BNR’s decision to cut the bad debt provisions is a measure that came as no surprise to market watchers, as it would improve lenders’ liquidity, whereas it would fail to revive markets for consumer and small-business lending, specialists polled by Wall-Street say.
The central bank decided late last week to enable lenders to cut the provisions set aside to write off bad debts, namely for loans with 90-day default period or for loans subject to legal actions, by 25% of collaterals’ value.
“BNR’s measure was absolutely vital in current market conditions, as the 90-day loan default ratio skyrocketed in the past few months, triggering the growth of bad-debt provision spending among lenders and in the end, of costs of loans granted to clients”, said Melania Hancila, head of research and strategy department with Volksbank Romania, third largest bank in Romania by assets.
This regulation is designed to differentiate the non-secured loans from the secured loans. “Therefore, the banks will have the possibility to lower the bad debt provisions by 25% of the collaterals’ value, which will lead to a reduction of provisions for mortgage-backed credits” said Hancila. In other words, more liquidity for banks.
She added that the measure adopted by the central bank would improve banks’ profitability and implicitly profit tax, and would boost the liquidity in the banking market, meaning a revival of market for consumer and small-business lending.
“BNR’s decision is welcomed, given the recent sharp slowdown of lending. In the event of an ongoing loan default ratio, the banks would be forced to raise capital to write them off,” said Nicolaie Alexandru Chidesciuc, senior economist at ING Bank Romania.
National Bank of Romania made public on Friday last week the new regulation regarding the classification of loans and placements, as well as bad debt provisions.
The previous legal framework did not allow the adjustment of provisions for loan delinquency period longer than 90 days.
The regulatory project was drafted after the recent talks between BNR and Romanian Association of Banks.
BNR says the new regulatory groundwork is aimed to line up national regulations to International Financial Reporting Standards in terms of guarantees scheme afferent to bad debts with a default period longer than 90 days in setting up provisions.
The new form of the regulation will be in force once its publication in the Official Gazette, in line with legislation in force.
Analysts react with raised eyebrows to the revival of lending market
Despite the fact that the lending market anticipated this new regulation of the central bank, specialists say there is still a long and winding road to the revival of lending activity.
“Unfortunately I don’t expect a major impact on lending activity. It is possible to see a minor deceleration of the sharp downtrend, but not a restoration of the lending market”, said Chidesciuc.
Bankers said that the major drawback for lending was the lack of demand, as a result of Q4 contraction and of high interests in the midst of a dried up liquidity in the global markets. Thus, these additional measures to reduce interest rates, both on a long and short run, seem to meet the market demand, Chidesciuc added.
Ionut Dumitru, head of research department of Raiffeisen Bank Romania sees a minor impact on the revival of lending.
“The impact of the new measure enforced by NBR over lending would be narrow, and we would rather see a slight ease of pressure on provisions and capital among lenders, but definitely not a revival of lending”, said Ionut Dumitru.
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