In modern economy, banks are considered an absolute blood circulation by giving “life” to all human beings. One of the key elements of that “blood” is the loan. If we take into consideration the fact that loan investments make up only 7-7.5% of Armenia’s GDP (this exceeds 100% in developed countries), then we can say that our country is in the “pre-heart attack” stage.
What is a loan? It is a means to get income for trade banks on the account of depositors. After all, banks play the role of a mediator of finances-collecting “free” money and giving it to those in need of it. For individuals and businessmen, getting a loan is the opportunity to make their “dreams” a reality-buying a house, a car, or simply starting a business. Finally, a loan is a unique “product”, which has supply and demand, as well as a price, which is the interest rate.
It is clear that there is always a demand for a loan. In other words, everyone needs money. But there is less supply and it depends on “how much” the depositors can give. No matter how much money a bank may receive from a loan, there are still many issues because banks always run a risk factor of not getting the money back.
There are three types of loans which may help make the “dreams” a reality-hypothec, consumer and business (trade) loans. No matter how much the people go for the first two types, the most important loan for the long-term and stable development of the country is the business loan. The latter is simply “food” for production, services and trade. However, some people believe that it is very hard to get a business loan. What are the reasons for that?
High interest rates
Businessmen complain about the high prices for loans. Armenian trade banks offer business loans with 18-24% interest rates. Banks not only depend on the loan term, price or mortgage, but also the international projects for which the loan is given. It is worth mentioning that banks usually give the loan with the money provided by the donor organization. The most active banks in Armenia in this field are “ArmEconomBank”, “Converse”, “Ineco” and “ArmAgroExchangeBank”.”
According to David Sukiasyan, who is the vice-executive director of one of the most active business loan banks in Armenia “ArmEconomBank”, the remainder of the bank’s trade loans is 15,486,720 dollars, of which 10 billion is part of the loan given to the German-Armenian fund’s projects, 1,610,619 to the EBRD (European bank for Reconstruction and Development) project, and approximately 1,327,433 dollars to the International Finances Corporation for implementing its project. As for the Commerce Bank, it has only been given 2-3 loans worth 500,000 dollars. The bank has given its own trade loans worth 1,000,000 dollars. Starting from March, “ArmEconomBank” will provide EBRD loans for implementing its financing programs. Those are large loans (each loan is 400,000 dollars minimum and more) and they are given by EBRD, however, the latter has the risk of losing half of the money; the other half is “ArmEconomBank”. The interest rate is pretty low-up to 12%. The interest rates for the loan given to the German-Armenian fund for the project are pretty low-16-22%. That depends on the customer’s loan history and the field for which the loan is given. Interest rates for the loans given to the EBRD and the International Finances Corporation ranges from 15-18%. Why are these interest rates considered high? Businessmen complain that those rates don’t really reflect the real market rates, considering the fact that trade banks in Armenia offer 8% income in exchange for deposits. There is a huge difference. But it is worth mentioning that the bank gets its profit thanks to the difference. Besides that, donor organizations are the ones that claim the “price” of the loan. In any case, interest rates have gone down in the past 10 years in Armenia.
It’s impossible without a mortgage
Mortgages allow banks to be more secure of getting the loan back. Although the Central Bank of Armenia sets limits on providing loans through mortgages, however, there are some banks in Armenia that provide those kinds of loans and that is pretty risky. But those banks are few in number. There is a problem with mortgages. Customers complain that banks don’t place a high value on the item. This is mainly widespread in Armenia’s regions because, compared to the capital city the price for real estate is low. In fact, if any bank gives a loan without a mortgage, it must prove that it has sources to get the loan back and state which business will receive the loan. This is one of the reasons among many why the loan market, as well as all fields of economy in Armenia, differ in developing rates. The national center for Small and Medium Business Development of Armenia (SMBD) is currently working on this problem. According to SMBD’s correspondent for financial help Hayk Shekyan, SMBD’s guarantee gives the businessman the opportunity to get a loan even if he has low mortgage rates and if sales are bad. This can be seen in the regions and border zones. The term for those loans is three years and SMBD can guarantee only 70% of the loan. In terms of amount, the maximum guarantee is 22,000 dollars.
Who gets the loan?
Now we get to the businessmen. “ArmEconomBank” gives 40% of its trade loans to large businessmen. Those businessmen are primarily financed by EBRD and the International Financing Corporation, however, one businessmen from the German-Armenian fund will get only 120,000 Euro loan. Small and medium businessmen get these loans.
Executive director of the “ArmAgroExchangeBank” Stepan Gishyan said during an interview that there really aren’t any problems with giving loans to small and medium businesses and his bank is pretty active in the loan market. He stated that there is a tendency to increase the loans. According to Gishyan, businesses just starting out are the ones that face problems. Although the Central Bank doesn’t allow banks of Armenia to give loans without any analysis, however, they are few in number because banks know whom to give the loan. Businesses that don’t have a background don’t receive loans because, after all, banks have their standards. In particular, those who want to get a loan from the “ArmEconomBank” must have at least three years of experience in business. Are there really any other sources for starting businesses besides getting help from friends or relying on oneself? There still is no answer to this question. David Sukiasyan believes that the state must support the businessmen starting out.
What fields of economy get the loans? The loans are mainly given to the field of trade. In terms of amounts, the “ArmEconomBank” “feeds” 40% of its loans to the trade field, 35% for services and 25% for production. This is the picture of almost all the banks of Armenia. The thing is that trade gets the money back to the bank at a rapid pace, but production takes time. There is no such thing as a “long-term redeem” in Armenia and the terms for loans are proof of that.
Some are of the opinion that the consumer loans given with higher interest rates are more profitable for banks and make the banks care less about giving loans to businesses. Some specialists don’t agree with this. According to them, each bank has its strategy. “ArmEconomBank” confirms its loan packet each year based on types of loans. According to D. Sukiasyan, approximately 54% are trade loans.
“Free” money
Based on non-official data, as of today there is “free” money circulating in Armenia worth 400-500 million dollars. That is the money that the banks get and don’t give. What is the reason for that?
“HSBC” bank is the leader in deposits. What’s interesting though is that it takes the deposits with small interest rates, in other words, for free. This is why the bank may allow itself to not give loans and not take the risk. As to why the people keep their money at “HSBC” as deposits, that is a different story. People trust this English bank and use it as a “closet for money”. In fact, rumor has it that English-Armenian businessman Vache Manukyan, who owns 30% of HSBC, hasn’t opened the HSBC branch in Yerevan, but rather he has bought the franchising right. In other words, he has founded an Armenian bank under the name HSBC.
According to specialists, it is necessary to make reforms in the law, which will force banks to distribute the accumulated money, will help reduce shady enterprise and develop economy. Let’s picture for a moment that this “free” money is aimed towards the production field. This will lead to new taxes, which will increase the state budget. Then we will probably have a real two-digit economic rise.
There is one other problem in the loan market. Many “shady” businessmen are afraid of getting loans because they will then have to pay the taxes and show how much they really earn. Serious reforms have to be made in the loan market and not only will Armenia’s economy benefit from this, but rather taxing and the political field for that matter.