Since the outbreak of the war, Ukrainian banks have faced severe financial losses and risks caused by a large migration of the Ukrainian population abroad, ongoing hostilities, decreases in clients’ solvency, inflation, credit portfolio losses, and martial law limitations. The National Bank of Ukraine (the “NBU”) reported that the profit of the banks decreased by three times in 2022 compared with 2021. The Head of the NBU indicated substantial credit portfolio losses which Ukrainian banks had been suffering as the biggest threat to Ukraine’s banking sector. In these circumstances and given the payment moratorium, the role of external financing from international financial institutions (the “IFIs”) has significantly increased. Among the financial instruments provided by the EBRD is a risk-sharing instrument, which has been widely used by Ukrainian banks since 24 February 2022.
Risk sharing is relatively new for Ukraine’s financial market. Risk-sharing agreements are governed by English law but note that they have some elements of suretyship and guarantee under Ukrainian law. Under a risk-sharing agreement, the EBRD undertakes to cover the credit risk of a respective bank, which arises out of loans, guarantees and leasing provided by the bank, by repaying a borrower’s debt if it fails to service the loan. The EBRD may agree to reimburse a certain percentage of credit losses incurred by the bank, while the bank, in turn, shall regularly pay to the EBRD a risk-sharing fee.
The repayments from EBRD do not reduce, release or discharge the borrower’s payment obligations before the bank, but the bank will not receive double recovery of a credit debt both from EBRD and the borrower since it has to transfer to EBRD the percentage of funds recovered from the borrower equal to the EBRD’s share of the risk. The fact of paying risk-sharing payments does not automatically result in subrogation or regression with respect to the loan; however, the EBRD reserves the assignment option, which means that it may acquire by way of assignment the bank’s claims against the borrower arising from a loan agreement.
Therefore, the EBRD in fact secures the borrower’s credit obligations, but without establishing any contractual relationship with the borrower. The structure discussed is an eligible credit protection instrument, which mitigates credit risk and makes it easier for the Ukrainian banks to comply with the provisioning requirements of the NBU. This also makes it a feasible instrument in circumstances of economic uncertainty, instability, and high credit risks by enabling the banks to keep operating in turbulent market conditions and financing high-risk sectors. Since February 2022, OTP Leasing, OTP Bank, ProCredit Bank, KredoBank and Crédit Agricole Bank have already taken advantage of risk-sharing facilities of an aggregate amount of EUR 338.25 million, covering a significant percentage of their credit losses. The financings are aimed at supporting lending to Ukrainian private companies operating in critical industries, inter alia, agriculture, food processing, retail and logistics.
As for the future, with risk-sharing instruments having proved their efficiency, we expect an increase in risk-sharing projects to be implemented in Ukraine. Currently, four risk-sharing projects – with ProCredit Bank, KredoBank, OPT Leasing and PrivatBank – with a total value of EUR 450 million are being processed. Considering the significant amount of financings in the form of risk sharing, which are expected to grow even more in the near future, we may assume that risk sharing has become a key instrument for credit risk threat deterrence.