Feb. 22, 2018

Of PrivatBank’s court woes, or Debts must be paid

The case Biola v. National Bank of Ukraine is scheduled for examination on 22 February in the Business Court of Kyiv ( No. 910/15949/17). Or more specifically - private joint-stock company Erlan: this is the official name of the company that makes products under the Biola brand.

Erlan is one of the so-called “PrivatBank companies”, and it acts as guarantor for PrivatBank’s refinancing commitments. The NBU wants the company to pay the bank’s debts.

To this, Erlan objects – the six month limitation period for the loan guarantee contract prescribed by the law expired back on 23 June 2017. While the NBU’s demands were made on 29 August 2017.

This case is not the only one, it’s rather a systemic error for PrivatBank’s problem debts. The bank is not just a leader in the number of clients, it’s also ahead when it comes to lawsuits against debtors. Thus, the Pecherskyi District Court is currently examining over 1800 such cases. The statistics of verdicts does not favor the bank. These is no official data, but in private conversations judges confirm: PrivatBank has lost a large number of cases. Both on corporate and consumer loans.

PrivatBank is a “happy” owner of the largest backlog of problem debts in the market. By the end of last year, 86% of the loans granted by the bank were inactive - in other words, no payments on them came in in over 90 days. This must be addressed - as per the Memorandum between the IMF and Ukraine.

86% of problem debts is too much. To compare: for private Ukrainian banks this indicator is at 24%. For liquidated banks - 58%. For state-owned ones (Ukreximbank, Oschadbank, Ukrgasbank) - 70% on average.

PrivatBank could look the other way when it comes to inactive loans. But in this case interest on depositors’ funds as well as the bank’s own debts will have to be paid at the expense of the state budget. This hardly benefits the state and its citizens. Which is why the bank is trying to collect debts through courts.

However, the timeframe for lawsuits is limited: for instance, three years for the loan itself and one year for the penalty. When a lawsuit is filed after that timeframe expires, the courts rule to decline it.

Many of these loans are consumer loans or overdraft. Yet Biola’s example shows that the situation with corporate loans is not so positive as well. Courts of all instances agree: debtors have failed to pay interest, but they still decline lawsuits since the period of limitation or loan guarantee contracts has expired (e.g. cases No. 563/1295/15-ц,303/5313/15-ц,  904/4218/16 ).

It is important to note: it is the defendant who must indicate that the period of limitation has expired, and he or she must do so before the start of the proceedings. PJSC Erlan reacted in a timely fashion, and their victory in court is all but guaranteed.

One might assume that it is not necessary to pay one’s debts at all now. Not so. Debts must be paid, and they must be paid at the right time. But they should also be collected at the right time. If PrivatBank is really determined to resolve the “86%” predicament, they should pay more attention to documents.

Meanwhile the bank’s executives name loans to small and medium business as one of their most important goals. Indeed, the number of problem debts in this area is relatively low - 22.14%. However, Platinum Bank and Mykhailovskyi Bank, to name a couple, already failed because they had miscalculated the risks and mishandled problem debts.

PrivatBank needs to address the “86% issue”. Changes in procedural law and bureaucratic blunders of the bank, however, make predictions increasingly grim: debtors will continue to win litigations. Considering the circumstances, it is unclear how PrivatBank is going to implement the declared 5 year development strategy with subsequent sale in 2021.