TIRANA, Nov. 3 – Lending standards during the third quarter of this year eased somehow for businesses but further tightened for individuals, according a lending survey carried out by the Bank of Albania published on Wednesday in the latest monetary policy report.
Data show lending standards eased only for small and medium-sized enterprises and home loans to individuals, confirming the commercial banks’ hesitation to lend for the third quarter in a row this year, especially because of a significant increase in the bad loans which climbed to 12.2 percent in the first half of this year.
Banking experts said the tight lending standards were influenced by specific problems in the sectors where businesses operate, the macroeconomic situation and the individuals’ financial situation.
Banks expect lending conditions for the fourth quarter of this year to ease for businesses but further tighten for consumers despite an expected increase in demand by both of them especially in foreign currency loans.
The monetary expansion registered significant growth rates during the third quarter of this mainly because of foreign currency inflows. Bank deposits further increased, improving the banks’ liquidity, especially in foreign currency, mainly because of favourable interest rates offered in seasonal promotional campaigns.
Individuals continued preferred time deposits while businesses increased their preferences for liquid products supporting their activities.
Lending preserved the second quarter’s moderate rates with the public sector continuing to positively contribute while the private sector’s contribution dropped to one of its lowest historical levels.
Deposits in the July-August 2010 registered a significant increase especially those in foreign currency because of the immigrants’ arrival to spend their summer holidays at home. Foreign currency deposits, mainly in euro, contributed to 90 percent of the total growth of 227.5 million euros.
Meanwhile, the annual growth for deposits in the national currency lek slowed down to 9 percent, down from 10 percent in the second quarter.
Credit to the private sector registered a 6.1 percent year-on-year growth in the July-august period, only 0.2 percent up compared to the average second quarter growth.
The poor performance was influenced by low demand and the banks’ careful lending behaviour.
The central bank expects credit to the private sector to grow during the second half of this year after the budget review and the cut of the key interest rate by 0.25 percentage points few weeks ago.
The International Monetary Fund expects the private credit growth to drop to 8.6 percent of the GDP this year, down from 10.3 percent in 2009 and 32.1 percent in 2008 when the global crisis started.
Euroization and Banking Sector Risks
A certain degree of Euroization appears inevitable as Albania becomes more integrated into the European market, and indeed reflects confidence in the country’s transition process, the IMF said in its latest report on Albania last July. To effectively contain the risks, banking supervisors should enhance risk-based supervision by setting high standards for risk management and ensure that banks have adequate buffers to handle large shocks.
Euroization increases banking sector risks and requires high capital and reserves buffer. Currency mismatches could increase solvency risks of the banking sector directly through unfavorable exchange rate movements or indirectly through credit risks of non-hedged portfolios. The central bank’s lender-of-last- resort facilities may only have limited funding in foreign currencies in case of bank runs, which could aggravate creditors’ fears and trigger a run.
While lower Euroization would facilitate monetary policy, it cannot be forced and prudential measures should be adopted to contain the risks. De-euroization policies could involve both marketbased and administrative measures, but should stick to the principle of first maintaining macroeconomic stability, and in particular low inflation.
