“There cannot be a decrease in bad loans, an increase in credit to the economy, healthier balance sheets for businesses and banks as long as there is no execution of collateral,” says governor Fullani
TIRANA, July 6 – Bad loans which have trebled to 20 percent during the past three years remain the key problem the Albanian banking system faces, central bank governor Ardian Fullani said this week at the conclusion of an EU funded project assisting the Bank of Albania improve its practices.
“The increase in non-performing loans has increased stress levels in the banking activity, lowered the contribution of the sector in financial intermediation and in supporting economic growth in Albania,” said Fullani.
According to him, delays in the execution of collateral remains the key problem for the sharp jump in bad loans and joint efforts by the banking system, the Bank of Albania and other state institutions, including Parliament and courts are needed to overcome the situation.
“A correction process is necessary in the economy which first of all would imply a rebalance of prices. There cannot be a decrease in bad loans, an increase in credit to the economy, healthier balance sheets for businesses and banks as long as there is no execution of collateral and as a result a correction of fixed asset prices,” said Fullani, adding that the process would inject new financial resources to the economy.
The central bank says it has been carefully watching the situation and that the bank of Albania remains open for a review of the supervisory regulatory framework, but rejects a request for lower provision coverage rates.
“It is necessary that some improvements to the legal and regulatory framework as have now been identified by joint working groups with the banking industry are implemented correctly so that the collateral gains its optimal value,” added Fullani.
Relationship with customers is also crucial in dealing with bad loans, said Fullani adding that some banks had lowered their NPLs during the past 2 to 3 years because of their efficiency in dealing with customers.
Central bank data show non-performing or bad loans climbed to 20.07 percent at the end of the first quarter of 2012, up from 14.42 percent during the same period last year.
Non-performing loans account for a total of around 1 billion dollars, representing around 7.6 percent of the GDP and becoming a drag on economic growth.
Experts say they are considered the second major threat to the Albanian economy after the public debt, currently at the legal ceiling of 60 percent of the GDP.
BoA data show bad loans doubled to 6.5 percent at the end of 2008, reflecting the first impacts of the global financial crisis. At the end of 2009, bad loans further climbed to 10.5 percent before reaching 13.61 percent at the end of 2010 and 19 percent in 2011.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking household income, businesses in crisis and the depreciation of the domestic currency, lek, mainly against the Euro. These factors have made it harder for people to pay back the loans they took in better times.
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 BoA. 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.
A newly drafted law by Albania’s central bank and the Association of Banks on the acceleration of procedures for the execution of collateral, a key barrier which has directly influenced on rising bad loans and falling banks’ profits as a result, is expected to bring positive changes. The draft law which has already been submitted to government foresees changes to the Civil Code requiring a qualified majority of 3/5 of votes.
Other measures envisaged in the draft law are the establishment of a special court section dealing with the execution of collateral and an amendment to the law on registration of real estate because of problems with the real ownership of property put up as collateral.
Latest Bank of Albania data show the construction sector leads the NPL portfolio with 29.6 percent, followed by trade with 21.3 percent and agriculture with 13.6 percent. In December 2011, non-performing loans for the real estate sector climbed to 12.55 percent from 9 percent a year ago. The NPL rate for individuals is estimated at 15.35 percent compared to 20 percent for businesses.
