TIRANA, July 19 – Businesses faced tighter lending standards in the second quarter of the year despite the key interest rate dropping to a new historic low of 1.25 percent and confidence in key services and construction sectors recovering, according to central bank surveys.
Lending has officially been at moderate negative growth rates since one year, but the central bank has downplayed the situation saying credit has increased in real terms considering the write-off of bad debt from banks’ balance sheets statistically keeping lending at negative growth rates of about 2 percent.
Non-performing loans (NPLs), a key barrier which continues holding lending standards tight, dropped by 4.6 percent to 18.2 percent or 106.7 billion lek (€765 million) in 2015 mainly due to a considerable write-off of bad debt.
Banks wrote off 26.6 billion lek (€191 million) in 2015 after a new regulation requiring the mandatory write-offs of loans that have spent three years in the “loss” category came into force at the beginning of 2015, according to the central bank.
Specific problems in the sectors where businesses operate, the country’s uncertain macroeconomic situation and the high level of non-performing loans were the main factors leading to tighter lending standards in the second quarter of the year when banks reported a slight recovery in SME demand for new loans but a decline in interest by big enterprises which although accounting for 1.1 percent of total enterprises contribute to about half of employment in the private sector.
The results come at a time when the Economic Sentiment Indicator, measuring both business and consumer confidence recovered to its historical average after a slump in the year’s first quarter.
A considerable increase in loan rates last May following a downward trend in the previous three months reconfirms the tighter lending standards businesses are facing. Average interest rates on loans denominated in the national currency, accounting for about 40 percent of total lending, rose to 7.29 percent last May, up from a historic low of 6 percent last April and 8.15 percent in May 2015.
The loan rates, although considerably lower compared to the pre-crisis levels, are still considered high by the business community and households because of their huge gap with deposit rates which last May dropped to an all-time low of 0.84 percent for lek-denominated savings.
The gap between loan and deposit rates has increased to more than 8-fold compared to about 3-fold in the pre-crisis credit boom, triggering a probe by the country’s competition authority over allegations of limited competition leading to high loan interest rates and standstill in lending.
The country’s central bank says further reducing non-performing loans, currently at 17 percent down from a record high of 25 percent in mid-2014, is a pre-condition for a recovery in credit at a time when new bankruptcies in the industry sector are posing a new threat.
Despite sluggish credit, banks’ profits hit a historic high of 15.7 billion lek (€111.7 mln) in 2015 as non-performing loans dropped to 17.66 percent and deposit interest rates registered a record low.
Lending to the economy has been striving to maintain positive growth rates since 2012 after growing by 30 to 50 percent annually in the pre-crisis years and an average of 10 percent from 2009 to 2011.
Fuelled by historic low interest rates of below 1 percent, deposits turned to negative growth rates last May for the first time since late 2008 at the onset of the global financial crisis when savers made panic withdrawals also worried over the health of banks in neighboring Greece, whose Albania subsidiaries held about a quarter of assets in the country’s banking system at that time.
Since late 2011, the central bank’s easier monetary policy has been mostly reflected on deposit rates and T-bill yields on government’s internal borrowing, rather than lower loan interest rates, failing to stimulate consumption and investment at a time when both businesses and households face uncertainties.
Governor Gent Sejko says the central bank could make a new cut to the key interest rate as lending and consumption remain sluggish and inflation rate for the first five months of this year hit a 16-year low of 0.7 percent, standing considerably below the Bank of Albania target of 3 percent, estimated to have a positive impact on the country’s ailing economic growth.
Surveys by top foreign business associations in Albania show a deterioration in the business climate for 2016 with high taxes, corruption and bureaucracy as key concerns.
