Kazakhstan’s Rehabilitation Bank

After the dissolution of the Soviet Union in 1991, the Kazakhstani government was concerned with averting a broad banking system collapse. It focused initially on restructuring the large state banks by dealing with the country’s sizeable stock of nonperforming loans. It also heightened the entry requirements for new banks and increased minimum capital requirements (Hoelscher 1998).

The NBK, tasked with running the restructuring efforts, used the RB and two specialized AMCs to take nonperforming loans off banks’ balance sheets. It removed the banks’ corresponding liabilities to the government, essentially shrinking banks’ portfolios (Hoelscher 1998). However, the government did not inject government capital to ensure banks could sustain losses on other loans.

The RB took non-performing loans of 45 of the largest insolvent debtors, mostly metallurgical and mining companies. The Agricultural Support Fund (ASF) took loans extended to nearly 4,000 insolvent farms, and the existing Exim Bank took loans that export credit agencies had funded under government guarantees (Hoelscher 1998).

The RB chose businesses that were the largest burdens on the country’s banks. It forced insolvent debtors to liquidate or restructure by cutting them off from any funds outside of the RB itself (Staff Appraisal Report 1995). The RB required insolvent debtors to submit restructuring plans that the RB board would accept or reject, the latter of which triggered liquidation (Staff Appraisal Report 1995). But the AMC “gave priority to enterprise rehabilitation rather than liquidation, developing comprehensive downsizing and restructuring plans for each enterprise” (Hoelscher 1998).

A subsequent detailed statute would later elaborate management characteristics, according to a World Bank report detailing the RB plan before its full implementation (Staff Appraisal Report 1995).

The specific nature of the new powers policymakers granted the RB is unclear.

The RB prioritized restructuring, potentially because it played a role in overall privatization and liberalization efforts, and as such, appeared to have no strictly enforced mandate to resolve the bad debt on its books (Hoelscher 1998).

The NBK established the RB as an entirely state-owned joint stock bank (Staff Appraisal Report 1995). Officials chose the central bank because the NBK’s staff was the main source of specialized banking and finance knowledge the government could tap (Hoelscher 1998). A World Bank report detailing the RB’s structure suggested the RB began business on the property of one of the country’s commercial banks, accessing the institution’s communication and computer systems as part of a “fee-based contractual arrangement” (Staff Appraisal Report 1995).

The RB’s Supervisory Board was chaired by a policymaker of at least “Deputy Prime Minister rank” and included members of the economy and finance ministries, the NBK, the State Property Committee, and outside “independent” finance and business management experts (Staff Appraisal Report 1995). The board’s mandate involved approving restructuring or liquidation plans and deciding the amount of financial support a debtor company received (Staff Appraisal Report 1995).

The RB’s Management was headed by a local director with finance experience. Officials incentivized management to reduce firms’ budgetary costs, cut losses, and keep businesses under the RB’s watch for less than three to four years (Staff Appraisal Report 1995). The management incentivization methodology is unknown.

NBK employees staffed the RB because it was the main source of banking expertise in the country (Hoelscher 1998). Other local professionals with experience in finance, law, business, social security, and liquidations were to be recruited as well, with the staff attending courses led by foreign experts and other trainings (Staff Appraisal Report 1995).

Non-performing loans totaling 11% of Kazakhstan’s GDP were transferred to the RB and the other AMCs by 1998. The RB took loans equivalent to one percent of GDP, the ASF received assets equaling four percent, and Exim took on loans of about six percent (Hoelscher 1998).

Any operating losses would be funded through the MOF from the state budget and by NBK refinancing facilities and RB bonds, which were guaranteed by the government, at market interest rates (Staff Appraisal Report 1995). The World Bank also helped finance the RB’s operations with a loan to the Kazakhstani government (Staff Appraisal Report 1995).

At the time of the program’s establishment, a weak economy and tightening monetary policy exacerbated the nonperforming loan problem, initially brought on by state-directed lending before Kazakhstan achieved independence. To prevent a banking system collapse, the NBK and policymakers focused on removing bad debt that burdened the largest banks, where most of the country’s deposits were held (Hoelscher 1998).

The businesses were selected chiefly by their total non-performing debt and burdens on “creditors in terms of outstanding non-performing net liabilities to banks, enterprises, and the state’s budget and extra-budget funds” (Staff Appraisal Report 1995). At the outset, the World Bank stated most of the firms likely to meet the criteria would be majority state-owned (Staff Appraisal Report 1995). The initial plan documents allowed the RB to take on 40 institutions, but the AMC had restructured or liquidated 45 by 1998 (Staff Appraisal Report 1995). Most debtors were large metallurgical and mining companies.

Public service enterprises, such as utilities, were excluded because liquidation would be unrealistic and such firms’ “financial problems stem largely from state pricing policies rather than operating inefficiencies” (Staff Appraisal Report 1995).

This shrunk the financial institutions’ portfolios (Hoelscher 1998).

Available program documents do not contain information about the RB’s pricing methodology.

The AMC “gave priority to enterprise rehabilitation rather than liquidation, developing comprehensive downsizing and restructuring plans for each enterprise” (Hoelscher 1998). Privatization was generally expected as part of restructuring plans as well, if applicable. Support from the RB remained “strictly tied to the implementation of the time-phased restructuring plans” (Staff Appraisal Report 1995). If the plans were not implemented completely or if they failed to make the chosen firm financially viable, the business would be liquidated and its assets sold. In a similarly strict ethos, the possibility that a firm’s management could be replaced in the event of even “minor shortfalls” in the restructuring process was an “enforcement tool” available to Kazakhstani officials (Staff Appraisal Report 1995).

Most documents detailing the RB’s establishment include little to no information about the AMC’s nonperforming loan disposal methodology, though the government appeared to auction off some of the bad loans. Authors of a report published three years after the RB’s establishment stated the resolution of bad loans on the AMCs’ balance sheets were of concern to the Kazakhstani government. Rehabilitation “institutions that received the non-performing loans were not able to make much headway in restructuring indebted farms and enterprises” (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).

The government originally planned to close the RB, “a temporary institution,” after four years (Staff Appraisal Report 1995). In June 1998, the RB was reorganized and renamed the “Rehabilitation Fund.”^FMany thanks to the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan authorities for their help tracking down RB facts. With available documents, details are unknown regarding this new organization’s structure, purpose, and funding, and if and when its operations ceased.