TIRANA, April 3 – At around 19 percent in 2011, Albania’s non-performing loans are among the highest in Central, Eastern and Southeastern Europe (CESEE), becoming a drag on economic growth, according to a recent report issued by the European Bank Coordination Initiative. The report surveying 21 CESEE countries ranked Albania as the fourth most problematic in the region after Montenegro, Lithuania and Latvia whose non-performing loans (NPL) levels reach up to 25.3 percent.
More recently, however, government arrears have contributed to the NPL problem. Governments facing falling revenues and under pressure to reduce expenses have begun to lengthen repayments to the private sector. “In Albania, borrowers have encountered serious delays in receiving VAT refunds and payments for goods and services provided to the government. While the exact amount of these payments is currently unknown, anecdotal evidence indicates that there is a direct correlation between this slowdown and increasing NPLs,” says the report.
The tax code, itself, may act as in impediment. In Albania, the tax code requires that transfer pricing issues be referred to a panel with specialized expertise but, to date, the panel has yet to be established. These issues which are of great importance particularly in the case of corporate reorganizations continue to be handled by the regular auditors who are poorly equipped to deal with the issue; thus, ensuring undue delays and inconsistent approaches.
A long list of obstacles in the legal, judicial, tax, and regulatory areas is holding up NPL resolution. A survey of international institutions and banks operating throughout the region has identified the enforcement of collateral which tends to take too long and rely heavily on cumbersome judicial processes, as the top issue.
The boom-bust cycle has left a legacy of high non-performing loans (NPLs) in various countries in Central, Eastern and Southeastern Europe (CESEE). Very high credit growth during
2003-08 gave rise to an unsustainable boom that ended abruptly with the global financial crisis of 2008/09. The deep recession that followed brought many of the accumulated underlying problems to the fore, including poor quality of some loans on banks’ books. NPLs now average some 11 percent in the region. Countries with particularly pronounced boom-bust cycles are considerably worse off, according to the report.
Moreover, data deficiencies and possible underreporting of bad loans in some countries might mean that the true NPL problem is even bigger than official statistics suggest.
The key concern is now that a festering NPL problem could become a drag on economic growth. Experience from past financial crises suggests that lasting recovery requires a clean-up of the financial sector, including bringing down NPLs. Empirical evidence from CESEE countries confirms that NPLs on banks’ balance sheets indeed create uncertainty and weigh on their ability to resume lending, and thereby aggregate demand and investment. Moreover, unresolved NPLs suppress economic activity of currently overextended borrowers and trap resources in unproductive uses.
Banks’ profits
Banks’ profits in 2011 registered their lowest rate during the past 12 years as bad loans reached a historical high record of around 19 percent, according to statistical reports published by the Bank of Albania. Data show banks’ net profits at the end of 2011 were only 706 million lek (Euro 4.95 million), the worst level since the 1997-1998 pyramid investment schemes when banks registered negative balance sheets. The 2011 profits are almost 10 times lower compared to 2010 and 15 times lower compared to the peak 2007 profits of 10 billion lek (Euro 70 million). The sharp rise in bad loans at an official 18.94 percent of the total at the end of 2011, three times higher compared to the end of 2008, and delays in executing collateral are the key reasons for the poor performance in the banking system. The rising bad loan portfolio has forced banks to considerably tighten lending standards, which has led to lending growing moderately at slightly more than 10 percent since 209 compared to the pre-crisis levels of 30 to 50 percent.
Considered as the second major threat to the Albanian economy after the public debt, currently at the legal ceiling of 60 percent of the GDP, bad loans rose by 5.3 percent y-o-y in the fourth quarter of 2011. Some 16 commercial banks, which are overwhelmingly foreign-owned, operate in the Albanian banking system.
