Banks may significantly increase credit rates for new clients but not for state-run companies, solid borrowers - NBU deputy head

MOSCOW. June 3 (Interfax) - A steep rise in the annual discount rate to 25% may lead to a significant increase of credit rates for new clients, while the burden of rate growth for state-run companies and industries prioritized by the government will be mostly borne by the state budget, deputy head of the National Bank of Ukraine Sergiy Nikolaychuk said.

"It is important for banks to maintain long-term relations with solid borrowers, which they have been cooperating with for years, and to find mutually acceptable ways to survive under the hard circumstances. So, the interest rate will be growing but I believe that a balance of interests of banks and borrowers will be maintained," Nikolaychuk said at a virtual discussion held by the Kyiv School of Economics on Friday.

"Most probably, the rise will be insignificant in state-run banks, as well as for state-run companies and solid borrowers, as for new clients or priority programs, the areas the government wants to support through lending, the rate will tangibly rise but will be mostly funded by the government," Ukrainian media outlets quoted Nikolaychuk as saying.

The National Bank seeks to stabilize the forex and financial markets by steely raising the discount rate from 10% to 25%, he said.

"The standard mantra of the International Monetary Fund and classic textbooks is that the economy needs devaluation to cope with shocks, but it does not work under the current circumstances. Instead, stabilization of the forex and financial markets is our goal and the way we see the maximum effect for Ukraine's economic recovery," Nikolaychuk said.

Speaking of the financial market reaction to the steep growth in the discount rate, Nikolaychuk noted the need for a higher cost of hryvnia resources in the economy. He said he was expecting the interest on hryvnia-denominated deposits to grow over the next few months owning to competition of banks for resources.

The move will not lead to any super-profits of banks and will not kill any banks, Nikolaychuk said. The decision to raise the discount rate is being criticized for contravening budget interests and increasing the cost of domestic bond borrowings for the Finance Ministry, 70% of the sovereign debt falls on the foreign currency debt. So, the alternative of devaluation and unstable exchange rate would have dealt a more severe blow to the debt stability.

The National Bank is expecting the Finance Ministry to gradually increase the yield, primarily on short-term instruments, since the current rate of 10-11.5% does not correspond to the real value of money and does not encourage banks to invest in these instruments.

Nikolaychuk assessed the potential bank investment in domestic bonds at the increased rate at tens of billions rather than billions of hryvni.