It turns out that the banking system of Armenia has developed so much and the competition is so tense, that they have launched a strong competition of prices and interest rates for financial tools and services offered in the market. They are reducing interest rates to attract creditors. This is not our opinion only but also such information was posted in the Central Bank’s “RA banking system development prospects 2011-2013” publication.
This survey’s section on the prospects of development of the banking system in 2010 writes the following: “Development of competition has been observed in the banking system. Meanwhile, the competition is done trough reduction of prices mainly, which has resulted in the reduction of the margins of corporative banking services. Banks had to reduce the interest rates offered to large creditors as they could find other sources of money with more attractive conditions.”
The authors of the work mention that the interest rate margin has been reduced in 2010 (this means also reduction of profits on part of the banks). “In the economic real sector banks were not able to increase the interest rates due to the crisis. Meanwhile, the high level of interest rates for debits has resulted in the reduction of interest rate margins (mostly for Armenian drams).” In addition, it is also a result of the fact that banks have used the opportunity of recruiting money with lower interest rates from other places, which has resulted in a competition which made banks to offer lower interest rates to allocate the extra money they have.
First, the first thing that the eye catches is the following expression in the text: “Crisis in the economic real sector.” As far as we remember in the beginning of 2010 our officials used to say that we had overcome the crisis. Later, in the end of 2010, when the economic growth was 2.6% instead of the planned 1.2%, they were more excited. Now it turns out that last year our economy was in crisis. This is weird because one of the pioneers that used to speak of overcoming the crisis was the minister of economy Nerses Yeritsyan, who is a member of the CB Board now.
Going back to the competition of prices, we think that this is somewhat exaggerated. Both experts and our sources from the banking system think that this exaggerated too. We will try to explain why.
First, the banking system differs from all other sectors first of all with the quality and high professionalism of employees. In the SWOT analysis section of the same publication they have written that the availability of highly professional staff hired by banks is strength. Especially the chiefs of banks are highly professional. Each of them understands that they will not benefit from the price competition, and even all of them may lose.
Second, even if one of the banks decides to make adventure and be the first one among all banks, the other banks may be consolidated to fight against that one. It is a fact that the banking system is one of the most developed and well-established mechanisms in Armenia. This means that affairs and relations between banks, meetings between bankers and other arrangements between them are very active, and the union of banks is not just a formal institution but establishes rules and makes sure that all banks follow those rules.
Third, our banks are almost voluntarily idle. They have found some occupation in the financial sector and have turned to an institution that makes money on interest rates and small services only. Despite the fact that banks try to convince us through commercials that they are the best and they differ from others, in fact all they are the same and are not different. The mentioned SWOT also writes weaknesses such as “inadequate level of types of services”, “less difference between competitors”, etc. There is another factor which should not have played a role, but in fact in the Armenian reality it works. Most of the Armenian banks belong to local oligarchs. Besides the foreign branches, in all local banks oligarchs have shares or own the entire properties. The impression is that each of them has established his own bank. However, usually oligarchs make competition of prices not against each other but against consumers. The best example is the market of petroleum, where nobody has reduced prices so far for the purpose of attracting clients. Why should do they this if they can make super-profits by increasing the prices?
Every day we see commercials advertising 12% interest rates on loans, short terms of issuing the loans, etc. The approach of banks to credit history is very interesting. When they advertise some interest rate by saying that it starts “from X%”, there is no chance that ordinary people can take money with this lowest interest rate because after going to the banks it turns out that in order to take this interest rate people have to comply with the strictest financial requirements. Usually borrowings are given for higher interest rates (usually 3-4% more than the advertised rate). Thus, if you read an advertisement that they give borrowings at 12% interest rate, definitely you will be able to take it at an interest rate of 15-16%.
In addition, in case of approving the borrowing, banks ask for different payments such as commissions, payment for legal proceedings, etc (which usually is equal to 3% of the sum). In other words, if you apply for 1 million drams, you will receive 970k drams. In addition, if banks also require to apprise or pledge property, you will have to pay much more money for appraisal, cadastre, public notary and other services. Banks do not pay those expenses. In the end it turns out that instead of that one million you take 900k drams or less. However, the banking fees are calculated for those one million. In the end it turns out that the actual interest rate is somehow more than the rate mentioned in the agreement.
The actual interest rate is very important and it is important first of all for banks and their reputation. If a client asks a banker what the actual interest rate is, they will not be able to give a correct answer. People will know the actual interest rate of their borrowings only after finishing all the procedures. In almost all banks the actual interest rate is higher (normally by 6-7 points).
After having all this information, will anybody believe that banks have serious reason to compete?