NPLs at around a quarter of total loans risk the country’s economic growth by reducing lending to the economy, limiting liquidity, and curbing investments and consumer demand, and forcing banks to invest in low risk government securities instead of households and businesses
TIRANA, Feb. 18 – The sharp reduction in migrant remittances, the economic slowdown and the increase in accumulated unpaid bills are the main causes of the high level of non-performing loans in Albania, economy experts say. At around 25 percent or 1 billion euros, Albania non-performing loans are the highest among eight EU aspiring countries and have become a real barrier in the recovery of lending which since the second half of 2013 has plunged into moderate negative growth rates of around 3 percent.
Elvin Meka, an economy expert, blames the sharp rise in Albania’s bad loans on the credit boom in the pre-crisis years.
“Albania has the highest level of non-performing loans because it faced an exponential credit growth in a relatively short period of time, a phenomenon which is not observed either in the region or in Europe,” Meka tells Deutsche Welle in the local Albanian service.
He said that NPLs at around a quarter of total loans pose a risk to the country’s economic growth by reducing lending to the economy, limiting liquidity, and curbing investments and consumer demand, and forcing banks to invest in low risk government securities instead of households and businesses.
Zef Pre詬 the director of the Albanian Center for Economic Research, says the sale of property placed as collateral is promoting corruption for loan defaults.
“The execution of collaterals involving apartments which are sold by banks up to 40 percent of their market value in the second round has turned them into ‘big game’ for Albanian and foreign banking officials and an opportunity for inflow of illicit money,” said Preci, suggesting that apartments should no longer be accepted as a loan guarantee and that other methods should be found. He suggests economic reforms promoting competition, punishing price increases and corruption in order to reduce non-performing loans.
Changes approved last year by Parliament in consensus foresee that the value of seized collateral will be lowered by 20 percent in the first auction and by 30 percent in the second auction. This means collateral worth 1,000 euros will drop by 20 percent to Euro 800 in the first auction and by another 30 percent to Euro 560 in the second auction, a drop by 44 percent in total.
The latest quarterly report by the European Commission shows Albania’s non-performing loans at 24.3 percent top the list of EU candidate and potential candidate countries. Serbia ranks second with 21.1 percent, followed by Montenegro with 17.7 percent, Bosnia and Herzegovina with 14.9 percent, Macedonia with 11.8 percent, Kosovo with 7.5 percent (data from IMF), Iceland with 5 percent and Turkey with 3 percent.
“The level of non-performing loans (NPLs) remained very high at 24.3 percent in the third quarter of 2013, constituting one of the main factors behind continuing tight lending standards. On a positive note, for the first time since their steep increase started in 2008, NPLs decreased slightly from the previous quarter, which might signal a turning point,” said the report.
After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 as bad loans hit more than 22 percent. Since September 2011, the Bank of Albania has cut the key interest rate by 2.25 percent to 3 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits, failing to produce lower lek-denominated loans.
Latest data published by the country’s central bank show lending shrank by 2.5 percent in the first eleven months of 2013 while deposits grew by only 2.2 percent over the same period.
Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits.
Banks’ profits drop
Affected by credit growth having plunged to negative growth rates and bad loans at a record 25 percent, the 16 commercial banks operating in Albania are facing their worst ever situation since the collapse of the so-called pyramid investment schemes in 1997. Central bank data shows banks’ net income in the first three quarters of 2013 registered a loss of around 1.3 billion lek (around Euro 9 million), the worst performance since 1998 soon after the turmoil triggered by the collapse of the pyramid investment schemes when the 10 banks operating in Albania at that time reported losses of around 3.3 billion lek (Euro 23 million).
BoA data shows bad loans doubled to 6.5 percent at the end of 2008, reflecting the first impacts of the global financial crisis. At the end of 2009, bad loans further climbed to 10.5 percent before reaching 13.61 percent at the end of 2010, 19 percent in 2011 and 22.76 percent at the end of 2012.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking household income, businesses in crisis and the depreciation of the domestic currency, lek, mainly against the Euro. These factors have made it harder for people to pay back the loans they took in better times.
“A strong rebound in credit would be contingent on progress in restructuring troubled corporate balance sheets. The high NPLs are indicative of the state of disrepair of corporate balance sheets, and partly explain banks’ high risk aversion in lending; credit would continue to be weak till there is improvement on this front,” says the IMF in its latest country report.
