A banker’s 8-years old son asks, “Daddy, I understand that your job is taking money, and giving money back, but I don’t understand what your benefit is.” The father takes a piece of fat out of the fridge, shows to his son, and puts it back and asks, “Did you understand it now?” The son replies that he still does not understand anything, and the father says, “I took the fat and put it back, but my fingers still smell like fat”.
In other words, banks are dealing with money and making some money due to interest rates. For example, in Armenia trade banks make 10-11% profit on the money they circulate. This information was recently announced by the Central Bank representative Artur Javadyan and added that for some businesses the profitability is even higher.
The banking system is one of the sectors, where it is prestigious to show that they are making more money. However, people in the government think that banks want to reduce their incomes and show that they are making less money in order to pay less tax. For this reason the government is proposing amendment in the tax law in order to re-estimate the current resources of banks. “In difference with the real sector, banks used to have privileges, i.e. they could independently re-evaluate their current resources, which had an influence on the income tax base estimation. Currently we have to give up on these privileges and banks will have to use the services of specialized institutions too,” said prime-minister Tigran Sargsyan. It is difficult to estimate what these changes will give and how much will increase the tax base of banks. Now banks are using services of specialized institutions too but in many cases this is a mere formal thing they do. For example, for pledged property they hire services of specialized institutions to evaluate the properties. However, real estate agencies usually evaluate properties at prices that are in the interests of banks as they don’t want to harm the interests of their good clients, thus it is very possible that the same may happen this time too.
Why does the government propose only one change for the banking sector? Is everything excellent in the banking sector and only one thing has to be changed? For example, the 20th point in the 100 Steps work of former PM Hrant Bagratyan concerns banks and credit organizations, as well as investment foundations. By the way, the main recommendations were not targeted at restricting the supervision but easing the policies towards these institutions. For example, the former PM proposes to make the registration process for banks easier and reduce the starting capital amount to 1.5 from 2.4 billion drams. He also proposes to exclude the super liquidity of banks as the interest rates established by the CB and the huge resources available with banks are simply wasting the financial resources of the society. Hrant Bagratyan believes that as a result of these steps the availability of credit resources will be significantly increased. He also says that as a result of fulfilling the 100 steps the capacity of overall actives of banks will be increased to the level of 70% of the GDP. Anyway, it seems that the government is not going to implement either of the steps for the banking sector proposed by Hrant Bagratyan. Maybe they think that the banking sector is developing even without it. For example, the CB head said that the actives of banks have reached the level of 54% of GDP in case when this rate was 28% in 2008. Certainly they did not mention that the rapid reduction of GDP in 2009 had a role in this process too. A. Javadyan also spoke about improvement in crediting. He says that the relation of taxes and GDP has grown from 16% in 2008 to 28%. The crisis played a key role here too because on the one hand the GDP was being cut down, and on the other hand huge financial resources were attracted from external sources.
It seems that the CB chief is keen to foster crediting on the account of domestic resources and the national currency. “If people keep their savings in banks with the national currency, the capacity of our banks to issue credits with the national currency will be higher. Currently only 30% of borrowings are in the national currency, and the 70% is in foreign currency,” said Javadyan. The information provided by Mr. Javadyan corresponds with the information published by the statistics services. According to the information of the national statistics service, in September 2011 the total amount of deposits in trade banks amounted 876.9 billion drams, and only 266.9 billion was in the national currency (30%). In case of the residents (citizens of Armenia), the capacity of deposits in the national currency is higher and makes 37% (256.8 billion out of 685 billion drams).
Meantime, the capacity of credits exceeds 1.1 trillion drams. This shows that the banking system does not allocate the resources effectively. This means that the citizens of Armenia take part in the crediting of the economy partly. The other half is done on the account of external sources. Going back to deposits, there is an interesting thing. The official statistics has included the accounts and deposits on demand in the mentioned amount too. However, by saying deposits we should mean the deposits for certain terms because these sources are considered to be savings and can serve as resources for issuing credits. If the money deposits for certain terms were in the national currency, the banks would have long money for issuing long credits. In this capacity only 26.7% is in the national currency.
In fact the CB would like to people trust the national currency first of all, and also trust banks in order to keep their savings in the national currency. However, Mr. Javadyan is very cautious and does not petition people to keep their savings in the national currency because they still remember March 2, 2009, when the national currency was devaluated by 25% in one day. By the way, several days before that the Central Bank had petitioned people to keep their savings in the national currency.
In addition to that bad experience in the past, the national currency continues to devaluate and it has already reached the level of 380 drams per USD. People have this bad experience and definitely there will not be increase in the deposits in the national currency in the near future. In order to trust the national currency people should first of all trust the authorities, which is very difficult now, especially after the recent resignations.