Bad loans to be recognized as deductible expenses

TIRANA, Feb. 25 – With loans classified loss having reached around 11 percent or 400 million Euros, Albania’s central bank and the Finance Ministry are working on a draft law which will allow banks write off bad debt from the balance sheets recognizing it as deductible expenses.
The changes foresee that loss loans will be recognized as deductible expenses one year after a request has been filed by the bank for the compulsory execution of collateral and one year after court has issued an execution order on different assets the borrower may possess in case the loan is not guaranteed by collateral.
The conflict had arisen from different interpretations of the profit tax law which determined that one of the conditions for the bad debt to be recognized as deductible expenses “is having taken all possible legal action for its collection.” The tax authorities did not recognize bad loans as tax-deductible expense when banks wanted to write them off, imposing taxes on them.
Apart from lowering the rate of non-performing loans currently standing at a record 24 percent, the write-off will also unfreeze considerable funds in provision coverage for bad debt.
Bank of Albania representatives had recently stressed the need for banks to remove loans which they consider as lost from their balance sheets.
Experts say the losses are also a result of banks having started to write-off bad loans. Central bank governor Ardian Fullani has earlier said the new measure will free banks, representing more realistic balance sheets and giving a new impetus to lending. The central bank estimates that writing off loss loans whose holders have failed to pay for more than 1 one year clears the banks’ balance sheet from non-performing assets which deform the structure and quality of the balance sheet.
Affected by credit growth having plunged to negative growth rates and bad loans at a record 25 percent, the 16 commercial banks operating in Albania are facing their worst ever situation since the collapse of the so-called pyramid investment schemes in 1997. Central bank data shows banks’ net income in the first three quarters of this year registered a loss of around 1.3 billion lek (around Euro 9 million), the worst performance since 1998 soon after the turmoil triggered by the collapse of the pyramid investment schemes when the 10 banks operating in Albania at that time reported losses of around 3.3 billion lek (Euro 23 million).
The situation was a result of soaring spending on provision coverage for bad loans which rose to 14 billion lek (Euro 98 million) in the first three quarters of the year, up from 7.8 billion lek in the first half of the year and 4.8 billion lek in the first three quarters of 2012.
Non- performing loans in the third quarter of the year reached 24.34 percent, slightly down from 24.39 percent in the first half of the year and 22.7 percent in the third quarter of 2012.
At the end of the first half of 2013, the highest percentage in the non-performing loan portfolio belonged to loss loans at 11.2 percent with borrowers having failed to pay instalments for more than one year. Second come substandard loans with 9.1 percent followed by doubtful loans at 4.04 percent. Under the BoA regulation, loans are considered doubtful when borrowers have not been able to pay for 180 days and substandard when payment has been delayed from 61 to 90 days.
While substandard and doubtful loans have almost preserved their late 2012 levels, loss loans registered a sharp increase at the end of the third quarter of 2013 when they rose to 11.2 percent, up from 9.23 percent in the previous quarter and 7.02 percent at the end of the third quarter of 2012.