The rising bad loan portfolio, which has doubled to almost 15 percent during the past couple of years, is the key factor for banks’ hesitation to ease lending standards
TIRANA, August 2 – Lending standards for businesses became tighter in the second quarter of this year and are expected to further tighten in the third quarter because of the banks’ deteriorating bad loan portfolios. The findings are revealed in the latest Bank of Albania lending survey which showed lending standards for both small and medium-sized enterprises and big businesses became tighter in the second quarter of this year. Businesses’ demand for new loans was also lower compared to the previous quarter, confirming the hesitation and pessimism of the business community as consumers have lowered spending fearing harsher times ahead.
“The main factors contributing to the tightening of standards for business loans were the situation of problematic loans in the banking system and specific factors of the sector where the enterprises operates.” The country’s macroeconomic situation, with rising budget deficit and public debt at the threshold level of 60 percent of the GDP also continued to negatively contribute.
“On the other hand, the liquidity situation and competition in the banking system continued to ease lending standards for businesses,” says the report.
The banks tighter policies were imposed mainly through increasing demand for collateral. The need to finance inventories and floating capital was the main factor contributing to demand for loans while demand to finance fixed investments continued dropping for the fourth quarter in a row.
Banking experts’ expectations for the third quarter of this year remain pessimistic despite an increase in demand for new loans by businesses.
Meanwhile, lending standards for individuals continued to ease even in the second quarter of this year, both for consumer and home loans. “The individuals’ financial situation and bad loans continue to negatively contribute to lending standards for individuals,” says the report.
Banking experts expect standards for individuals to continue remaining eased even in the third quarter of this year.
For the third quarter of this year, bankers expect a slowdown in lending activity for both the national currency, lek and foreign currencies, mainly Euro and US dollar. Expert forecast a drop in interest rates especially for loans in foreign currency.
Lending in foreign currency especially Euro, continues to account for 70 percent of the total portfolio in Albania, mainly due to the difference in interest rates, revenues and purchases made in Euro, especially in the construction sector.
However, experts suggest the sharp depreciation of the lek against the Euro is another reason not to borrow in Euros for those who are paid in lek. Experts expect interest rates for credit in the national currency, lek, to increase in the second quarter of this year mainly due to the monetary policy followed by the Bank of Albania– which late last March increased the key interest rate by 0.25 percent to 5.25 percent.
Bad loans which have doubled to almost 15 percent in the past couple of years are the key factor preventing credit growth which before 2009 ranged from 30 to 50 percent annually.
Latest data published by Albania’s central bank show lending was up 11.5 percent year-on-year during the first half of 2011.Meanwhile, deposits rose by 15.7% year on year.
Bad loans, which the central bank and financial experts warn is a key risk to Albania’s banking sector, continued rising even in the first quarter of this year while banks’ profits were reduced by more than 50 percent. Latest data published by the Bank of Albania show bad or non-performing loans climbed to 14.42 percent of the total portfolio in the first quarter of 2011, up from 13.61 percent in the final quarter of 2010 and 11.46 percent in the first quarter of 2010. Meanwhile, the banks’ net profit more than halved to 668 million lek (6.7 million dollars) in the first quarter of 2011, down from 1.5 billion lek (15 million dollars) at the end of the first quarter of 2010.
Bank of Albania governor Ardian Fullani and Finance Minister Ridvan Bode have reiterated the need for the quick execution of collateral to keep the Albania banking safe from the risk of rising bad loans.
