Increase in bad loans, tighter rules and lowered demand are making it harder for businesses to borrow from Albanian commercial banks, say experts at Bank of Albania
TIRANA, Sept. 15 – Although Albania’s government and central bank have been telling banks for months to make it easier for businesses to borrow money, experts say there is little indication that things are getting any better, particularly for medium and small-sized businesses.
Bank of Albania says in a recent report that the cost of borrowing has gone up instead of going down and the conditions have further tightened.
To make things worse, bad loans have also increased, notwithstanding the stricter rules that have been implemented by banks for months.
The central bank says commercial banks are just being too careful as they have plenty of liquidity to loan for investments. The central bank says commercial bankers tightened lending standards on business loans in the second quarter of 2010. The standards have been tightened to a higher degree for investment purposes rather than for floating capital needs, according to the BoA.
The BoA also said demand for consumption credit has increased, while demand for corporate and individual real estate purchases has decreased.
For the third quarter of 2010, banks expect the easing of standards for businesses and for individuals.
Between 2007 and 2009, the worst of the global economic crisis, bad loans in Albania increased 300 percent.
Bank of Albania’s data on those who had defaulted on their loans or were behind in their payments showed that bad loans continued to grow, which is why banking experts have placed the tighter applied standards for credit for investment purposes and to fund floating capital.
The main factors contributing to the tightening of standards during the second quarter of 2010 are the specific problems of the sector in which the business operates, the troubled credit situation and the country’s macroeconomic situation.
The banks’ policies in second quarter of 2010 were mainly conducted through increased margins on loans with higher risk and increased demand for collateral.
The main factor contributing to boosting the demand for credit continues to remain the need for floating capital, according to the central bank.
Demand for consumer credit continues to be positive, although at a level lower than the previous quarter. According to experts at the commercial banks, the fall in demand is driven by the deterioration of consumer confidence, the developments in the real estate market and the perception of tighter credit standards applied by banks.
The banks tightened their loan portfolio conditions after a boom in lending just before the global economic crisis hit. It came as the number of bad loans continued to increase in.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking family incomes, businesses in crisis and depreciation of the local currency, mainly against the euro. These factors have made it harder for people to pay back the banks for loans they took in better times.
But the Bank of Albania says future credit performance will be an important factor on the economy’s recovery.
Bank of Albania has for several months urged Albanian commercial banks to lend more. It repeated in its latest statement that it stands ready to help the banking system with the necessary measures to reactivate the credit markets.
In a statement, the central said, “the banking system can and should make more of an effort to transmit monetary policy by providing more credit to the economy.”
“Without harming fulfilling our mandate to control inflation, we remain willing to help the banking system through taking necessary measures to reactivated the credit market,” BoA Governor Adrian Fullani told the Albanian banking executives at a recent event. Lowering the number of bad loans can help banks redeploy their assets back into the economy, giving a boost to economic recovery and job creation, according to economic experts.
