Interest rates on loans denominated in the national currency registered only a slight decline in June 2014 despite the key interest rate being cut to a historic low of 2.5 percent, reflecting the poor transmission of the central bank’s easier monetary policy as bad loans stand at around a quarter.
TIRANA, Aug. 5 – Both lending and deposits slightly recovered in June 2014 despite the former continuing remaining at moderate negative growth rates and the latter escaping its downward trend.
Bank of Albania data published this week show lending to the economy slightly recovered in June 2014 when it declined by 1.6 percent year-on-year, down from 1.66 percent year-on-year last May and 2.15 percent in April 2014, remaining at moderate negative growth rates since the second half of 2013.
Meanwhile, deposits grew by 1.64 percent in the first half of 2014, considerably recovering compared to last April when the annual growth rate dropped to a historic low of 0.5 percent. That was the lowest growth rate since late 2008 and early 2009 when banks in Albania witnessed panic deposit withdrawals in the face of spillovers from instability of global financial markets which were compounded by concerns about the health of the Greek banking system in the fall of 2008.
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 and shrank by 1.25 percent in 2013 as bad loans hit a record of 24 percent.
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.
Central bank data show the deposit growth slowed down to 2.1 percent in 2013, down from 6.3 percent in 2012, and 11.7 percent in 2011, unveiling the downward trend in consumers’ saving trend.
The slowdown in deposits is also a result of sharp cuts in interest rates and more favourable interest rates in the emerging investments funds.
“While these funds have helped diversify the ownership of government securities, they are inadequately supervised and regulated, invest mostly in longer-dated securities and their clients appear to consider these funds as substitutes for bank accounts,” warns the IMF in its latest report.
Lending standing at moderate negative growth rates of around 2 percent since one year is also a result of banks writing off bad debt from their balance sheets which under new legal changes are being recognized as deductible expenses, says the IMF.
“An explanation for the credit shrink is also the fact that banks have written off bad debt from their balance sheets, which lowers credit artificially. If we remove this element, lending has mainly remained unchanged,” Nadeem Ilahi, the IMF’s mission chief to Albaniahas recently told VoA in the local Albanian service.
Interest rates
Interest rates on loans denominated in the national currency registered only a slight decline in June 2014 despite the key interest rate being cut to a historic low of 2.5 percent, reflecting the poor transmission of the central bank’s easier monetary policy as bad loans stand at around a quarter. The situation also reflects the huge fivefold gap between deposit and lending rates, which experts say is unprecedented compared to even regional banking systems.
Bank of Albania data published this week show average interest rates on lek-denominated loans dropped to 9.05 percent, down from 9.41 percent last May and 10.73 percent in June 2013.
Meanwhile, average interest rates on Euro-denominated loans rose to 6.82 percent, up from 6.48 percent last May and 7.08 percent in June 2013 despite the European central bank having cut the key rate to a new historic low of 0.15 percent.
The situation with deposits continues deteriorating with Albanians’ savings hardly managing to maintain positive growth rates, especially because of interest rates having dropped to a record low and at around the same level to annual inflation rate.
Average interest rate on lek-denominated deposits dropped to a new historic low of 1.76 percent, down from 1.94 percent last May and 4.59 percent in June 2013, making investments in deposits one of the least attractive opportunities.
At an average of 1.76 percent for the first half of this year, the inflation rate continued remaining below the central bank’s lower limit of the target range of 2 to 4 percent, a situation reflecting sluggish internal demand which is the key driver of Albania’s growth.
Meanwhile, interest rates on 12-month euro-denominated deposits dropped to a historic low of 0.88 percent, down from 1.01 percent last May and 2.27 percent in June 2013.
With lending continuing remaining at moderate negative growth rates of around 2 percent and inflation rate below the target, the central bank made a new cut to the key interest rate in late May 2014 an effort to give a boost to consumption and private investments whose sluggish performance is affecting growth.
The cut to the key interest rate was the second for this year and the eleventh consecutive slash by 0.25 percentage points since September 2011 when the central bank adopted an easier monetary policy to handle crisis impacts.
However, the moves have mostly been reflected on lower interest rates for lek-denominated deposits and T-bill yields, which have almost halved during the past year, while interest rates on lek-denominated loans have registered only a slight decline.
More than half of Albanian businesses consider high interest rates as the key barrier in borrowing from banks, according to a survey carried out by the Bank of Albania. Businesses also consider credit insurance terms, the appropriateness of the credit structure and lack of transparency in the approval and monitoring of loans by banks as factors of average difficulty.
