Banking experts expect lending standards to remain tight even in the final quarter of 2011 both for businesses and individuals
TIRANA, Oct. 18 – The rising bad loan portfolio, currently at around 17 percent, and the macroeconomic situation with public debt as the most problematic indicator at around the legal ceiling of 60 percent of the GDP, were the main two factors contributing to the tightening of lending standards for both businesses and individuals during the third quarter of 2011. The findings are revealed in the latest Bank of Albania survey which showed low demand for loans also contributed to the tight lending standards. Banking experts expect lending standards to remain tight even in the final quarter of 2011 both for businesses and individuals. Data from the survey show lending standards during the third quarter of 2011 became tighter for both SMEs and big businesses, especially to finance floating capital and investments. The liquidity situation and competition in the banking system continued to ease lending standards for businesses, although to a smaller extent compared to the previous second quarter, says the report The banks’ tighter policies were imposed mainly through increasing the margin for credit risk and rising demand for collateral. The BoA survey reveals that lending standards to finance consumption for individuals were tightened by 24.6 percent after slightly easing in the second quarter of 2011. Home loans were also slightly tightened. Banking experts say the individuals’ financial situation, the bad loan situation and developments in the real estate market contributed to the tightening of standards for individuals at a higher extent compared to the previous quarter. Competition in the banking system, the liquidity situation and the Bank of Albania decisions and the capital adequacy did not manage to balance the tightening effects of the abovementioned factors. The decrease in the Installment to Income Ratio (IIR) and in the amount of loan and rising demand for collateral were used as tightening policies for credit to individuals. Falling demand for new loans by individuals is explained with developments in the real estate market and the possibility of using alternative financing sources. For the final quarter of 2011, banking experts expect a slight increase for lending in the national currency, lek, and a decrease in lending in foreign currency. Experts expect lending rates to drop for both lek and foreign currency in the fourth quarter of 2011. 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. Back in the third quarter of 2011, lending standards became tighter for businesses while standards for individuals eased for both consumer and home loans. The latest Bank of Albania move to lower the key interest rate for lek by 0.25% to 5 percent is expected to a give a boost to lending, which after the 2009 global financial crisis has been at slightly more than 10 percent compared to the pre-crisis levels of 30 to 50 percent. Credit to the economy continued preserving the slow growth rates even in August 2011. Latest Bank of Albania data show credit to the economy grew by 58.7 billion lek or 12.7 percent y-o-y last August. Meanwhile, total deposits in August 2011 continued their rising trend, growing by 111 billion lek or 15 percent y-o-y. Latest Bank of Albania data show interest rates for new loans in the national currency lek during the second quarter of this year averaged at 11.96 percent, down 0.95 percentage points compared to the first quarter of 2011. The majority of new loans in lek were issued to meet short term needs for businesses. A considerable increase has also been registered for lek-denominated home loans considering the depreciation of lek against the euro, which is the currency used in construction industry. Interest rates for loans in Euro slightly increased by 0.15 percentage points to 7.36 percent. Meanwhile, interest rates for new deposits increased for both lek and euro-denominated deposits. Interest rates for Lek deposits rose by 0.22 percentage points to an average of 4.59 percent while for euro by 0.08 percentage points to 2.23 percent.
