The increase in non-performing loans - one of the risks of the banking system this year

English Section / 15 martie

The increase in non-performing loans - one of the risks of the banking system this year

(Interview with Gabriela Folcuţ, Executive Director of the Romanian Banking Association)

An increase in the volume of non-performing loans is one of this year's risks for the banking system, Gabriela Folcuţ, Executive Director of the Romanian Banking Association (ARB) told us. "The Balance of Non-Governmental credit evolved by 5.5% in 2020, as the economy contracted by 5.2%, according to estimates. Thus, paradoxically, we could also witness an increase in the degree of financial intermediation, up from 25%.".

In 2021, lending is expected to record a growth rate at least equal to that of 2020, but this sector is also affected by uncertainties related to the evolution of pandemic. One of the identified risks is that of an increase in of non-performing loan ratio. "

Reporter: How has the banking system been affected by the Covid-19 pandemic?

Gabriela Folcuţ: The Romanian banking system finished the first year of the pandemic with a series of strengths, which allowed it to act as a solution to the negative effects of the health crisis. Banks acted from another perspective, compared to the crisis a decade ago, as being part of the solution to the economic problems of the crisis. The solidity of the banking system, the absorption of customers' liquidity problems, the increase in lending on sustainable bases, the speed-up of computerization and a large increase in savings are the strengths of the banking system in this pandemic context.

Banks have absorbed the liquidity problems encountered by debtors, companies and individuals, in a joint effort with the state authorities. In 2020, credit institutions have approved the requests by 560,000 debtors to have their loan repayments suspended, and continue to absorb those liquidity issues experienced by customers in accordance with European and national regulations. The change in the flexibility of the national and European regulatory framework allowed the postponement of the debtors' payment obligations affected by the Covid-19 pandemic. Customers directly or indirectly affected by the pandemic situation may benefit from the suspension of the payment obligation for a period between one and nine months. The maximum suspension period is nine months, taking into account the suspensions they have benefited last year based on legislative and non-legislative moratoriums.

The solvency ratio of the banking system was at 23.18% at the end of December 2020, nearly three times above the minimum allowed limit. The Non-Performing Loans Ratio was 3.83% in December 2020.

The banking system ensures financial intermediation, with protecting the savings of the population and of companies. Romanian banks have the necessary resources for lending, the loans/deposits ratio was at 65.89%, at the end of December 2020.

The negative effects of the pandemic did not leave their mark on the stability of the banking system, which has been resilient to the challenges it has encountered so far and, at the same time, proactive in terms of solutions. The Romanian banking system ranks above the European average in terms of solidity ratios. Since the onset of the pandemic, the solidity indicators of the banking system have allowed a proactive approach, of absorbing the borrowers' problems and the increase in credit at a sustained pace. The banking system's solvency indicator is placed at 23.18% at the end of December 2020, almost three times over the minimum allowed. The rate of non-performing loans was 3.83% in December 2020.

Reporter: What is the sentiment of the banking market this year?

Gabriela Folcuţ: The signs of the year 2021 are positive. Non-governmental lending has advanced in January 2021 by 5.1%, YOY, while saving has increased three times more (15.8% at an annual rate). The banking system is solid, with the general picture being one that involves stability. There are positive signs concerning the recovery of the economy, so that in 2021 we ought to see a more favorable evolution.

Reporter: What is the outlook for 2021?

Gabriela Folcuţ: Romania has a number of opportunities. The way in which the authorities will be able to pace the steps to achieve the development objectives will be defining for the evolution of the Romanian economy in the post pandemic period. Our country has at its disposal the valve of European funds, and our ability to handle this valve that allows the entry of funding streams can have a transformational impact in the economy. A great opportunity that Romania has is the funding from the National Recovery and Resilience Plan. The banking system remains in wait of the overview of the plan to ensure it will contribute to a good absorption.

Romania's economy is still in convalescence, even if a 3-4% growth is predicted for this year. The gaps we are seeing in relation to the European medians in terms of individual economic welfare, the degree of financial intermediation and the level of financial inclusion are arguments in favor of a generally exemplary mobilization.

The economy is still anesthetized by the pandemic, and the risks are present alongside opportunities. The evolution of the banking system, which is a mirror of the economy, is dependent on economic recovery measures.

Reporter: How has lending evolved in the last year and how do you think that segment will do in 2021?

Gabriela Folcuţ: Romanian banks have continued to grant loans at a sustained pace in 2020, like they used to do in normal times. In the context of the pandemic, banks have continued revving up the engines of lending, covering the customers' financing needs, the level of new loans granted on the non-governmental segment being slightly above the level seen in 2019.

New loans extended to companies and the population have amounted to 84 billion lei last year and it holds a weight of almost one third in the balance of non-governmental loan. This aspect is explained through the short maturity of some loans, of less than one year, especially on the corporate segment. The corporate segment was the one that boosted lending, with a weight of 57% in the total new loans granted.

The balance of non-government credit rose 5.5% in 2020, as the economy contracted by 5.2%, according to estimates. Thus, paradoxically, we could also witness an increase in the degree of financial intermediation, up from 25%.

For the year 2021, lending is expected to record a growth rate at least equal to that of last year, but that sector is also marked by uncertainties related to the evolution of pandemic. One of the identified risks is that of an increase in the rate of non-performing loans. On a national level, we will witness the adaptation of the legislative framework to the European Action Plan to prevent the formation of a new wave of non-performing loans.

With a degree of financial intermediation at least three times lower than the European average, of 85%, the Romanian authorities and the private sector should be able to pace their steps to identify solutions to push for an increase in lending and the level of financial education.

Analyses in 80 countries over a period of 30 years show that financial intermediation creates the prerequisites for economic growth. The correlation between the GDP/Capita and the level of financial intermediation is a strong one (0.8).

We are aware of the positive role that such an evolution of the degree of financial intermediation will have on reducing the level of poverty, the development differences between rural and urban and between regions, as well as in strengthening Romania's economic growth.

To achieve this, we need to eliminate those barriers that affect lending, such as the legislative risk or reduced capacity of some companies in accessing loans.

For years, the banking industry has revealed the legislative risk as a serious problem for lending. Even though in most cases the Constitutional Court declared unconstitutional a series of populist laws, the impact on lending happened.

Lending did not work at full capacity when the risk of those laws being passed was in play, as capital turned towards states with a more predictable legislation. Now that confidence needs to be restored for the business sector to be able to bet on stability.

Romania is the country with the lowest entrepreneurial footprint among the states of the European Union and must define its priority of supporting the entrepreneurial sector. The causes behind the reduced entrepreneurial footprint, of 29 SMEs per mille and the precarious health of a major part of Romanian companies need to be eliminated, especially in the new pandemic and economic context.

The domino effect among companies caused by the distortions in the economy caused by the Covid-19 pandemic is one of the possible risks. Statistics show that solvency ratios of non-financial companies have already deteriorated. The difficult cashing of receivables increases insolvency risk, and in relation to banks there is already a risk of increasing non-performing loans.

Funding through loans from banks and non-financial lenders accounts for 8.4% of liabilities in companies. However, representatives of the business sector are saying that access to funding is one of the least pressing issues of companies.

The top three of the actual pressing issues for companies are the production or labor costs, the availability of skilled workforce, and lack of demand. Negative equity firms account for 42% of the total number of companies, so certain tax incentives need to be identified to increase capitalization and, implicitly, for he chance to become bankable.

Reporter: How much of the total volume of loans goes towards the real estate and mortgage area?

Gabriela Folcuţ: The lending for home purchase segment has reached an increase during the pandemic. New loans granted for home purchases have amounted to 15 billion lei in 2020, up 9.2% compared to 2019. New loans for the purchase of homes account for 18% of the total new loans granted last year. In terms of amount, home loans amount to nearly 90 billion lei (18 billion Euros), meaning 32% of non-governmental loans. The weight of home loans in the GDP is less than 10%, which means that Romania has a major potential for growth on that segment, compared to other European countries.

According to the study "The computerization of the banking system as perceived by Romanians", 11% of Romanians have a real estate / mortgage loan. For 2021, 10% of the respondents in the study mentioned said they were considering taking out a real estate / mortgage loan, most of the respondents being men. Approximately 17% of people aged 18-35 and 10% of people aged 36-50 have said they were considering taking out a real estate loan / mortgage.

Reporter: How have the interest rates evolved on this type of loans?

Gabriela Folcuţ: The interest rate on existing loans denominated in lei, granted to households for homes with an initial maturity of over 5 years has diminished last year with almost one percentage point, to 4.77%, while for new loans the scale of the drop has been more tepid.

The Noua Casă program facilitates the access of individuals to the taking out of state-guaranteed loans for buying housing, with a 5% downpayment for loans for buying old / new homes of up to 70,000 euros, and 15% for new housing loans up to 140,000 euros.

According to FNGCIMM information, through the two programs, 16.102 guarantees have been awarded through the "Prima Casă" and "Noua Casă" programs, for loans of approximately 3.6 billion lei last year. For 2021, the Noua Casă program has a total guarantee cap of 1.5 billion lei. If we take into account the appetite of Romanians for buying more spacious housing, I expect the cap to be exhausted.

Reporter: How has the banking system reacted to the process of forced computerization?

Gabriela Folcuţ: We have witnessed a more accelerated computerization across society, with the banking system being one of the sectors that adapted very quickly to the changes caused by the pandemic. Studies show an increase in the degree of financial inclusion and computerization in the banking system.

Two out of three Romanians (67%) use banking products and services of any kind, such as current accounts, cards, loans, bank deposits and they make payments, according to the Study on the Computerization of the Banking system as perceived by Romanians of the Romanian Institute for Evaluation and Strategy (IRES). In 2017, the degree of financial inclusion was estimated to be 58% in Romania.

The IRES study reveals the increase in computerization compared to past years, with this trend being also sped up by the sanitary protection measures passed during the pandemic. Among financial services users, 43% make card payments with merchants (POS), 27% pay using the Internet / Mobile Banking, and 61% of respondents said that they withdraw cash from ATMs, on a multiple choice question. Card usage behavior shows a 30 percentage decrease in the number of people withdrawing cash from ATMs compared to the situation five years ago.

The low level of financial inclusion is also caused by a low degree of financial education. The OECD study places Romania as having a low score in the financial literacy chapter. The average financial literacy score in the countries participating in the OECD study is only 12.7 out of 21 and 13 for the OECD countries only. Lower scores were earned by adults in Italy (11.1), Romania (11.2) and Colombia (11.2).

Reporter: How would the Romanian banking system react when faced with a new economic crisis?

Gabriela Folcuţ: The analysis of the banking system in terms of structure indicators shows that it is resilient. A potential economic crisis may have negative effects of a lower or higher amplitude. A possible impact depends on the resilience of the banking system, but also the direct and indirect effects on banks' customers and the length of a potential crisis. We express our optimism that we will witness a recovery of Romania's economy in line with the expectations of national and international experts, so that the likelihood of such a crisis will be low.

Reporter: Thank you!

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