Kazakhstan’s Rehabilitation Bank

After the dissolution of the Soviet Union in 1991, Kazakhstan officials made market-oriented stabilization reforms to its previously Soviet-planned economy, including removing most price constraints, privatizing various state-owned enterprises (SOEs), and taking steps to prevent the collapse of its banking system. As part of its efforts, Kazakhstan created the Rehabilitation Bank (RB) in 1995 to absorb the large number of non-performing assets from state-owned banks while also assuming a corresponding amount of the institutions’ liabilities, essentially “shrinking their portfolios” (Implementation Completion Report 1998). The RB, established with a four-year mandate, either liquidated the debtors or required the firms to restructure. Kazakhstan policymakers also created two other institutions alongside the RB to take the non-performing assets associated with businesses in specialized industries. Overall, loans totaling 11% of the country’s gross domestic product were transferred to the RB and the two other asset management companies. The RB’s collection methodology and final recovery figures are unclear. The non-performing asset transfers did not have an immediate positive impact on the quality of Kazakhstan’s banking system portfolio. Though the portion of the country’s loans considered non-performing fell to a third in 1995, the figure rose to 41.3% by the end of 1996. The increase was due to better loan classification and an underlying deterioration in loan quality. Still, some have credited the policy with helping to prevent the banking system’s collapse.

Prior to the early 1990s, the Soviet central bank, Gosbank, allocated all financial resources to its republics. Kazakhstan’s financial system was historically organized to accommodate this relationship and remained structured this way after the 1991 dissolution of the union. In 1992, the country’s banking system was made up of former Gosbank domestic arm National Bank of Kazakhstan (NBK), which became the country’s central bank, five specialized state banks, and more than 70 smaller commercial banks. Gosbank previously directed credit to the specialized banks and required them to lend the resources to specific firms. This credit “resembled budget transfers” because debt payment was not enforced (Hoelscher 1998). This contributed to an eventual run-up in non-performing assets.      

After the Soviet Union’s collapse, Kazakhstan lost its traditional revenue sources, lacked domestic financing from nonbank institutions, and had little access to international capital markets. The country’s economy contracted sharply, living standards fell, and the number of insolvent businesses grew, including those to which the main state banks lent. By 1994, an audit showed nonperforming debt in Kazakhstan equaled 55 percent of total portfolios in the country (Gürgen et al. 1999).

To prevent a collapse in the banking system, the assets of which were largely concentrated in the largest five banks, the newly independent NBK established the asset management company (AMC) Rehabilitation Bank^FNAlso called the “Rehabilitation Trust” in various sources. (RB) to manage firms that constituted the biggest financial burden on the banks. The Ministry of Finance (MOF) also played a substantial role in the RB’s establishment and operations (Staff Appraisal Report 1995).

The RB forced the selected firms to restructure or liquidate and took on the businesses’ non-performing loans to help clean up their balance sheets, along with the major banks’ (Staff Appraisal Report 1995). The central bank considered blanket loan forgiveness but eventually rejected the option because it worried banks would come to expect such bailouts in the future (Hoelscher 1998). The RB took non-performing loans of 45 of the largest insolvent debtors,^FNVarious sources give different figures for the total number of enterprises the RB handled. The author chose Hoelscher 1998’s 45 figure because of the report’s singular focus on Kazakhstan’s restructuring program and the time elapsed between the program’s inception and the report’s publish date. most of which were large metallurgical and mining companies, and a corresponding amount of liabilities, shrinking banks’ portfolios (Hoelscher 1998). “The state in many ways relieved banks of bad loans that had been imposed by authorities” (Implementation Completion Report 1998).

The NBK established the RB as part of a broader financial system stabilization strategy, which included tightening entry requirements for new financial institutions and modernizing the country’s legal and regulatory conditions. The NBK also created the Agricultural Support Fund (ASF), which took over loans extended to nearly 4,000 insolvent farms, and utilized the already-existing Exim Bank to acquire loans that export credit agencies funded because of previous government guarantees (Hoelscher 1998).

The RB and the two other AMCs struggled to resolve the bad loans they absorbed. A detailed account of the AMCs’ overarching collection methodology does not appear to be available. The government auctioned off some of the bad loans, and later began paying joint stock company Agency on Reorganization and Liquidation of Insolvent Enterprises to deal with the non-performing debts (Implementation Completion Report 1998). The State Property Committee, an entity created to privatize SOEs, also assisted in the sale of a chosen company’s assets (Staff Appraisal Report 1995).

The Kazakhstani government struggled to adequately resolve the bad loans transferred to its three AMCs largely because the institutions were unable to comprehensively restructure many of the indebted businesses and farms. By 1998, the RB had provided its restructuring and liquidation services for only 14 of the chosen firms, including liquidating five and pushing for staff reductions in eight (Implementation Completion Report 1998).

The failure to adequately restructure some of the firms stems in part from management and funding problems that arose. The Kazakhstani cabinet made restructuring decisions for the largest selected firms, and the MOF held back most of the funds appropriated for the RB, “making it difficult to make agreed payments under restructuring plans” (Republic of Kazakhstan 2001). World Bank researchers argued that even if the restructuring efforts were ineffective, the process still minimized “allocation of further resources to” the enterprises, “contributing significantly to the health of the banking sector” (Implementation Completion Report 1998).

Even so, the prioritization of restructuring viable businesses took scarce government resources, slowing “the emergence of a prosperous enterprise sector” (Hoelscher 1998). “The activities of the AMCs would have been more effective had debtors been quickly closed, assets sold off, and the nonperforming loans quickly liquidated” (Hoelscher 1998).

Analyses conducted in 1998, four years after the asset transfers began, showed mixed outcomes. The banking sector’s balance sheet improved, according to a World Bank review detailing the completion of its financial support for the asset purchase program (Implementation Completion Report 1998). Though the portion of the country’s loans considered non-performing fell to a third in 1995, the figure rose to 41.3% by the end of 1996 (Hoelscher 1998). The rise in bad assets was partly due to improved loan classification standards but also an actual deterioration in asset quality (Hoelscher 1998). Still, some have argued that the NBK successfully prevented the banking system’s collapse, partially because of “avoidance of moral hazard” and the other concurrent restructuring policies (Hoelscher 1998).

The program did not involve substantial capital injections, nor operational and institutional restructuring of the banks that took on the bad assets to begin with, causing four of the country’s biggest banks to undergo further financial stress, which then lead to a subsequent bailout and “merge recapitalization” of two of the financial institutions (Tang, Zoli, and Klytchnikova 2000). Kazakhstan’s experience “illustrates how bank restructuring without adequate capitalization and not accompanied by operational and institutional restructuring cannot resolve banking sector problems and may require successive government interventions” (Tang, Zoli, and Klytchnikova 2000).