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16cal works is to provide conditions favorable for the creation of innovations, as well as in the study of mechanisms that transform innovation from the stage of idea to the final product. At the same time, in most of the studies reviewed, insufficient attention is paid to problems that have a negative impact on obtaining the results of innovative activities. The main risk associated with innovation is considered to be a market risk, but the economic situation in recent years has shown that the feasibility of innovative projects to a large extent depends on the external economic environment of the project. Despite the large number of works in economic science devoted to innovations and everything connected with them, a significant gap should be noted in the methodological support for managing the innovative activities of enterprises. A significant number of publications are devoted to the analysis of the specifics of the functioning of knowledge-intensive industries, however, the analysis of these works showed the absence of a unified methodology for identifying science-intensive industries.
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TRANSFORMATION OF APPROACHES TO RISK MANAGEMENT OF BANK LOAN PORTFOLIO
Perevoznyk A.
Doctoral Student, Department of Banking Kyiv National Economic University named after Vadym Hetman, Kyiv, Ukraine
Krasnova I.
Doctor of Economics, Associate Professor, Department of Banking Kyiv National Economic University named after Vadym Hetman, Kyiv, Ukraine
Lytvynenko O.
Doctoral Student, Department of Banking Kyiv National Economic University named after Vadym Hetman, Kyiv, Ukraine
DOI: 10.24412/9215-0365-2020-57-3-32-39
Abstract
This paper examines the issues of introduction of an adaptive risk-oriented approach to management in banks, the need for which is associated with the problem of formation of the business model of functioning of a bank which in its turn is caused by the global reform of the banking supervision system at the global and national levels. The purpose of the research is to determine the key economic characteristics and risk profile of various business models of Ukrainian banks. It was established that, in the context of the financial crisis and uncertainty, in-depth research is necessary for the issues of determining the risk profile and risk tolerance assessment in terms of the business areas of the bank in general and credit risk, as the main risk, in particular. The process of banking business is accompanied by large-scale work of all structural service and business units of the bank. It was substantiated that, in the system of identification, assessment and management of risks of the loan portfolio, attention should be paid to the organizational structure and interaction between structural units of the bank. It was proved that the nature of manifestation of the credit risk differs in the business areas of the banking institution, which requires the choice of adequate approaches to its management. The types of credit risks and the specifics of their manifestation in business areas of the banking business were described. Based on the results of analysis of the loan portfolio by business areas of the largest banks in Ukraine, it was found that the ratio between corporate and retail loan portfolios varies depending on: the model of development of the banking institution and external conditions. In addition, it was found that every bank, regardless of the capital size, business model and scope of business, feels, at all levels of management, the impact of extraordinary situations and unforeseen circumstances. It was determined that most domestic banks had identified lending to corporate customers as the priority line of development for themselves. At the same time, there is a growing interest in lending to retail cus-
tomers. Scaling up the business, a banking institution forms a new business model tending to increase the risk profile. Such active behavior in the lending market requires the introduction in banks of not just a risk-oriented approach to risk management, but adaptive management, based on the constant monitoring of compliance of the actual level of adaptation of the risk profile to the risk appetite. The directions of adaptive risk management taking into account the specific character of the business area of banks were proposed. It was proved that the risk management system should be based on advanced technologies and the international best practices of risk management.
Keywords: Business model, business units, loan portfolio, business areas, corporate loan portfolio, retail loan portfolio, credit risk, risk management.
Statement of problem. Every bank chooses an individual line of development, which is reflected in its business model and risks associated with it. In Ukraine, bank business is classically divided into retail and corporate. Leaders of the banking sector, such as Deutsche Bank, UBS Group, BNP Paribas, City Group, HSBC, Barklays, Bank of America divide the risk separately for each business area, actually distinguishing general and specific features, which form the risk profile of each business area of the bank. Thus, the risk management process is transformed from the singular approach to the integrated risk management of the bank. The problem of risk management becomes particularly acute in crisis, post-crisis and uncertainty conditions. This requires an adequate response to the whole set of risks of the external and internal environment, taking into account the specific character of business areas of banking. Adaptation of international experience and methods of risk mitigation becomes an urgent issue against the backdrop of the challenges posed by the epidemiological situation in 2020, which has affected all areas of public life, including the operation of the financial sector.
Latest scientific progress and publications review. The topic of research of bank business models is widely covered in numerous publications of Western experts, including Ayadi R. (2011) [1], Demirgüg-Kunt, A. [2], Roengpitya R. [3], Grossmann D., Scholz P. [4], Tomkus M. [5]. Among Ukrainian researchers and experts, the issue of bank business mod-
els is far less popular, save for works by such authors as Panasenko H., Bortnikov H. [6], Zarutska O. [7], Prymostka O., Krasnova I. [8], Rashkovan V., and Pokidin D. [9]. Basel Committee pays particular attention to development of methodological recommendations on management of key banking risks [10]. The issue of identification of bank business models taking into account the risk profile and special aspects of the business is widely covered in the following works: Altunbas Y. (2011) [11], Ayadi, de Groen, D., et al. (2015) [12], Hryckiewicz et al. (2015) [13], Köhler, M. (2015) [14], Soares (2017) [15], Farnè & Vouldis (2017) [16], Lautenschläger (2017) [17], Japparova & Rupeika-Apoga (2017) [18]. Among domestic scientists who have conducted research on banking risks and methods of managing them, attention should be paid to the works of V. Vitlinskyi, O. Prosovych, O. Dziubliuk, V. Lavreniuk. However, the issues of building risk-oriented risk management in terms of business areas of banking are insufficiently studied.
Results of research. In banking business, a bank's management should pay attention to the strategy of increasing lending resources, management of loan portfolio quality and risks. In the process of identifying and optimizing risks, a bank should adhere to the overall corporate strategy in respect of business scaling. This is especially important for Ukraine, where, as can be seen on the map (Fig. 1), the share of bank nonperforming loans is the largest in the world and for the year 2019 amounted to 48.4%.
M f "
4u
Ukraine : 48,359
mk
<3.37 3.37-6.99
■ 6.99-12,81
■ 12,81-23,07
■ >23.07
Figure 1 Bank nonperforming loans to total gross loans (%) Source: Data of the World Bank [19]
All of this raises the issue of building risk-oriented management in domestic banking institutions. An essential condition for the effectiveness of the risk-oriented approach is the organizational independence of business units involved in risk-taking, in compliance with the principles of corporate governance set out in international standards of banking supervision [10].
Figure 2 Interaction of business and service units of the bank in the risk management process Source: Built by the authors
Almost all units of the bank of different organizational levels are directly or indirectly involved in the process of dealing with credit risk. For clarity, we build a model of internal interaction between business and service units of the bank in the process of risk management (Fig. 2).
The general scheme of division of business units of the banks is as follows:
- retail business, attracts and supports personal customers, households and individual entrepreneurs;
- corporate business serves companies which are the bank's customers. Depending on the business model, it can be differentiated in mass and medium business, which includes serving small business customers. In fact, in this way the bank segments customers depending on the charter capital of the company, or depending on the operating profit that the customer brings to the banking institution, etc.
The division of the bank's business units is typical. In practice, each bank divides customers and assigns them to a particular area individually. Thus, banks may separate wealthy personal customers to the VIP segment, and service them separately from retail customers; the distribution of customers between medium and corporate business is determined by the management of each bank individually, in accordance with the strategy. Regardless of how the bank segments business areas, they form the market risk. It is the measure of how much the bank is willing to scale its business and be an active participant in financial markets.
The main task of business units is to maximize profits. Meanwhile, the redistribution of earned funds between the business areas of the bank is carried out by the treasury, which acts as a "bank within the bank". The relationship between risk management and business consist in finding a compromise between the desire of business managers to raise as much money as possible and the need to maintain the risk percentage of the bank portfolio at a level acceptable for en-
suring the effective operation of the bank's lending programs.
In the course of operating activities, risk management directly cooperates with the bank's treasury. The competence of the treasury includes maintaining the monetary (including foreign exchange) position of the bank. When entering the interbank market, the treasury has the potential risk of encountering a change in the discount rate, or a change in exchange rates, which will influence the reduction or increase of assets. The interest rate risk faced by the treasury is a component of the bank's operation in the money market, not in the capital market. The treasury cooperates with risk management to ensure the stability of the bank's reserves. Capital market interest rate risk management has long been impossible for domestic banks, and should be considered in the context of the work of the capital markets department and risk management, rather than the treasury.
The main principle of independence of risk management from business units must be implemented in practice, which is a fundamental characteristic of risk-oriented management. Risk management must be able to express its position, which is a mandatory part of the description of a draft lending decision. Thus, in practice, the risk management policy is an internal document of a bank and provides for its unquestioning fulfillment by officers. A Risk Management Policy usually states that it is important to ensure that no non-typical or large transaction may be conducted without the approval of the 2nd line of defence [20].
Depending on the business model and needs of the bank, the organizational structure includes either a securities department or a capital market department along with the securities department. The capital mar-
ket department is inherent in international banks, or banks that have debt securities and derivatives circulating in international financial markets in their trading portfolios. The bank's trading portfolio generates a number of risks, therefore the internal interaction with risk management in respect of the trading portfolio is mandatory.
Another link in the internal structure of a bank is the bank's accounting department. This unit does not directly interact with risk management, but reflects changes in balance sheet and off-balance sheet accounts that arise as a result of the bank's operating activities.
The financial unit is, in fact, the main service unit that directly cooperates with the business. Unlike the accounting department, which carries out accounting and implements financial statements, the finance department of a bank provides business areas and management with management analysis. The finance department calculates the P&L of individual business areas, and the bank as a whole, carries out planning and budgeting of business units of the bank. In the course of the budgeting and forecasting process, there is an interaction of financial analysts and risk management of the bank. It is important that business targets reflect the possible impact of risks and should therefore include risk models. For example, PD (Probability of default).
Acceptance of risks by the bank must not pose a threat to the interests of depositors, other creditors, owners, financial stability and should contribute to the effective functioning of the bank's business model. All banks, taking risks at a certain level of risk appetite, seek to achieve competitive advantages through their access to specialized resources, other available market opportunities and management decisions. The most problematic risk, which requires preventive and adaptive management methods, is credit risk, since the lending process concentrates a significant amount of banking services. Accordingly, the credit exposure will always be high. As known, there is a close relationship between credit risk and loan portfolio, be-
cause with increasing credit risk and nonperforming loans, banks reduce the size of the loan portfolio.
Having analyzed the business models of domestic banks through the accepted credit risk in the period 2019-2020, we consider it appropriate to divide the analytical information into two segments. The first is the change in the loan portfolio of banking institutions under the influence of stable development of the state and its economy, represented by data for the period from March 2019 to March 2020; the second - from March 2020 to August 2020. This period reflects the performance of Ukrainian banks in the context of the COVID-19 pandemic.
We understand that credit risk increases regardless of the bank's expectations under the influence of external and internal factors. Its size depends on the conservatism of the business model, provided there are an adequate economic environment and business landscape. In the event of a crisis of a political, economic or man-made nature, the risk actually materializes. The COVID-19 pandemic represents the materialization of the risk caused by external factors. According to the World Health Organization, a pandemic is the development of a new disease occurring worldwide. The activities of a banking institution under such conditions should be based on minimizing such impact on operating activities. Structural and institutional imbalances in Ukraine's economy, the impact of the pandemic forced participants of the domestic banking market to reorient business models to meet customer needs remotely. It is obvious that seven months of the pandemic and quarantine restrictions for both the public and business have reduced the loan portfolios of banking institutions (Fig. 3). However, unlike the impact of the systemic banking crisis of 2014-2016, this did not significantly affect the migration of business models of domestic banks. At the same time, this raised the issue of finding efficient methods of credit risk management, adapted to the type of the business model and external conditions of functioning of banks.
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Figure 3 Credit portfolio size of the TOP10 banks of Ukraine as of 01 March 2019, 01 March 2020, 01 August
2020, USD ths. Source: Prepared by authors based on the data of [21]
On average, the increase of the loan portfolio of the TOP 10 banks of Ukraine amounted to 3% as compared to the beginning of 2019 and 2020. The following banks became the leaders in increasing credit liabilities: PUMB - 23%, OTP Bank - 17%, Ukreximbank - 13%, Privatbank - 12% and Alfa Bank - 10%. Improving economic climate in the country, stable inflation supported the demand for credit resources, both among citizens and businesses, and the moderate monetary policy of the National Bank of Ukraine provided opportunities to increase the loan portfolio. The influence of external factors, since the beginning of 2020, has significantly reduced the ability of banks to grow their business through lending
operations. On average, the decrease in the loan portfolio of banks in the analysis set amounted to 9%, which is three times higher than the increase in credit resources for 2019-2020. Leaders in the outflow of the loan portfolio were Oschadbank - 21%, OTP Bank -12%, PUMB - 11%, Privatbank - 10%, Raiffeisen Bank Aval - 10%.
The risk-oriented model of banking business involves the adaptation of existing, regulatory approaches to credit risk management by business areas, in particular between the corporate loan portfolio (the "CLP") and retail loan portfolio (the "RLP") on different principles (Fig. 4). Credit risk on bonds is not considered in this study.
Figure 4 Special features of credit risk in terms of banking business areas Source: Built by the authors
According to the current Resolution of the National Bank of Ukraine No. 351 dated 30 June 2016 on "On Approval of the "Regulation on Determining the Size of the Credit Risk for Active Banking Operations by Banks of Ukraine", replacing the Resolution of the National Bank of Ukraine No. 23 dated 25 January 2012, credit risk management tools do not differ according to the business area [22]. However, the use of such risk management tools is different. First of all, this is due to the fact that the retail business margin is formed from the interest income for almost 100%, while in corporate business the share of the fee-based income increases significantly. If a client occupies a significant share in the corporate portfolio of the bank's clients and carries out a great number of transactions, forming the fee-based income of the business, then in most cases the bank forms individual conditions when there is a credit need.
The analysis of practical experience shows that effective tools for managing the portfolio risk of corporate lending are as follows: sectoral diversification; risk appetite limits; assessment of the probability of default of an individual borrower; monitoring the fulfillment of the terms of the contract and the collateral quality. At the same time, the best-proven tools for managing the portfolio risk of retail lending, as a set of homogeneous financial assets, are: diversification of the loan portfolio by products; control of the compliance of the risk tolerance with the risk-appetite of
the bank for retail loans; monitoring the nature, scale and structure of the bank's loan portfolio.
The balance between the loan portfolio of retail and corporate businesses is quite logical in line with the bank's strategy and varies depending on:
- the bank's business model and strategic tasks set by management and stakeholders;
- external conditions: the state of the financial market, macroeconomic environment, political factors, etc.;
- factors of uncertainty and systemic risk: force majeure circumstances, natural disasters, pandemic, etc.
The influence of uncertainties shifts the emphasis in risk management towards operating management, which is particularly important and appropriate in minimizing the consequences of risks that arise unexpectedly. The intensification of such risks characterizes the current period of economic development of the country and the banking system. This necessitated and requires the introduction of adaptive risk-oriented management. The main thing at which the adaptive approach is aimed is to eliminate or avoid the danger of the negative impact of those phenomena that were not or could not have been taken into account in advance. These are force majeure situations, or "unexpected" risks.
The process of credit risk management should be aimed at examining all possible scenarios, provide for
its identification, planning and forecasting, rationing trol procedures and technologies, continuous monitor-and limiting, regulation and creation of specific con- ing, in accordance with external conditions.
Table 1.
Distribution of the loan portfolio of the TOP 10 banks of Ukraine by business areas (expressed in USD ths.)
% of % of % of
Increase of the CLP for the period from Increase of the CLP for the period from the increase of the CLP for the period from the increase of the CLP for the period from Increase of the RLP for the period from Increase of the RLP for the period from the increase of the RLP for the period from % of the increase of the RLP for the period from 03.2020
03.2019 to 03.2020 03.2020 to 08.2020 03.2019 to 03.2020 03.2020 to-08.2020
03.2019 to 03.2020 to- 03.2019 to to 08.2020
03.2020 08.2020 03.2020
Privatbank 658,112 -712,010 9.05 -8.98 420,176 -326,343 21.64 -13.82
Oschadbank 115,439 -794,192 3.52 -23.39 77,579 14,772 25.66 3.89
Ukreximbank -504,426 -205,312 -13.00 -6.08 656 -1,701 1.40 -3.57
Alfa Bank Group -82,364 18,480 -8.04 1.96 -131,047 -119,858 -11.90 -12.35
Ukrgasbank -87,174 -67,016 -5.48 -4.45 -5,815 -15,865 -2.85 -8.01
Raiffeisen Bank Aval 47,408 -137,923 3.08 -8.69 49,052 -43,121 20.43 -14.91
Ukrsibbank -99,298 -6,152 -14.04 -1.01 21,612 -42,668 10.15 -18.20
PUMB 84,618 -101,005 10.38 -11.22 196,424 -54,569 50.89 -9.37
Credit Agricole Bank -4,722 -20,907 -0.59 -2.62 54,364 -25,203 37.94 -12.75
OTP Bank 85,265 -63,162 13.00 -8.52 75,052 -67,028 24.01 -17.29
Source: Prepared by the authors based on the data of [21]
The retrospective analysis of the loan portfolio in the period from March to August 2020 allowed us to clearly see that the credit risk materialized. The average decrease in the CLP in 2019-2020 was 0.21%, while the average increase in the RLP in the banking market was 18%. This trend is natural, since the realities of the modern Ukrainian banking market provide for greater profitability in the retail lending segment. While in the corporate lending segment the margin is on average about 2-3%, the margin of unsecured retail loans in cash is 5-7%, and for credit cards it can reach 10-12%.
When scaling business, a bank forms a business model tending to increase risk appetite. It is quite easy for risk management to build a standardized model that takes into account the ambitions of the retail business and the need to manage the quality of the loan portfolio. Calculating the percentage of the increase of the RLP in the segment, we see that the increase of the corporate loan portfolio decreased in all banks. In corporate business, one often has to make loans on an individual basis. The main problems of corporate lending are based on the internal vulnerability of the bank, because of:
a) the lack of funding from both shareholders and depositors;
b) hypersensitivity to regulatory pressure;
c) lack of a clear business strategy, which leads to high operating costs, incompatible with efficiency.
Referring to statistical data of previous years, it should be noted that many retail loans issued before the global crisis of 2007-2008 were written off by banks due to mass defaults caused by the exchange rate shock and weak legislative protection of rights of creditors. As a result, the share of retail loans dropped more than twice in 2018 from 36.3 to 15.7% after the boom in consumer lending. The active revival of retail lending is still not facilitated by low growth rates of real incomes of the public and the loss of interest in lending by foreign investors due to significant financial losses. Drives for the growth of retail lending are lower interest rates and a change in the behavioral model of the public from thrifty to active consumption. The tendency towards the change of the focus to retail lending, in which loans are provided with adequate margins and risks, will serve as a marker of improving business climate.
Oschadbank appeared to be the most sensitive to credit risk, it reduced corporate business loans by 23.39%, as the balance of CLP and RLP was in the period 87% and 13%, respectively (Table 2). At present, it is difficult to assess the effectiveness of risk management, because Oschadbank is a state-owned bank, and, historically, a creditor of state-owned companies, so the reduction of the loan portfolio indicates a reduction in credit programs in the public sector.
Table 2.
Distribution of shares of the loan portfolio of the TOP 10 banks of Ukraine by business areas (%)
Share of the CLP (%)2019-03 Share of the RLP (%)2019-03 Share of the CLP (%) 2020-03 Share of the RLP (%) 2020-03 Share of the CLP (%)2020-08 Share of the RLP (%)2020-08
Privatbank 78.92 21.08 77.04 22.96 78.00 22.00
Oschadbank 91.56 8.44 89.94 10.06 86.83 13.17
Ukreximbank 98.80 1.20 98.61 1.39 98.57 1.43
Alfa Bank Group 48.18 51.82 49.25 50.75 53.03 46.97
Ukrgasbank 88.65 11.35 88.37 11.63 88.76 11.24
Raiffeisen Bank Aval 86.51 13.49 84.59 15.41 85.48 14.52
Ukrsibbank 76.87 23.13 72.17 27.83 75.84 24.16
PUMB 67.87 32.13 60.71 39.29 60.22 39.78
Credit Agricole Bank 84.88 15.12 80.18 19.82 81.87 18.13
OTP Bank 67.72 32.28 65.65 34.35 67.89 32.11
Source: Prepared by the authors based on the data of [21]
The situation is quite the opposite in Alfa Bank, which during the researched period increased the CLP by 5 percentage points, inter alia during the pandemic when the bank actively provided loans to businesses. A significant reduction is observed in the retail segment. Along with the change in the macro environment under the influence of the COVID-19 pandemic, Alfa Bank in 2019 completed a merger agreement with Ukrsotsbank, which also had an impact on the outflow of customers from the RLP.
The analysis of distribution shares in the loan portfolio makes it possible to see that during the researched period (from 1 March 2019 to 1 August 2020) the business models of most banks did not undergo radical changes. At the same time, in two banks the distribution of the loan portfolio significantly changed towards the increase of the share of retail business. Interestingly, PUMB, which is part of a large industrial conglomerate and has not historically been considered a retail bank, increased its retail loan portfolio from 32.13% to 39.78%, increasing its retail portfolio, even during quarantine restrictions, while reducing its corporate loan portfolio share by almost 8% since 2019. It is fair to assume that the bank's management has shifted the focus of the development strategy and begun considering retail business as a promising line of development.
In can be seen that the credit risk of the corporate portfolio has a stronger impact on domestic banks than the credit risk of retail business. Such situation is natural and in line with global trends. The credit risk of an individual - a potential borrower - can be assessed on the basis of personal data (level of permanent income, property, etc.), and the scoring model will easily assess the parameters of the loan product that may be offered by the bank. When granting a loan (loan facility) to a company, the bank faces much greater risks of non-repayment of the loan, therefore approaches to credit risk management in the corporate area of business should be in line with international best practices and include effective tools.
The approach of active behavior in credit risk management by business areas of banking requires a more accurate assessment of prospects. In addition, the implementation of this approach requires significant resource capabilities (intellectual and material) of the bank and the use of improved risk management methods.
Conclusions. The study analyzes the interaction of a bank's units in the process of risk identification and management. The structural model of interaction of internal units of a bank in the course of distinguishing and management of the risks inherent in the business of the bank was built. The regularities of the impact of credit risk on business areas of a banking institution were clarified. In the context of economic recession there is an increase in the retail loan portfolio of banks. At the same time, there is a negative increase in the corporate loan portfolio in all analyzed banks of Ukraine. Banks which in 2019-2020 focused on changing the priorities of business models towards retail business were able to increase their loan portfolio in the segment. We assume that the impact of the COVID-19 pandemic has changed consumer behavior. The need to stay at home gave rise to an online shopping boom in the autumn of 2020, which in turn increased the demand for consumer lending. It is obvious that the corporate loan portfolio requires analysis and application of new management methods.
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НАЛОГОВЫЕ ЛЬГОТЫ И ДОХОДЫ РЕГИОНАЛЬНОГО БЮДЖЕТА
Старкова О.
Пермский государственный аграрно-технологический университет им. Д.Н. Прянишникова, доцент TAX INCOME AND REGIONAL BUDGET INCOME
Starkova O.
Perm state agrarian and technological University. D.N. Pryanishnikova, associate Professor
DOI: 10.24412/9215-0365-2020-57-3-39-42
Аннотация
В статье рассматривается понятие налоговых льгот, их виды и необходимость для осуществления налогового регулирования. Проведен анализ налоговых доходов регионального бюджета. Определены потери бюджета от налоговых льгот по некоторым налогам.
Abstract
The article discusses the concept of tax benefits, their types and the need for the implementation of tax regulation. The analysis of tax revenues of the regional budget is carried out. The budget losses from tax benefits for some taxes have been determined.
Ключевые слова: Налоговые доходы, ставка налога, налоговый вычет, налоговая нагрузка.
Keywords: Tax revenues, tax rate, tax deduction, tax burden.
