TIRANA, May 3 – Credit continued struggling to recover in the first quarter of this year while deposits grew by a mere 1 percent as interest rates on savings dropped to a historic low.
Central bank data shows credit to the economy contracted by 1.85 percent in the first quarter of this year when banks cut lending on both businesses and households.
The first quarter performance hints credit will suffer another tough year and fail to support the ailing economy after contracting by 2.4 percent in 2015. The high level of non-performing loans and poor demand by both businesses and households have kept credit at sluggish growth rates in the past couple of years despite loan rates undergoing a considerable drop due to consecutive cuts to the key interest rate by Albania’s central bank and the European Central Bank.
The country’s central bank has downplayed risks by saying that credit is gradually recovering and stands at positive growth rates if non-performing loans write-offs are taken into account.
Banks wrote off about 16.8 billion lek (€120 million) from their balance sheets in the first three quarters of 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, the government says.
Despite a significant drop compared to the onset of the global financial crisis when lending was still growing at double-digits, loan rates are still considered high by the business community, remaining seven times higher compared to deposit rates.
Latest Bank of Albania data shows average interest rates on lek-denominated loans dropped to 7.3 percent last March while deposit rates in the national currency fell to a historic low of 0.94 percent in March 2016 just before the key rate was cut to a new all-time low of 1.5 percent.
Meanwhile, average interest rates on euro-dominated loans which account for about 60 percent of total lending dropped to 5.32 percent last March after the European Central Bank cut the eurozone’s main interest rate to zero.
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.
Tackling high NPLs is essential for easing bank risk aversion which continues to thwart a revival in the flow of credit and the broader recovery, says the IMF.
