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The NPL ratio is high, but is gradually declining

The nonperforming loans (NPL) ratio in Ukraine was 41% as of the beginning of 2021.  

The NPL ratio has been declining gradually since 2018. In 2020, state-owned banks did a large-scale work: during the year, they wrote off UAH 30.6 billion and an equivalent of USD 3.1 billion in NPLs. It allowed them to reduce the NPL ratio from 63.5% to 57.4%. As a result, the total NPL ratio in the banking sector declined by 7.4 pp in 2020.

At present, banks have recognized all NPLs. Their coverage by provisions has been rising continuously and stands at about 98%. Thanks to these efforts, NPLs put no pressure on banks’ profitability and capital.

However, the still large NPL ratio remains a burden for the banking sector, especially for state-owned banks, which accumulated over 70% of the sector’s NPLs (PrivatBank accounts for 42%).

Such a high NPL ratio is a result of the credit expansion seen in previous years, when borrower assessment standards were low, and creditor rights were not properly protected. Another major reason was the practice of related-party lending. The related parties stopped servicing their loans during the crisis.

The NBU encourages banks to be more active in cleaning their balance sheets: they should restructure, sell, or write off their NPLs.

The Regulation On Defining Criteria for Writing Off Impaired Financial Assets of Banks against Expected Loss Provisions was approved by NBU Board Resolution No. 49 dated 13 April 2020.

Top 25 banks, million UAH
 
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NPL ratio of the top 25 banks in terms of loan portfolio, %

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NPLs ratio of the top 25 banks in terms of loan portfolio, %
The surge in the NPLs ratio during 2015-2017 emerged mainly due to three factors:
  1. An Asset Quality Review (AQR) of banks held by the NBU, which prompted banks to recognize significant volumes of loans as non-performing.
  2. Introduction of a more stringent definition of "non-performing loan (NPLs)" term in accordance with best international practices (NBU Board Resolution No. 351).
  3. Recognition of NPLs by PrivatBank after its nationalization.

 

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Details on NPLs definition in different years:
  • Starting from 1 February 2017, NPLs are determined in accordance with the NBU Board Resolution No. 351 of 30 June 2016. NPLs are the defaulted loans. The default is determined by the fact of payments on the asset past due 90+ days, or the inability of the borrower to repay the debt without repossession of collateral.
  • From 1 January 2013 NPLs are determined in accordance with the NBU Board Resolution No. 23 of 25 January 2012. Non-performing exposures (previously defined as negatively classified assets) were determined as exposures with payments past due 90+ days; individual exposures past due 30+ days with low counterparty financial class (the last two of the five quality categories).
  • Starting from 1 January 2001, NPLs are determined in accordance with the NBU Board Resolution No 279 of 6 July 2000. Loans classified as "doubtful" or "bad" are determined as negatively classified loans. Negatively classified loans are loans for which debt service is at high risk (taking into account the borrower’s financial condition and the quality of the collateral), and the likelihood of full repayment of the outstanding debt is low or practically negligible.
Details regarding the disclosure of NPLs

The NPLs data has been published on the website of the National Bank of Ukraine since September 2017. Prior to that, disclosure of NPLs data accompanied the banksʼ quarterly financial statements.

1. Monthly from 1 September 2017 on the official website of the National Bank of Ukraine according to:

  • On establishing a list of information subject to mandatory disclosure by banks of Ukraine (NBU Board Resolution No 11, of 15 February 2018);
  • On publication of certain information on the activities of Ukrainian banks (NBU Board Resolution No 85 dated 31 August 2017).

2. On a quarterly basis, from 1 January 2012, banks are required to publish interim financial statements (including the Note "Certain Bank Performance Indicators" with data on loans by quality categories) by posting on the Bank’s website according to:

  • Guidelines on the procedure of preparation and disclosure of the financial statements of Ukrainian banks (NBU Board Resolution No 373 of 24 October 2011).

3. On a quarterly basis, since 1 April  2005, banks are required to publish quarterly financial statements (including the Note "Certain Bank Performance Indicators" with indication of loans by risk categories) in the newspaper of Cabinet of Ministers of Ukraine, "Government Courier", or the parliament’s (Verkhovna Rada of Ukraine) "Voice of Ukraine" according to:

  • Guidelines on the procedure of preparation and disclosure of financial statements of Ukrainian banks (NBU Board Resolution No 480 of 27 December 2007);
  • Guidelines on the procedure for preparation and disclosure of financial statements of Ukrainian banks (NBU Board Resolution No 598 of 7 December 2004).