ication could support an increase in growth towards its projected potential of about 6 percent over the next 5 years, but this will require a healthy, adequately capitalized, and well regulated financial system.
. Despite significant public sector support to banks, the financial sector remains under stress and there is a need to fully address the underlying vulnerabilities. The banking system has been stabilized with large scale capital and liquidity support. The successful external debt restructurings of Alliance Bank and BTA have been key in stabilizing the financial positions of these banks, which are now ready to employ new business models. Nonetheless, the ongoing sharp increase in nonperforming loans (NPLs) across banks and economic sectors reflects banks excessive exposure to currency induced credit risk stemming from the combination of a low and dollarized deposit base, the reliance on foreign funding, and risky lending practices. Therefore, actions should be taken to:
Swiftly design and implement a comprehensive and transparent resolution of NPLs. Given the ongoing deterioration in asset quality, the associated effects on provisioning and capital, and the increasing prospect for higher minimum capital requirements at the international level, it is essential that banks, in conjunction with the Kazakhstani authorities, take more forceful and broad action to reduce NPLs. This would help to effectively rehabilitate the financial system and support a level of credit growth consistent with the necessary deleveraging of the corporate sector. There is no guarantee that higher GDP growth will automatically solve the banks bad debt problems, and the maintenance of a high stock of NPLs could act as a significant drag on growth prospects. While the aggregate provisioning level of the banking system is currently high, it has been declining. A full diagnostic assessment of systemically important banks would help to establish whether there is scope for remedial measures at the bank level, or whether there is a need for a more centralized approach to deal with bad assets. Such assessment should also determine any needs for additional capital and a contingent plan for recapitalization.
Address the vulnerabilities that led to the deterioration of the quality of bank credit portfolios. Given the challenges ahead, the government should continue to strengthen the Financial Supervision Agency s authority, independence, legal protection, and resources to credibly address weaknesses and risks that became apparent during the crisis. This includes continued action to curb overseas borrowing (especially short term) by banks, raise provisioning requirements on foreign currency loans to insufficiently hedged borrowers, strengthen banks governance framework...
