- Deputy Governor of the National Bank of Ukraine Katerina Rozhkova called you the ideologist of the bill, which aims to solve the problem of non-performing loans in Ukrainian banks. Now we are discussing different ideas. Do you think that it is necessary to create a “bad bank” in Ukraine or will a separate, specialized agency be better for working with the NPLs?

- One way to deal with distressed assets is to sell them. So, you can sell the NPLs to either an asset management company or a bad bank. During the crisis of 2001 in Turkey when I was the head and Chief Executive Officer of the Banking Regulation and Supervision Agency and Savings Deposit Insurance Fund (an analogue of the Deposit Guarantee Fund. - FinClub), a law was adopted that regulated the activities of companies managing problem assets. And in the middle of the crisis, companies such as Lehman Brothers and Deutsche Bank decided to invest in the NPLs through the creation of joint companies with Turkish investors to deal with distressed assets. The main condition for non-residents to participate (also in Ukraine. - FinClub) was uniform transparent rules.

The activities of these companies in Turkey were controlled by a separate department within the Agency. We set minimum capital requirements at around US$5 million (if I remember correctly). Investors had to disclose the ownership structure up to the ultimate beneficiaries, and show the source of funds. Companies working with distressed assets received a number of rights and benefits: the new creditor had the right to continue to charge interest on the loan, and VAT was not charged when selling a problem asset or collateral. Even after 15 years, there is no VAT for such transactions in Turkey.

When I proposed implementing this idea in Ukraine, it received support. The working group, which included the Ministry of Finance, the NBU, the Deposit Guarantee Fund, factoring and leasing companies, State Fiscal Service, and the NABU, put together a draft law. We proposed to separate factoring from operations for selling problem loans, amend the Tax Code, and create a number of tax incentives similar to the Turkish experience. We also offered to release from corporate income taxation for five years companies that will work with distressed assets.

I suggested setting a minimum amount of authorized capital at US$10 million, but the members of the working group decided that just UAH30 million is sufficient. If you want to buy toxic assets, you must register as a distressed asset management company, disclose the ultimate beneficiaries, and prove the legality of the origin of the funds.

- The tax benefits you are talking about actually duplicate the norms laid down in the law on voluntary financial restructuring adopted last year?

- Exactly

- But they do not work. What will change with the adoption of the new law? Why do you think that this proposed solution for problem borrowers will work now?

- The problem is that no one in power in Ukraine wants to take responsibility for the decisions made. When Turkey adopted the law on the management of distressed assets, I, as head of the Agency, was responsible for its implementation. I controlled every step along the way from the adoption of the law and the subsequent fulfilment of each of its points.

- Who should take responsibility for the promotion of the proposed law in Ukraine?

- It can be the Governor of the National Bank or the Ministry of Finance. It can be anyone, but most importantly, he or she must take full responsibility for the adoption and implementation of the law. Last year, for example, a law on financial restructuring was adopted. When this document was being prepared, the authors studied international best practices, in particular British and Turkish. We have written that the write-offs will be tax-exempt, income will reduced by the amount of provisioning, and partial forgiveness of the debt will not be considered as income of the debtor. In Turkey, it worked well. It was a sensation! But in Ukraine something went wrong. At some stage, significant exclusions were made in the final document before it was enacted. And now that law is crippled and someone needs to assume ownership and succeed in having it amended very very clearly and explicitly.

- You are not entirely correct; most of the tax benefits remained, which raised hopes for the restructuring of UAH200 billion of problem loans, as officials said a year ago. But only seven companies have begun the procedure of financial restructuring and for small amounts.

- I'm sorry. In Turkey, more than 300 companies have financially restructured, only 40 of which were large corporations; the rest of the companies were small and medium sized. The total amount of restructured debt was over US$6 billion. In Ukraine, tax incentives have not worked because they are either not there or implementers are finding excuses not to implement.

- I will explain using the example of Oschadbank. It can’t fully take advantage of tax benefits from the law, because at any time the State Financial Inspection, or the SFS, can treat the write-off of part of the debt if it caused damage to the state. And there is criminal responsibility for such actions.

- The fact remains that the law does not work. If the problem for the SFS, is that it will not collect tax payments for the budget, then it is important for them to understand that if there is no restructuring, there will be no restoration of business, and there will be no taxes at all anyhow. Someone should  make sure that these changes were not only accepted, but they really worked. That someone, if necessary should go to the president, discuss the situation and try to find a way out of the situation. In Ukraine, ownership of such products don’t exist and  therefore the law does not work.

- Who, in your opinion, can become responsible for the bill on distressed assets, which is now being prepared?

- Katerina Rozhkova. She agrees with all the norms of the bill and agrees to be responsible for it. Now we are waiting for comments and proposals to the draft law from the expert community.

- Do you think that she has enough strength to bring the process to fruition?

- I don’t know, but I hope she does.

- She will have enough detractors, including in the person in charge of the tax service, who will collect less money for the state budget.

- But if nothing is done, then there will be no revenue in the budget either now or in the future.

- Will the law apply only to new companies?

- Yes. Therefore, if you currently have a factoring or collection company, you will be able to re-register and work under the new law. Companies managing distressed assets will be able to buy assets of all banks, both private and public. This will create a secondary market for distressed assets, and investors will be able to manage their liquidity more effectively.

But if we are talking about the distressed assets of state-owned banks, there is a nuance. In the draft law, we allow the state to establish its own company to manage problem assets. The state company will work exclusively with the problem assets of state-owned banks. But before you create it, you need to negotiate with international financial corporations: the IFC, IMF, and World Bank. It is necessary to clearly define what this company should be, what corporate governance standards it will use, and at what price the problem assets of Oschadbank, Ukrgasbank, PrivatBank and Ukreximbank will be transferred to the new structure. This all must be written in the law. This issue needs direct coordination with the IMF.

- How effective was this company in Turkey?

- There was no state company in Turkey. The Savings Deposit Insurance Fund took those duties.

- Is it possible in Ukraine for such a scenario when the Deposit Guarantee Fund will exercise the functions of a state company for managing distressed assets (PARC)?

- Of course. But for this it is necessary to make legislative changes. Ukrainian legislation on the deposit guarantee system is lagging compared with international practice. And while you would improve it, it will take a very long time. It is easier to adopt a new law that will prescribe uniform rules of the game for everybody.

- Who do you think would be willing to buy NPLs: foreigners or local investors?

- Both.

- But who would be interested in the distressed assets of state-owned banks when there are many "political borrowers" among them? For example, Oschadbank lent to the businesses of the Klyuev brothers, whose solar stations are in the Crimea, and it is impossible to repossess them now.

- None of the private investors will be interested in them. Therefore, I believe that the idea of creating PARC is the way to go.

- Assets in portfolios of state-owned banks can be sold as a pool and liberate the state-owned banks from problems. But what should be donewith these assets?

- They can be written off, restructured, managed, financed or turned into profitable business. At the right price with the right new owner.

- Another very important question is how to determine the price of such assets.

- This is a controversial question. Yet, first you need to adopt a law that establishes the rules for corporate governance of state-owned banks. Without this, the bill on bad assets will not work. We need an independent Supervisory Board, and may be independent evaluators which recognize and assess these assets. Only after that can PARC be created, and it will request funding from the  IFIs.

- At what price can these distressed assets can be sold?

- In the world market, the average price is 7% of the nominal value.

- And is 7% OK for Ukraine?

- I do not know. It was 40% in Turkey. In Ukraine, it may be 20%, it may be more; it may be less.

- What part of the Ukrainian toxic credits would be interesting for buyers?

- In my understanding, at any particular moment, any asset has its own price. If for someone now the price of the asset is higher than it is for you, sell it immediately. After all, not all your assets have zero value. Somewhere in the mortgage there is real estate, and somewhere there is nothing. Companies managing distressed assets will not pay for an asset that has no value. Do you know what the biggest problem with the NPLs is? Recognizing them as NPLs and accepting it as a fact. Banks are reluctant to recognize NPLs, because if they are recognized, they will have to create reserves against them. Banks do not like to do this, especially the state banks.

- If Ukraine follows the path you proposed and allows state-owned banks to sell their assets to a state-owned company, how do you avoid corruption in the state-owned banks? How can state banks be prevented from writing off good assets to zero when it is still possible to realize some return from them?

- If Ukraine adopts the PARC law, it will be necessary to develop a mechanism for assessing assets. It should not be solely up to the management of the bank and PARC to determine their value. There must be one, two, or three independent valuation companies. In Turkey, the valuation of assets was conducted by up to three appraisers depending on their values. In addition SOB law should be enacted as soon as possible.

- Was this dependent on the asset?

- The larger the loan amount, the more companies were involved. You will not be able to limit yourself to the draft PARC, you will have to change the rules of the appraisers' work separately. A separate legal act or regulation needs to define how to become an appraiser, who can do this, what requirements are imposed on them, what is meant by an "independent" appraiser, and the like. In Turkey, there are very strict requirements for appraisers.

- Must it be a special law?

- No, in Turkey it was not a law, but a regulatory act. In Ukraine, the NBU can become such a regulator or, for example, the National Commission for the State Regulation of Financial Services Markets. But this should not be a formal document of just one page; it must be detailed.

- How many claims in Turkey were there from shareholders of banks that challenged the sale of their assets?

- There were thousands of claims from the Fund to the owners of banks and thousands of claims from owners to the Fund.

- And what was the result?

- In most cases, the agency won. It is so, because in Turkey there are clear laws that are enforced. To have achieved this result, we have done a great job. When we passed the law on distressed assets, we conducted training, including training for judges. Fund experts, professors, and IFI staff were involved. In Ukraine, this option can work since you have a centralized court system. As far as I know, the World Bank is already preparing such a program.

- In Ukraine, there are about 20 "zombie banks" that allegedly want to return to the market. Their owners or even clients have received court decisions that liquidation of the banks was illegal. But the NBU has not returned licenses to these banks, because no one understands how to do it, and they are in limbo. What can be done in this situation?

- Unfortunately, it is difficult to call Ukraine a country that respects the rule of law, that is, where laws are observed. But there is international practice. The decisions of the regulator and the bank resolution authority cannot be suspended or not executed! If I am the owner of a bank that the NBU withdrew from the market, I can go to court and challenge the NBU’s decision. If the court decides that the NBU is wrong, the regulator will pay me compensation. But the bank will still be withdrawn from the market or whatever, according to standard procedures. If the National Bank pays me compensation, it will conduct an internal investigation to determine who is guilty in illegally withdrawing the bank from the market. And a person or a group of people who are guilty will be held liable. If no one is guilty or all acted in good faith there will be no penalization. You cannot send a bank to the Fund, and two months later return it to the market, and after three months again begin liquidation.

- Half of the country's lawyers don’t agree with the decision proposed by you.

- Don’t worry about what lawyers say. It is their job to say so. It is an international practice, and it is applied in too many countries.

- How long do you think it will take to pass the distressed assets law?

- It's hard for me to say.

- Look, for many reasons, there it highly likely that the law will not be passed. Among them, there is considerable disagreement among those involved,  and the draft bill may not find support in the Ukrainian parliament. What other options can be used for resolving the issue of bad assets?

- That is, if absolutely nothing changes, and the corporate governance law is also not adopted?

- Yes.

- In this situation, I am very sorry for the country.