Bank of Albania data show lending shrank by 2.2 percent year-on-year in October while interest rates on lek-denominated loans registered a slight increase despite the central bank having lowered the key interest rate to a historic low of 3.25 percent
TIRANA, Dec. 2 – Lending suffered another blow in October 2013 when it extended its decline while the key interest rate at an all-time low proved inefficient to lower interest rates on loans denominated in national currency.
Bank of Albania data show lending shrank by 2.2 percent year-on-year in October 2013 while interest rates on lek-denominated loans registered a slight increase despite the central bank having lowered the key interest rate to a historic low of 3.25 percent.
The situation reflects a critical situation in the banking system which remains liquid and well-capitalized but faces a record high of around 25 percent in non-performing loans. Apart from poor demand for new loans, tight lending standards applied by banks and high interest rates have also influenced on lending which registered negative growth rates for the fourth month in a row, in a situation which is unprecedented in the past 15 years.
In the first nine months of this year lending shrank by 2.2 percent, or 12 billion (Euro 84 million) year-on-year, after striving to remain at positive growth rates in the year’s first half, according to central bank data. 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.
Tighter lending standards applied by commercial banks, has increased the levels of informal borrowing. More than half of debtor Albanian households, some 56 percent, borrow informally mainly from friends and relatives and local shops, shows a recent Bank of Albania survey. Construction companies, whom government owes millions of Euros for finished public works, are the most engaged in informal borrowing whose interest rates range up to 5 percent compared to an annual 10 to 12 percent in banks.
Meanwhile, deposits in the first ten months of this year grew 1.7 percent or only 16 billion lek, continuing their downward trend. Deposits grew by 6.3 percent in 2012, down from 11.7 percent in 2011, unveiling the downward trend in consumers’ saving trend.
Since September 2011, the Bank of Albania has cut the key interest rate by 2 percent to 3.25 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits.
Poor demand for new loans, tight lending standards remain the key barriers for a recovery in credit for both households and businesses whose confidence remains low as the economy strives with the lowest growth rates in the past 15 years.
Average interest rates on lek-denominated loans have remained almost unchanged during the past two years, reflecting the failure of the consecutive cuts to the key interest rates in the past two years.
Average interest rates on lek-denominated loans slightly dropped to 9.67 percent in October 2013, down from 10.14 percent in September 2013, but up from 9.11 percent in October 2012. In October 2011, average interest rates on lek loans were at 11.41 compared to 12.54 percent in October 2010, according to Bank of Albania data.
Average interest rates on Euro denominated loans dropped to 6.61 percent, down from 7.09 percent in September 2012 and 7.38 percent in October 2012, positively reflecting the easy monetary policy of the European central bank which has cut the key rate to a record low of 0.25 percent.
Meanwhile, interest rates on lek-denominated deposits have seen a sharp drop of 44 percent in past year, reflecting the consecutive cuts to the key interest rates.
Twelve month-T-bill yields have also dropped to a record low of 3.73 percent, compared to 6.6 percent at the beginning of this year, when the key rate stood at 3.75 percent. Experts explain the declining trend in T-bill yields with more active participation by commercial banks which have turned to investments in government securities due to poor demand for new loans as non-performing loans have reached a record 24.4 percent.
Last week, the Bank of Albania lowered the key interest rate by 0.25 percent to a historic low of 3.25 percent as inflation rate remains far below the 3 percent target band. The new cut is the third consecutive intervention of the central bank through its monetary policy during this year, but the transmission mechanism has failed to reduce interest rates on lek-denominated loans and has been reflected on only lower T-bill yields and interest rates on lek-denominated deposits.
