"The 5-7-9 Program needs fundamental changes

Danylo Hetmantsev, Chairman of the Parliamentary Tax Committee, shared insights from the latest Financial Stability Report for June 2024.

Below, we will talk about the 5-7-9 program, which became a driver of lending at the beginning of the war, but now needs a systemic change in design and focus.

Why did the changes become necessary?

1. The program has become too expensive for the budget. In 2022-2023, the government amended the program 16 times, expanding its application. The portfolio of loans under the program has more than doubled since the beginning of the war, reaching UAH 129 billion as of the beginning of June 2024. The program budget was not designed for such dynamics. As of the beginning of 2024, the debt on compensation to banks exceeded UAH 7 billion (as of the beginning of June, it decreased to UAH 5.8 billion). Delays in financing the program increased uncertainty and restrained lending by both banks and clients.

2. The program increased risks to the banking system. Although the share of NPLs on loans under the program grew modestly during the war (from 1% to 8% of the loan portfolio), the rate of accumulation of such loans became increasingly unsustainable, masking insolvent clients and deteriorating the quality of the loan portfolio. Some banks have built up more than 50% of their net hryvnia corporate portfolio through the program, while the system average is about one third.

3. The program restrained price competition for customers and lowered interest rates.

The cost of borrowing under the program remained extremely low, even when market rates increased significantly. Significant amounts of loans were provided at 0% for a long period. As of the beginning of 2024, the average interest rate under the program for customers was 4.5%, while the state compensated banks 14.4% of every thousand hryvnias of loans issued. The full program rates (including compensation) were higher than those for loans on market terms.

4. Participation in the program did not improve the operational efficiency of borrowers, but rather increased their profitability through savings on loan servicing.

In addition to the measures already implemented (limiting the interest margin of banks, reducing the limits of working capital loans from UAH 60 million to UAH 5 million), the report identifies a number of further steps to balance the program:

▪️ Focusing mainly on investment projects;

▪️ Providing working capital loans to a limited number of clients (e.g., war-affected businesses with the potential to recover);

▪️ Tightening lending standards;

▪️ Limiting the total portfolio of loans under the program, taking into account the budget allocated for it

The MP believes that the program really played a positive role, especially at the beginning of the war, in particular, by helping to pass the sowing season, harvest the crops, supporting critical infrastructure enterprises and retail chains with working capital when it was really necessary, when banks were reluctant to lend due to uncertainty.

Perhaps the government should have worked more actively on the design of the updated program when the economy emerged from the "numbing" phase in the first year of the war. Nevertheless, the risks of the program in its current form became apparent in the second half of last year. That's when the work on its improvement began.

This work will now receive a new impetus. The program will be administered by the Entrepreneurship Development Fund, on the basis of which the National Development Institution (NDI) will be created. The corresponding draft law developed by our committee together with the Ministry of Finance and the NBU was adopted in the first reading.

We have to ensure that the NDD's resources are directed to the priority areas - stimulating lending to strengthen defense capabilities, promising growth points within the post-war recovery, relocated businesses, businesses in the de-occupied territories, IDPs and other projects that, for various reasons, primarily increased risks, are less interesting for conventional commercial banks.