Issues and Opportunities 

A lthough one of the most active fields in Armenia is the banking sector, many of the existing problems in the industry hamper full economic growth. Since the beginning of the 20^th century, economists have begun to study the link between the banking sector and economic growth. The model developed by the economist Ross Levine shows [1] mechanisms of the banking sector, free cash flow, investments and economic growth indicating that via the banking system, the activation of the financial sector will also lead to economic growth. The pace of the banking sector and economic growth in Armenia is not in harmony: the most important index characterizing the activity of banks and credit organizations over the last 5 years, which is the average annual growth of loans, amounted to about 10 percent, whereas the average pace of real GDP was 2.5% on average.

The weak link between the banking system and economic growth is a result of a number of factors.

The structure of loans is one of the primary issues in the banking system. In 2018, the volume of loans increased in all spheres: consumer loans had the greatest share, about 25% within the structure of loans. Next are the loans directed to industry, which are about 19%, and trade loans about 16%. This structure may at first sight not provide us with detailed information, but there is no doubt that it has become one of the weakest points of the economy.

Compared to 2017, 2018 consumer loans increased by 37%, and the share of total loans became 25% instead of the previous years 21%. Comparing loan structures and loans/GDP results, it has increased by 3.7% as compared with 2017. It becomes clear then that the increase in loan volumes do not promote economic growth and the main branches of the loan volume grows at a high pace, unlike the economic growth and economic activity [2].

The volume of mortgage loans increased by 22% in 2018 compared to 2017, and the activity recorded in the mortgage market is a result of state programs. Although industry loans grew by 21% in 2018, which is quite high, their share in the total loan structure has not increased significantly. There is quite an interesting trend in agricultural loans. If in 2017, the agricultural volumes were reduced by 4%, then in 2018 they increased by the same amount reaching the level registered amount in 2016. We can conclude from the above, that the government-funded projects directed to that sphere already have made a positive influence restoring the previous level of agricultural loans. Within the State Support project’s framework, 6195 loans, which forms 26.1 billion AMD, have been issued since the 4^th quarter of 2017 up to the end of 2018, of which 5282 loans, which is 21.9 billion AMD has just been issued in 2018.

710 million AMD have been issued for subsidizing loans, and the average amount of the loan was 4.2 million AMD. The loans in the field of trade and service are of great interest: the growth rate of service loans have showed a declining trend from 2016-2018. The volumes of trade loans have decreased by 5% in 2018 compared to 2017, whereas it was 25% in 2017 compared to 2016. The shares of the two fields mentioned above have declined in 2018. Thus, the growth of loan volumes have been mainly provided by the increase in consumer loans, which in its turn stops the long-term economic growth.

This structure of loan portfolios within the banking system have created many difficulties for the banks. Particularly, this refers to the quite cautious and sometimes even evading activity implementations.

To reduce the risks and promote the banking system, the Central Bank of the Republic of Armenia establishes a number of standards, including liquidity standards. The behavior of commercial banks in the RA can be characterized as too cautious.  In recent years, a situation has been observed from the point of 2 indicators characterizing bank liquidity, when the actual indicators (rates) have always exceeded the normative rates.  The actual rates of 2015-2018 high liquidity assets/ general assets have exceeded the normative rates 2 times, and the high liquidity assets/ demand liabilities 2.4 times.

The above mentioned proves, that the banks have begun to increase the risk’s           “appetite”, though it is too early to estimate its effectiveness, as the volume of loans for financing the ongoing expenditure is growing faster than the loans given for capital expenditure. Thus, a positive shift has been noticed in terms of liquidity, but the banking system still remains in an overvalued condition. The negative impact of high liquidity is noticed, when the banks avoid taking risks and send free cash money to the market, which can promote development of economy.

According to Andranik Grigoryan, Head of Financial System Stability and Development Department of the Central Bank, both at the end of 2018 and now, the liquidity rates of the banking system continue to stay high, which proves, that at any time the banks have an opportunity to serve customers at the expense of liquidity means. It can refer to giving loans, deposit repayments and various types of payment transactions. Within professional frameworks, however, the banking system is characterized as hyper-inflated, and it is particularly mentioned as being above the normative.[3]

One of the most important tools to inject money into the economy is the refinancing rate defined by the Central Bank, which influences the interest rates of loans and deposits. The refinancing rate has a tendency to decrease: if in 2015 it was 9.75%, in January 2019 it was 5.75%, which was the minimum for the mentioned period. The dynamics of both deposits and loan interest rates were in general fluctuating unlike the refinancing rates: the minimum rate for loan interest was registered in April 2019.

There is a public opinion, that high interest rates and low deposit rates cause non-affordability for the loans, whereas the durability of the loans is not only connected to the given loan’s time, interest rate or the purpose of the loan, but to the documentation and pledge liquidity as well.

Loans accessibility protects the rights and interests of the lender, as it may later lead to non-performing, unreliable loans, which in its turn can suppress the economic growth. Among non-performing loans are the loans classified as controlled, non-standard, unreliable or suspicious by the Bank.

Non-performing loans / common loans and bank liquidity rates

In recent years, there has been a positive tendency for these loans: in 2018 it dropped by 3% points compared to 2015. Consumer, trade, processing industry, public food and agricultural loans had the largest share within the non-performing loans, all their rates have decreased in 2018 compared to December 2017, except for consumer loans, which became 1.39% instead of 0.85%. All this proves once again, that the high volume of consumer loans increases the negative influence on the economy within general loans.

Legislative changes were made by the Government’s initiative to smooth the barriers of the banking system and to free the banks from unnecessary burden, which gave the opportunity to get rid of considerable sum of non-performing loans. The latter made it possible for the trade banks to forgive individuals the penalties and fines imposed on unreliable loans up to May 31, 2018, without additional tax liabilities.

According to Nerses Yeritsyan, Deputy President of the Central Bank, banks have always been ready to solve that problem for the borrower, but it has created additional liabilities on them (in case of 1 million AMD concession, the bank had to pay a tax of about 200 thousand AMD). Hence, this kept them away from taking that step.

According to Central Bank’s data, the volume of amnestied fines and penalties imposed on loans given to individuals recognized unreliable as of June 2, 2019 was about 11 bil. 817 mil. AMD, and the number of beneficiaries was 20889.

During a year banks have been relieved of part of non-performing loans, though besides the issues of amnestied fines and penalties imposed on unreliable loans, the key issue is raising the organizations’ competitiveness in the country. There are some worries, that the amnesty will not increase the competitiveness and creditworthiness of the organizations, as most of the loans go to the replenishment of working capital. This once again emphasizes the ineffective structure of the loan portfolio.

For providing financial stability and raising the efficiency of the banking system and availability of services, the Central Bank made a decision in 2014 to change minimum capital threshold: since January 1, 2017, the minimum amount of total capital threshold was set 30 billion AMD, instead of the previous 5 billion AMD. As a result, the number of banks in the RA dropped to 17. The drop in the number of banks was also accompanied by the concentration increase in the market: if in the 2^nd quarter of 2016, the share of assets of the 3 largest banks in the RA banking system was 37.8%, and the largest share was 15.1%, then in the 4^th quarter of 2017, the indices increased by 3.9% and 0.4% respectively, forming 41.7% and 15.5%. In 2018, no significant changes have been seen yet.


Share of banks with the largest share of banking system assets, %

Most of the issues in the banking system are a result of a loan portfolio system. Although the Government jointly with the Central Bank tries to turn the revival of banking system into economic development, the latter will be possible only in case of a more efficient structure of loan portfolio. The increase in the minimum total capital of banks does not encourage competition in the banking system in the long run, by making the tariffs of services tougher.

Possible Solutions

T he presence of specialized banks in the financial system is highlighted from the viewpoint  of banking system development, and so as to promote their activities, it is important to regulate the legal field, elaborate relevant norms, sub-legislative acts, as today’s banks of the RA are universal, and the legal framework of this field is consistent to them. Taking into account that using domestic sources for economy financing is beneficial, the free cash available in the economy should be directed to the special investment programs financing. Also, knowing the role of the banks in the development of economy, it becomes important to use the tools, which already exist but are not widely used. The normative defined by the Central Bank of Armenia, with the help of which it provides financial sustainability in country, lets the banks feel more secured. Mandatory reserve norm is among the most important tools of the Central Bank, which is different [4] for the funds attracted in AMD and in currency. The minimum limit for the funds attracted in AMD is 2% and in currency 18%. However this same limit attracted in stocks is 0%, which should have promote banks to issue stocks, which in its turn would benefit to another financial area’s activation, that is stock market.

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[1] Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, XXXV, 688-726

[2] Statistical Committee of the Republic of Armenia.

[3] The table presents interest rates on the loans and deposits for a period of 1 year

[4] CBA Regulation 2, p. 5.