Lending standards fail to ease

TIRANA, Oct. 16 – The tight lending standards the 16 commercial banks operating in Albania are applying remained unchanged for both businesses and individuals even in the third quarter of this year, despite demand continuing its downward trend, according to the latest survey carried out by the Bank of Albania. Central bank data show lending standards remained unchanged for both SMEs and corporations. Individuals also had their lending standards unchanged for both consumer and home loans.
Banks are optimistic lending standards will ease for both businesses and individuals in the final quarter of 2012 and demand for new loans to slightly increase.
Banking experts expect an increase in the approval of loans in lek and a drop in those denominated in foreign currency for the final quarter of 2012. Interest rates are expected to drop for both lek-denominated loans and foreign-currency ones, the latter account for around 70 percent of total lending.
Specific problems in the sector where businesses operate, the situation with bad loans, and the general macroeconomic situation are the key factors contributing to tougher lending standards for businesses. Apart from the non-performing loan indicator, individuals’ financial situation and developments in the real estate market also affected the tighter standards for individuals, according to the survey.
Demand for collateral remains the key condition of the banks tighter policies while the liquidity situation and Bank of Albania key interest rate cuts had minor impacts in easing lending conditions.
Bad loans at a record high level of 21 percent, tighter lending standards and a sharp drop in demand by both businesses and individuals are seriously affecting Albania’s credit growth during this year. Latest central bank data show total lending grew by only 6.5 percent in the first eight months of this, almost half of the credit growth in 2012, reflecting the difficulty both businesses and consumers are facing as domestic consumption remains at low levels and new investments have been postponed.
Total credit to the economy at the end of Aug. 2012 registered 552 billion lek, down 1.25 billion lek compared to last July, but up 33 billion lek compared to Aug. 2011.
The situation with deposits appears more stable due to consumers’ saving trend fearing harsher times ahead and the transfer of deposits by migrants in Greece.
In Aug. 2012, total deposits grew by 10 percent to 930 billion lek, reconfirming the confidence citizens have in the Albanian banking system which is also proved by the indicators such as the
loan-to-deposit ratio at 60.4% and the capital adequacy ratio at 15.9%, above the BoA’s minimum requirement of 12%.
Bad loans and delays in collateral execution are the key reason for lending standards becoming tighter despite demand having considerably dropped by both individuals and businesses as domestic consumption remains at low levels and the market seems to have reached a saturation point.