Lending returns to positive growth

Average interest rates on lek-denominated loans dropped to 8.58 percent in July 2014, down from 9.05 percent last June and 10.98 percent in July 2013, positively reflecting the consecutive cuts to the key interest rate by the country’s central bank.
By Ervin Lisaku
TIRANA, Sept. 3 – Lending to the economy registered a turning point in July 2014 when it overcame a 12-month moderate decline of around 2 percent as the economy struggled with its poorest growth rate in more than a decade and bad loans stood at around a quarter.
Bank of Albania data shows lending grew by 0.5 percent year-on-year in July 2014, positively reflecting the easier lending standards banks are applying and a recovery in demand by both households and businesses as average interest rates on loans denominated in the national currency have dropped by around 2 percent.
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.
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 Albania has said.
Deposits’ growth also recovered to 2.45 percent year-on-year in July 2014 after almost plunging into negative growth rates earlier this year due to interest rates having dropped to below 2 percent, the same as the average inflation rate for this year. Last April, deposits slowed down to a record low of 0.5 percent, registering 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.
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.
Loan interest rates down
Average interest rates on lek-denominated loans dropped to 8.58 percent in July 2014, down from 9.05 percent last June and 10.98 percent in July 2013, positively reflecting the consecutive cuts to the key interest rate by the country’s central bank.
Meanwhile, average interest rates on euro-denominated loans dropped to 6.81 percent, down from 6.82 percent last June and 6.96 percent in July 2013.
Interest rates on 12-month lek-denominated deposits slightly rose to 1.9 percent in July 2014, up from a historic low of 1.76 percent last June and 4.26 percent in July 2013.
Interest rates on 12-month euro-denominated deposits dropped to a historic low of 0.76 percent, down from 0.88 percent last June and 2.08 percent in July 2013.
Meanwhile, 12-month T-bill yields continue hitting new record lows, dropping to 3.19 percent in the latest Bank of Albania auction, down from 3.21 percent in the previous auction and 4.6 percent a year ago.
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.
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.
Loans denominated in the national currency have increased their share by 5 percent in the past three years rising from 32 percent in 2011 to 37 percent in 2013.