Banks say they expect lending standards to ease in the third quarter of 2013 both for businesses and households and forecast a bigger increase in foreign-currency denominated loans rather than in the domestic currency
TIRANA, July 16 – With bad loans standing at a record 24 percent, banks continued applying tight standards even in the second quarter of 2013 while demand for new loans remained sluggish by both businesses and households, a central bank survey showed this week. Data show lending standards were eased for households but further tightened for businesses on economic and business concerns.
Banks say they expect lending standards to ease in the third quarter of 2013 both for businesses and households and forecast a bigger increase in foreign-currency denominated loans rather than in the domestic currency. “Interest rates are expected to increase for lek-denominated loans and drop for foreign-currency loans,” says the central bank report. Expectations for an increase in lek-denominated loans reconfirms that the consecutive cuts the central bank has made to the key interest rate are proving inefficient to reduce the cost of lending in the national currency. With the key interest rate standing at a record low of 3.75 percent, the central bank’s monetary policy has been reflected more on reducing T-bill yields and as a result the cost of internal debt, rather than increasing lending, consumption or investments, which would be reflected in economic growth. The situation is also a result of financial institutions increasing their investments in government securities as lending strives to remain at positive growth rates.
In the second quarter of 2013, banks eased lending standards both for home purchase and consumer loans but further tightened loans for SMEs both for working capital and investment purposes.
While businesses continue hesitating to borrow, households’ demand for new loans rose, marking a turning point since the second quarter of 2011.
Specific problems in the sector where businesses operate, the situation with bad loans, and the general macroeconomic situation are the key factors contributing to tougher lending standards for businesses. Apart from the non-performing loan indicator, households’ financial situation and developments in the real estate market also affected the tight standards for individuals, according to the survey.
Competition in the banking system, liquidity levels, the capital adequacy ratio and decisions by the central bank had a positive impact on easing lending standards for both households and businesses.
Demand for collateral, higher commissions, and a decrease in loan maturity remain the key measures of banks’ tighter policies.
Bad loans at a record 24 percent and falling demand by both businesses and individuals for new loans have considerably affected credit growth which during the first half of this year is struggling to preserve its growth rates, registering the lowest rates in the past decade. After registering record high growth rates of 30 to 40 percent in the pre-crisis period until 2008, and maintaining moderate growth of 10 to 12 percent even from 2009 to 2011, credit growth decelerated to as low as 2.3 percent in 2012. In the first five months of this year, loan growth dropped to a historical low of 2.3 percent.
Lending drops to historic low of 0.2%
Lending dropped to a historic low in the first five months of this year when it grew by only 0.26 percent driven by a sharp drop in demand for new loans by crisis-hit households and businesses and tight lending standards banks are applying as bad loans stand at a record 24 percent. Bank of Albania data show lending has remained almost unchanged in the first five months of this year growing by a mere 1.4 billion lek (Euro 10 million) year-on-year, and registering the lowest growth rates since the collapse of the notorious pyramid schemes in 1997. At the end of May 2013, the loan stock was at around 555 billion lek, down 0.01 compared to December 2012.
Deposits although decelerating continue preserving a moderate growth trend unveiling consumers’ saving trend and insecurities about their future as they expect harsher times ahead. In the first five months of 2013, deposits grew by 4.7 percent year-on-year with its stock climbing to 940 billion lek. Compared to December 2012, deposits grew by only 1 percent or 10 billion lek.
Interest rates have registered a slight decrease for lek-denominated loans positively reflecting the central bank’s cut to the key interest rate in early 2013 to a historic low of 3.75 percent. Average interest rates for lek-denominated loans in May 2013 loans slightly rose to 11.05 percent in May 2012, up from 10.83 percent last April but down from 11.28 percent in May 2012, according to BoA data.
Meanwhile, T-bill yields continue registering new record lows. In the latest Bank of Albania auction, 12-month T-bill yields dropped to a historic low of 5.52 percent, down from 5.59 percent in the previous auction and 6.35 percent at the beginning of 2013 when the key interest rate was at 4 percent, considerably reducing the cost of Albania’s public debt currently standing at a record 62 percent of the GDP.
Low inflation pressures have allowed the Bank of Albania to cut the key interest rate by 1.5 percentage points to a historic low of 3.75 percent since Sept. 2011 in an effort to stimulate the economy but the moves have been poorly reflected in lower loan interest rates and an increase in consumption or investments.
Informal borrowing increasing
As the Albanian economy strives with the poorest GDP growth rates in the past 15 years, prospects for Albanian households and businesses who are switching to informal borrowing become grimmer. The latest survey carried out by the country’s central bank shows both households and businesses are facing rising difficulty in paying off loans they took at better times and do not plan to borrow in the short term either to finance home purchase or increase investments. The findings in the latest survey published in the Bank of Albania financial stability report for the second half of 2012 reconfirm once again the poor confidence for both households and businesses and the high rate of informal lending because of the tight lending standards and high interest rates banks are applying.
Individuals
One-third of surveyed households, some 33 percent, said they had at least one unpaid load, up 2 percent compared to the first half of 2012. The survey, which interviewed some 1,200 households in 16 Albanian districts, revealed the majority 54 percent of Albanian households borrow informally from relatives, friends and local shops. Households mostly borrow to purchase or repair real estate in 33 percent of cases, to finance consumption in 32 percent of cases and develop businesses in 15 percent of cases. Lending from banks and non-banking financial institutions accounted for 45 percent of the total at the end of 2012, up 2 percent compared to the first half of 2012. The overwhelming majority of 92 percent of households said they had borrowed in the national currency, mainly because of the high level of informal borrowing and that they had to pay their loans in one year in 41 percent of the cases. While the debt figures might seem normal, one in four households, some 26 percent, said their ability to repay loans has deteriorated mainly because of a drop in income and an increase in spending on basic products. In order to handle the difficulty in paying off loans, some 51 percent of households said they had cut their spending, 24 percent said they were looking for a second job while another 12 percent said they had requested the ease of the lending standards, according to the survey.
Prospects for the first half of 2013 seem grim as 70 percent of debtor households do not expect an improvement in their ability to repay debts. Some 24 percent of surveyed households expect their repayment ability to deteriorate compared to only a 5 percent who are optimistic. A majority 57 percent of households rule out the possibility of taking another loan in the next six months, indicating that consumption as one of the key drivers of the country’s growth will continue remaining sluggish.
Businesses
Strongly related to the situation of households, businesses are also facing tough times, having frozen the extension of their activities and investments. Only 1.7 percent of businesses said they had extended their activities or carried out new investments in the second half of 2012, down 2.4 percent compared to the first half of 2012, said the survey where 727 enterprises nationwide were interviewed. More than half of the active enterprises, some 53.6 percent said they had a loan to pay off, down 2.8 percent compared to the first half of 2012. Loans are mainly used to handle current expenditure in 37.3 percent of cases, followed by long-term investments in 30 percent of cases. One in four enterprises, which sell 80 percent of products domestically, said they had suffered losses from their business. While enterprises conduct the majority 80 percent of their activity in lek, around 50 percent of them borrow in Euro. Debts account for almost half of the enterprise’s capital in 75 percent of cases. Two out of three debtor enterprises say they spend 20 percent of their income to pay off loans and another 27 percent spend from 20 to 50 percent of the income.
An overwhelming majority of around 84 percent of enterprises said they do not plan to borrow in the next six months. Around half of them describe the relationship with banks as necessary while 52 percent of them describe the process of being granted a loan as normal.
The rising public debt, now standing above the 60 percent of the GDP ceiling, the accumulation of unpaid bills, and banks tightening lending standards as bad loans soar, has led to a sharp increase in informal borrowing, economy experts say. Gjergj Filipi, the director of Tirana-based Agenda Institute says businesses are turning to informal channels after being classified by banks as unreliable borrowers.
Local media report construction companies, whom government owes money for finished public works, are the most engaged in informal borrowing whose interest rates range up to 5 percent compared to an annual 10 to 12 percent in banks.
In crisis since the onset of the global financial crisis and facing liquidity problems the construction sector has been widely using the countertrade practice which involves the exchange of goods or services with other goods or services, rather than with money
The Albanian government owes the private sector in unpaid bills over Euro 200 million, according to business associations. The majority of unpaid bills, at an estimated Euro 120 million, belong to the crisis-hit construction sector, followed by Euro 50 million to service companies and 12 million euros in unpaid bills to hydropower plants concessionaries for electricity purchases. Businesses also claim dozens of millions of Euros in VAT refunds.
