Executive Director of the Bank Asmus Rotne has told ArmInfo about the Bank’s achievements and plans.
by Tigran Khachatryan
ProCredit Bank Armenia started up in Armenia in February 2008. The Bank’s activities in the country are based on ProCredit Holding’s strategy and are focused on SME financing. Today ProCredit Bank Armenia has almost 15% of this market and the biggest share of SME loans in its total lending portfolio (90%).
In Q3 2013 you finally earned enough profit to be able to reduce your losses. When are you planning to zero them and to become profitable? Are you planning to intensify your lending activities for this purpose? What priorities do you have here?
As of today we have already gone out of losses and are beginning to make a profit. ProCredit Holding’s experience in other countries shows that the average time its subsidiaries need for becoming profitable is 3-5 years. The reason why this took as a bit longer is that we started up right before the global economic crisis. I think we are already quite active in lending. This year we have had quite vigorous advertising campaigns to familiarize both existing and potential customers with new aspects of our business. The fact that we are a German bank makes us quite attractive. We are shortly completing a campaign that will show what our customers think about us. The quality of our services is constantly improving. We have almost no queues in our offices. Our customers notice this. And this, in my opinion, is the key reason why our clientele and business, in general, are growing.
In the last one and a half years you have increased your capital twice. Do you have such plans for 2014?
According to our preliminary plans, in 2014 we will continue increasing our capital but already in the form of a subordinated loan, that is, the stakes of our shareholders will not be changed. In 2014 we will continue increasing our loan book. So, we expect to show as serious results as we showed this year.
You have the biggest SME lending share in your loan book and this is not surprising considering the strategy of ProCredit Holding. What part of this market does your Bank have? And what is the part of the Holding?
The Bank has almost 15% of the market, depending on how you define a SME. In any case, this is much more than we have in the aggregate business portfolio of the other Armenian banks. Here we have just 3-4%. But in SMEs we have quite a good share. I am not sure about the Holding, in general. It has 22 banks all over the world, which makes it hard to calculate.
Do you have any restrictions in selecting borrowers from among SMEs? Do you set any requirements to them? If yes, are they different from the requirements set by other banks?
We have criteria related to the environment in a global sense. We do not finance businesses that pollute the environment or worsen the social climate, be it a production of tobacco or an import of alcohol. We are a responsible bank, so, we look for customers that are responsible, reliable and efficient in their businesses.
Do you mean that there are few responsible customers on the market?
No. The problem is that in Armenia SMEs are having hard times because of slow economic growth. The inflow of investments into the country is shrinking and this is having a negative effect on the loan books of the local banks. That’s why business lending in the banking sector has been almost inactive in the last nine months.
What solutions would you suggest? Perhaps, the Government could help, as it does when subsidizing agricultural loans?
I think that the best way for you to attain real development is not so much to provide subsidies as to diversify opportunities on the market. ProCredit Bank Armenia is also involved in the Government’s initiative to subsidize agricultural loans. Under this program we offer our customers AMD loans with a maturity of up to two years and an interest of 10%, which is really good for them. This is even lower than the deposit rates offered by some banks. But real business development in Armenia will be possible only when local businessmen see real opportunities on the market and are confident that their plans will face no obstacles. Today your businessmen are not very much confident of the country’s economic future and prefer delaying their investment plans. Today very few people are investing in their businesses. Most of our borrowers prefer using our loans to finance their working capitals. They simply do not trust the market.
What do you think about the potential of the SME market in Armenia?
Today it is not developing at all. Each bank is simply trying to offer better terms and services for this small segment. And we are quite successful here. Our loan book is growing not only because our services are good. Our loans help SMEs to survive hard times. This, in turn, helps us to establish long-term partner ties with them.
Can the compulsory accumulative pension system intensify SME market?
This system will change the capital market because it will accumulate a lot of money, which will have to be invested. But it will hardly intensify the SME market. It is more likely to influence large companies, the turnover of public securities, bank bonds and deposits. As the capital market will develop, this may cover smaller players as well, but hardly at the initial stage.
You mentioned agricultural lending, where your bank is quite active. What are your criteria for “agricultural borrowers” and what do you take as security? Do you have preferential terms for the repayment of such loans?
We take as security a house, land, equipment, even animals but for micro-loans we take no security at all. It is more important for us to know who the borrower is and what he does: how responsible he is, if he will be able to make a stable profit and to repay the loan. And it is also important to know what he is borrowing the money for.
Given that your bank is the only bank that does not operate in the market of government bonds, can we say that the Bank’s lending is continuous and rules out free cash flow?
In case of short-term cash surplus, we can put the money into government bonds, but we see no reasons yet to do that. Our goal in Armenia is to contribute to development of small and medium-sized enterprises and we finance this segment at the expense of the depositors’ funds. In addition, we can always apply to our shareholders for financial support but there is no need to do that now.
What can you say about the card market? How much are you going to increase the number of active cards and ATMs in 2014? How can you explain the fact that the Bank is working with the Visa system only?
In 2014 we are going to expand the network of ATMs, but I can’t say to what extent. As regards Visa, we decided to work with that system only, because we think it is inexpedient to simultaneously use two systems, whose functions do not differ much. We don’t work with ArCa local cards, because Visa cards are more dynamic. The funds become available as soon as they are transferred to the card account. Along with it, Visa cardholders have the advantage of making international operations.
What changes are expected in the loan and deposit rates? What will cause the changes?
It is very difficult to say, but over the past few months the rates of USD deposits have been dropping and those of AMD deposits have been on the rise. It is hard to say how long this tendency will last. I think it is conditioned by the current slow growth of the bank’s loan book, which reduces the need for deposits.
You have worked in different countries of the CIS. I’d like to know your opinion about the specificity of the Armenian banking market in particular and economy in general? How does the meditating role of Armenian banks differ from that of other CIS countries?
What strikes the eye in Armenia is the too many banks for such a small economy. There is no big concentration. The business sphere faces the opposite situation – very strong concentration of large enterprises that cover almost the whole market. So, the share of SMEs is very small. And our goal in Armenia is to support the stalemated SME segment of the economy.
So, you think that a big quantity of banks is bad for Armenia’s economy. But a big quantity of banks ensures competition, which leads to more attractive conditions, whereas concentration, on the contrary, leads to risks.
Well, to have too few banks is also bad, of course. As you have mentioned, it rules out intensive competition, but I think 21 banks are too many for Armenia. For instance, in Georgia 3 or 4 large banks share almost the whole market. The small customer base of Armenia is unable to ensure high-quality and efficient work of the 21 banks.
How do you assess the competition in the Armenian banking market?
Certainly, competition exists and the real spread in Armenia, i.e. the difference between the deposit and lending rates is rather small. As compared to the interest rates in other CIS countries, the loan and deposit interest rates in Armenia are low. We have repeatedly demonstrated that by focusing on the service quality we can expand our customer base and loan book and that we are capable of competing with other banks.
What can you say about the capital adequacy of the Armenian banking market? Doesn’t the market need more active capitalization?
I think Armenian standards of capital adequacy are too high. I can explain it through the example of our bank. Our shareholders think our capital is too big as compared to the loan book. By international standards we could even work with smaller capital.
How could you explain the almost zero growth in lending in the Armenian market? Is it the lack of conscientious borrowers or …? When do you think the situation will improve? Are any state programs needed for that?
The reasons of the stalled growth of the banking system’s loan book are different. One of them is the complicated situation at some large enterprises. As a result, the lending banks come across unforeseen problems. The case of Armavia is an example. Another reason that has had a more serious effect on the real sector, including the SME segment, is certainly the rise in gas and electric power tariffs, which has considerably increased the expenditures of both households and enterprises.
It is already clear that next year Armenia is going to join the Customs Union and further the Eurasian Economic Union. Can we say that our banks are on the watch for the upcoming changes?
I think it is the customers rather than the banks that are expecting changes, because most of the customers do not simply understand what the Union implies and what changes it will bring to Armenia's economy. The Government of Armenia has intensively been negotiating with the European Union to have an Association Agreement with the EU and that process itself has given some positive results. For instance, customs clearance has become more flexible. Furthermore, though the Agreement has not been initialed, positive changes are still visible. As regards the Customs Union, the situation is still vague for our entrepreneurs.
In general, the number of overdue loans is growing in the banking market of Armenia, while standard lending has considerably slowed down. Would you explain it by the deteriorated social condition of the borrowers or by the low level of risk management in the banks?
The problem of overdue loans can be solved by a more careful lending policy only. Our portfolio of overdue loans has also grown a little, but we are not alarmed yet. Like all the other banks, we are not perfect. But I should point out that the share of overdue loans in the total loan book is the lowest in our bank as compared to the rest of ProCredit Holding's subsidiaries.
I wonder how you have managed to enhance the performance standard and the service quality in the bank in a short period of time. How many “Young Bankers Programme” participants are there in the total staff of the Bank for the moment?
We have taken numerous measures. We have put a big emphasis on enhancement of the service quality. Apparently, you are aware of our “Young Bankers Programme”. Under the Programme we have been training our future employees for two years. So, all these young people have been trained by our highly skilled personnel and have become part of our competent staff. Today they constitute more than one-third of the Bank’s total staff. I’d like to say that I am amazed at the knowledge of these young people. I can say with confidence that Armenia will really have a bright future with such smart youth.