stretched in time for a period of more than a year and it was performed more “skillfully”. For example, the building of the bank on Velyka Vasylkivska Street in Kyiv was purchased for credit funds, and the loan has not yet been repaid. The Bank took the land on its balance at an inflated price. This is a typical scheme - the whole Makarov district of Kyiv region is pledged to the insolvent banks.
Khreschatyk was also systemically preparing for such a turn of events, although we had hoped that it would survive.
Mykhaylivskiy bank, it would seem, had a clear business model in retail, but it turned out that the owners and management of the bank decided to withdraw the bank’s corporate sector. And they deceived their depositors, by taking deposits of individuals in favor of financial services companies. That’s not how the business should be done.
That is, did Mykhaylivskiy originally plan to deceive its – or better say the financial company’s – investors and not return the money to them?
I can’t say that; this is a question to the law enforcement agencies. The bank explained this mechanism with the effective restrictions on deposits. These funds received from investors they supposedly invested in the retail business. The IDGF and the National Bank did not control and did not realize the volume of these funds – there was a misunderstanding between the functions of the NBU and the National Commission for financial services market regulation. We assumed that it’s about some UAH 200-300 million. The NBU in the form of an ultimatum demanded that the bank recapitalize and reveal these operations on its balance sheet. But what they did was anything but revealing them on the balance sheet. It was about cheating people. And no one suspected that there was more than a billion hryvnias there.
Calling these people the depositors of Mykhaylivskiy is not quite correct – they are the people who were deceived with the participation of Mykhaylicskiy bank. They would come to the bank’s branch and sign the contract, where the title says "Mikhaylivskiy Bank”, but on the inside, there are completely different signees. The thing is that many people simply did not read through the papers down to that point, so they failed to realize what was going on. Then in just one day, the operations were displayed on the bank's balance sheet with the assistance of B-2, the software developer (who also played a not very good role). It is possible that the developer will also be held accountable if we can prove that it has contributed to these offenses. After manipulation, the money never appeared in the bank; there were only records left in the bank papers. Meanwhile, the funds were siphoned to the affiliated companies, and it is now justified to demand from them the return of money to depositors.
How was it possible? Investors were interested in figures - the financial services company offered a higher rate on deposits and did not withhold from depositors the interest tax. Having fallen for the promised profit, the people are paying for it today. This is the price of their risk. I believe that it’s the court that has to take the decision now. If it rules that the Fund must pay, we will do so. This is quite possible, as we have already seen cases when the evidence was presented in court hearings that transactions on fragmentation of deposits were carried out at night,beyond the bank hours, but the court ruled in favor of the depositors, and we were forced to implement such verdicts.
In addition to the fraud with investors, Mykhaylivskiy’s credit portfolio was through a fictitious sale transferred to the financial company Pleiada, which then ceded the portfolio to the company Fagor. In addition, apparently, they could have a special agreement regarding the court ruling in favor of this illegal transaction. This is - a living portfolio, and now, a factoring company in the form of an ultimatum demands from the bank's borrowers the return of the money in its favor. That is, someone is trying to make money around this fraudulent scheme. But the money belongs not to the factoring company, bit to Mykhaylivskiy bank and its creditors.
There was an interesting precedent with Ukrinbank, which received a court ruling on cancellation of its liquidation, then re-registered and got renamed overnight. How can you comment on this?
This is a typical fraud scheme aimed to withdraw assets. The former owner of the bank (Volodymyr Klymenko, whom the media tie with ex-President of Ukraine Viktor Yanukovych and his closest entourage) received the court ruling; but in this way he does not try to revive the bank, he rather tries to turn the assets into liabilities and cheat the taxpayers, withdrawing UAH 1.8 billion. If he has the money, he should go to the National Bank, as he is supposed to, and he should accept the creditors' claims to the bank, including those from the Fund, and we will wish him luck. But he will have to return the money, spent on the payment of deposits. He doesn’t need the bank, he needs access to assets. But our interests are the interests of the public. We are interested in selling these assets in order to return the funds to creditors.
Why do the courts rule in this way, making the people question the competence of the NBU?
This is not about the courts, but the individual judges. Such decisions, absurd decisions,were obviously dictated not by logic, but some other considerations. The courts are undergoing their own reform, therefore the dirty judges try to use their last chance to snatch something. We report these facts to the National Anti-Corruption Bureau, the Higher Qualification Commission, and the Higher Council of Justice. I believe that the sharp change is coming, and the situation will improve.
There are plenty of such examples, while the Fund has some 80 banks under its management. How much time is needed to completely withdraw them from the market?
The law provides for five years for the liquidation of the bank. In practice, the greatest amount of work begins in the second or third year. But I think that we will fit within a five-year term. We're once again returning to the idea of setting up a specialized agency to deal with the smaller-scale problematic assets and close faster the banks with only two or three people and virtually no assets left. The remaining assets are worth nothing, while infrastructure costs to maintain them is just too high.
How is the sale of assets going ? What is being sold the best?
This year, the Fund received from the insolvent banks about UAH 3.6 billion, including UAH 2.3 billion - from the repayment of loans, UAH 1.3 billion - from the sale of assets, UAH 47.6 million - from rent. The sales are poor now. For example, there were some 200 auctions at all stock exchanges last week, and only UAH 170 million was received with the estimated value at more than a billion hryvnias. In fact, there are few buyers, and there are few assets that can be sold with profit.
The best thing for sale is real estate, but there is not so much offer. There is also property that remains in the bankrupt banks, but this is mostly trash no one needs. The most difficult thing to sell is loans. For example, if it’s a loan with a pledged real estate, then people do buy it. If a pledge on the loan is "the next year’s harvest" which has passed three years ago, then who would buy it? Maybe only the borrower company… But often it also waits until the Fund reduces the price, so that it could redeem its loan at a more profitable price. But this cannot continue indefinitely. Sooner or later, we will package such loans into one batch and sell it as a whole.
After the introduction of the temporary administration, only 10% of borrowers continue to repay the loans, while the others start evading it. Apparently, they believed that the debt will be written off, and everything will be forgotten. But this is not the case, and borrowers should be prepared for the fact that if they don’t repay their loans today, collectors will knock on their door tomorrow. Besides, the interest on the loan continues to be accrued, even after the introduction of the temporary administration, so the debt keeps rising. Therefore, it would be more profitable just to come and solve the problem peacefully, if possible. We do not forgive debts; and it is not the money of the state or the Fund – it’s the funds of depositors. Someone deposited funds and someone took a loan. And in this case, those who do not pay back the loans, don’t cheat the state – they cheat the depositors, their neighbors.
Perhaps you will have to cut down your plans for asset sales this year?
Our financial plan is UAH 7.5 billion that we want to return this year, including through the sale of banks' assets. Now it's summer, and the activity is down. But we are still fighting for this figure. We hope that eventually, the system alike Prozorro [e-procurement by state agencies and SOEs] will start operating, which will reduce speculation on the stock exchanges. However, the monopoly, created by the National Bank, demanding that the assets pledged as collateral for refinancing loans be sold through SETAM system, is a road leading nowhere. What is pledged to the National Bank – is the best assets, and we would like to fine-tune the process to have them sold as quickly as possible. But when the National Bank decides on the sale of just 10 assets per week, can you imagine how long the process will take?
If the assets are being sold so slowly, will the Fund be once again forced to take loans or will it revise the rules for regular contributions from banks?
We owe more than UAH 51 billion to the Ministry of Finance, nearly UAH 9.1 billion – to the National Bank. This year, we haven’t taken a hryvnia from the state, however, the unscheduled decisions on the withdrawal of banks from the market (Khreschatyk, Mykhaylivskiy, and Fidobank) can force us to turn to the Ministry of Finance, again. This does not mean though that we need money immediately, maybe we can even do without new loans. We do have the funds for the current payments. But the reality is that, given the economic situation, I don’t understand clearly, how much we can gain from the sale of assets of insolvent banks. There is also a norm in the law, requiring that we keep at least 2.5% of the total guaranteed amount in our accounts. That is, even if the situation is normalized, and there will be no large-scale payments, we will still need to keep UAH 4.5-5 billion in our account, and, if necessary, we will be borrowing funds for this purpose.
Today we are not going for the increase in contributions, we do not introduce any new, special contributions. But we will need to return UAH 60 billion of received loans. Do you think it’s the Fund which took this UAH 60 billion? No, it’s the banking system which took it, and it’s the banking community which will have to return it. Maybe, a year or two will pass, we will push away from the bottom and start going up, and then we will introduce additional contributions, and the Fund will be forced to take the decision on raising charges for the banks, and this means the additional load on the entire banking system. We're all in the same boat.
Maybe it's time to change the system of guarantees, to make provide for the joint liability of depositors and the state? For example, to cancel the guarantees on interest...
Canceling guarantees on interest… Let’s discuss it. If an investor puts money in the bank under a higher interest – this is their passive income, their business and their risks.
Probably, it would be necessary to adopt legislation providing for mandatory warnings in the advertisements of banks offering high rates that this is actually an increased risk and personal responsibility of the depositors.
Today, we again go out with the initiative to amend the law, to have an opportunity to deprive certain banks temporarily of membership in the Fund, as a sanction. And this information will be made public.
Besides, we have now introduced decadal reporting for the banks, and if we see a rapid increase in the load upon the Fund, then we initiate introduction a temporary administration. That is, when we see something strange happening, as it was with Khreschatyk Fidobank.
In fact, you have accelerated the bankruptcy of these banks?
In fact, yes, we have, together with the National Bank. You see, we have already paid to depositors of Khreschatyk nearly UAH 3 billion… Why should it be at the expense of the state? Why have certain individuals, who are close to the leadership and possess insider information, taken their assets out of the bank and closed down their loans? To put it mildly, this is not fair and should be punished according to the law.
But what I was most worried about, is the protracted restructuring of the police, where a number of unscrupulous officers still remain. That’s why we spoke up when they wanted to take over the loan cases regarding Khreschatyk. Those are not just cases, but loans associated with borrowers of Ivanov-Khmelnitsky group. Let them take the cases, we do not mind, but only in compliance with the rules: we must make affirmed copies. But taking them quickly and doing business on them is at the very least immoral.
So, is someone in the police setting up such business?
Definitely. For example, when we are "stepping" on Tsyplakov, who has withdrawn all of his assets from Yuzhkombank, he finds an opportunity to initiate criminal cases and have our people, the liquidators, interrogated. So who is chasing whom, after all? Who should be pursued by the police? Perhaps, it’s Tsyplakov, in order to return the money that the state has spent on payments to depositors of his bank.
Often, law enforcement officers perceive us as a private finance company. They send SWAT teams to seize documents at our premises, lay our employees on the floor, stopping short of kicking them. Although, all they need to do is make a phone call.
Someone is working honestly and in good faith to achieve the end result, but someone is setting up their own business – as in police, as in the judiciary. A spoon of tar spoils a barrel of honey.
Maybe this is the reason why the security forces have still returned nothing to the Fund and no one was punished following the massive bank failures?
Yes, I am declaring it officially. Despite the barrage of criticism that fell upon the Fund, we have returned UAH 7 billion. Let someone from the security forces claim they have returned at least UAH 1… Although, we applied to them many times.
There is worldwide practice when the assets are returned quite effectively. Take South Korea, where a Fund has two prosecutors and 15 detectives assigned to it.
Today, the Ukrainian investigators lack qualification. There are smart guys who will bring it to the end and issue suspicions against bank owners. But there are very few of those. We must have detectives who specialize in the banking segment. For our part, we are ready to advise and assist as an interested party.
How many cases are now stuck in the law enforcement agencies and what is the amount of the claims in question?
We have already submitted to law enforcement authorities more than 3,000 applications totaling UAH 241 billion. Including 370 applications for UAH 178 billion in respect of the owners and top managers of banks. This is a huge amount of money. At the moment, the output is zero. But I hope that there will be some result after all. It won't come fast, though.
What will happen to our banking system? Is it viable after the turmoil experienced?
Today, it does not live, it purely gets by. There is no lending, bankers risk very cautiously. I agree with the National Bank: for 90% of the loans, it is necessary to create reserves. But what shareholder will go for it, given that the banking business is not currently profitable? There should be a compromise between the businesses, the banking sector, and depositors.
The depositors need to understand that today, the rate on deposits may reach 27%. There are no such rates anywhere else in the world, except in countries with hyperinflation. The rate may be 12% in hryvnias and 4-5% in foreign currency. We all need to go for some compromise if we are interested in the future of our country, stability and peace.
Will there be any other high-profile bankruptcies in the banking sector?
To be honest, we haven’t even expected any high-profile bankruptcies, such as of Mykhaylivskiy, Fidobank and Khreschatyk. These are the “unplanned” bankruptcies. We expected that the owners and the management of these banks will not allow the financial institutions to fall apart. We hope that there will be no more of such resonant bankruptcies. But after these three cases, there is no clear certainty. Frankly, after this episode I believe no one’s words anymore. I had no personal contact with Adarich, but I personally spoke with Doroshenko [head of the board of Mykhaylivskiy Ihor Doroshenko], with Hrydzhuk (head of the board of Khreschatyk Dmytro Hrydzhuk), and I hold a personal grudge against them for providing false information. They are not real men for me.
Will they be brought to justice? Will anyone be punished for mass bankruptcy of banks?
So far, no owners or senior bank managers have been punished. But someone will certainly will, one day. We are now conducting joint work with the investigators, and we are already getting to the point when suspicion will be announced against certain owners and top managers.
The biggest problem today is the lack of consolidation of efforts in this direction. There is no joint action, no common position, and no good judicial practice. There is no coordinated work with the Prosecutor General’s Office, but I hope that this situation will change with the appointment of the new prosecutor general.
Some of our cases are in the police, some - in the PGO, and some - in the SBU. There must be coordination between all law enforcement agencies aimed at the return of assets to creditors of banks. The largest creditor of these banks is the IDGF, and then goes the National Bank, which also protects the interests of the state and wants to return the funds earlier issued to the banks as refinancing. By far, we are failing to have complete understanding with the security forces.
We do not need to put someone to prison; first of all, we want to return the assets. On the other hand, if the management of Ukrprofbank were prosecuted at the time for the withdrawal of assets, then there would be a similar story later with the Khreschatyk and Mykaylivskiy banks. And their shareholders and managers would not breathe freely, laughing at the law enforcers and talking in informal conversations that they "bribed certain people, and everything will be fine for them".
There are some decent owners of failed banks, who are not hiding and who try to pay their major investors at the expense of their other businesses. They are trying to find ways to settle with us as with their creditor. Our main task is to get everyone to settle and find a joint solution to the situation and return public funds, which we spent on payments to depositors.
And the biggest problem is our mentality. We all need to think about our actions and deeds, not shifting responsibility onto others.
Olha Hordienko (UNIAN)