The main systemic risks faced by the financial sector today are the large share of the state of the banking sector and the level of non-performing loans (NPL), according to a financial stability report posted on the website of the National Bank of Ukraine (NBU).

"The nationalization of PrivatBank has resolved the systemic problem, but it has created a long-term challenge, as the share of the state of the banking sector has reached 56% in net assets and 62% in deposits of the public. In the past year there was almost no progress in reforming state-owned banks, while strategic principles approved by the government are not executed," the NBU said in the report.

According to the document, operation effectiveness of state-owned banks is too low. The coupon payments on government domestic loan bonds bring the main part of interest income. The quality of credit decision is doubtful. Clear business models have not yet been designed. The key factor in reforming state-owned banks is the adoption of the law that would introduce independent supervisory boards and remove the banks from the influence of politics.

According to the report, the high share of NPL (57% in April) is a burden for the balance sheets of banks.

"Servicing of most of these loans would never be restored, and it is better to reserve funds for them and waive. Amendments to the legislation should be made to remove negative tax consequences for banks. Banks should be more active in restructuring loans for honest borrowers, whose financial state is being restored. Banks should use the financial restructuring institution that started working in May at full," the central bank said.

In H2 2017 the NBU would demand to draw up a strategy for operation with NPL by banks and would set the clear terms for their implementation, the NBU said in the document.