KYIV, April 29 – Ukrainian banks issued less loans to businesses and people in the first quarter amid collapsing demand due to coronavirus pandemic and quarantine, the National Bank of Ukraine reported Wednesday.

The demand for loans was the weakest in 5 years and is expected to translate into weaker business activity during the next 12 months, potentially posing more problems for the economy down the road.

"The decrease in demand for consumer loans was due to a decrease in spending on durable goods,” the NBU said in the report. “A decrease in consumer confidence and household savings played a key role in the decline in demand for mortgages.”

The banks expect the next 12 months a significant deterioration in the quality of the loan portfolio in Ukraine, increased risks, primarily credit, and a slowdown in the flow of customer funds.

Meanwhile, the largest drop for in lending to small businesses was observed for long-term loans and for loans in foreign currency, while the demand for short-term loans was slowly growing, reflecting the need for businesses to stay afloat during the quarantine.

In the first quarter, business demand factors changed significantly, in particular, the influence of interest rates decreased, while requests for debt restructuring peaked from the third quarter of 2017. "It is this factor and the need for replenishment of stocks and working capital that are decisive for the credit demand of large enterprises," the NBU said.

The banks said that there was a significant decrease in the demand of small and medium-sized enterprises (SMEs) for loans to replenish working capital and for capital investments.

According to banks, the decline in consumer demand for consumer loans is the largest since 2015. The demand for mortgages also fell sharply, but mainly in several major banks, while 38% of respondents indicated an increase in this figure.

The banks expect a significant decrease in demand both from businesses – for loans in foreign currency and for long-term loans, and from the population – for mortgage and consumer loans.

In January-March, half of the banks tightened business lending standards. The tightest were the requirements for loans to large enterprises and loans in foreign currency.

"Inflation, exchange rate and general economic expectations have most strongly affected the toughening of standards. In particular, exchange rate expectations are significant for SMEs, while expectations for the development of an industry or an individual enterprise for large enterprises," the NBU said. (om/ez)