LENDING – A STRATEGIC DEVELOPMENT PILLAR FOR ROMANIA’S ECONOMY

 

The financial crisis has brought up for the first time the possible stagnation of the process of globalization.
International capital flows fell sharply at the beginning of the crisis and picked up but moderately in the last two – three years. During the economic and financial crisis, Romania was not forced to support the banking sector with public money while bank shareholders have contributed with additional capital amounting to over €3.5 billion during 2008-2016.

We should be witnessing the adoption of a coherent set of macroeconomic policies that would make possible the positive development of the Romanian economy, including by enhancing financial intermediation and by providing for the stability of the financial sector. Financial intermediation, calculated as weight of non-governmental credit against the GDP, shrank during the crisis by one quarter, from 40% to 29%. In Romania, financial intermediation represents one quarter of the European average. Even if domestic saving went up by 60% in the last eight years, capital transfers did not happen at the intensity seen before the crisis. And let’s not forget that the Romanian banking sector is one of the best capitalized banking sectors with the highest liquidity level across the European Union and, very importantly, it did not benefit from state aid during the crisis.

The RAB wants to become the promoter of a national strategy for enhancing financial intermediation in Romania. It would be advisable to have such a policy at national level i.e. a policy for enhancing financial intermediation in Romania, needless to say within the parameters that avoid slippages or high growth rates.
This is the reason why the RAB has as strategic pillar lending – especially lending to SMEs, next to the integration of financial intermediation in order to increase the rate of accessing European funds, developing public-private partnerships and funding large investment projects.

The objective of enhancing economic welfare and covering the needed level of lending at national level must be correlated in an appropriate manner with the task of regulating – meant to provide enhanced resilience of the European financial and banking sector – and of building more trust. We must take steps in order to contribute to lending to the economy, participate as much as we possibly can to the GDP formation and enhance financial inclusion. The banking sector can once again demonstrate its capacity and availability to participate to economic growth. We are ready to face strong growth, since Romania has a very good outlook in this respect.

Lending development

In 2016, lending had a moderate growth rate. Last year’s balance sheet cleaning has had impact on the gross loan volume. The bulk of non-government credit is very high and if we examine it from the point of view of 2016 inputs and outputs, we could discover that loan origination advanced rather a lot. In June 2017, the balance of non-government credit advanced by 4.2%, compared to the same period of last year.

The banking sector is pretty robust and benefits from a structural stability which allows it to carry out in a strong manner its mandate of financier. At the same time, we see that lending is needed. In this context, in the years to come, focus will be put on corporate lending and, mainly, on the corporations that intend to invest with a view to enhance their productive capacity in order to satisfy an increasing consumption demand.

Society needs to “smoothen lending” and for that it should address aspects concerning demand (the number of micro-enterprises represents 87.7% of SMEs, increasing solvent demand, the level of entrepreneurship financial literacy, productivity, SMEs capitalization, credit culture etc.) as well as concerning supply (increase and stimulation of certain segments via more efficient guarantee systems, the review of lending norms – not necessarily their relaxation but rather the elimination of some blockages generated by conditions with roots in the crisis that ended.

SMEs are a segment with a high lending potential for banks – the most recent NBR report on financial stability shows that 80% of SMEs have never applied for a bank loan. Corporate indebtedness means 26.2% of the GDP, of which the indebtedness of local banks represents 13.3% of the GDP. There are positive signs as regards the funding already granted by banks – the NPL rate had a significantly downward trend in the last two years, i.e. from over 35% in December 2014 to about 19.3% in December 2016, according to the NBR report.

The banking sector is open to funding SMEs, but there are a number of vulnerabilities such as the high level of indebtedness or the long period for working out receivables, which all burden banks’ lending effort.A recent survey performed by Coface mentioned the fact that, in Romania, we still do not have an SMEs culture; more than half of the established companies disappear in at most 10 years’ time since their registration, while the ones that stay active conduct rather modest business. This fact represents a challenge but, at the same time, it shows that SMEs need support in order to develop and, in this respect, banks can play a very major role. The first three most pressing problems facing companies continue to be high taxation, the lack of predictability when it comes to their fiscal environment and competition, according to the NBR survey. Access to funding ranks only number 9 as a pressing problem for companies. As regards access to funding, Romania is in a better position compared to the EU average. Only 6.46% of the applications for bank loans are turned down (2015) compared to 9.6% the EU average (Small Business Act 2016).

The initial potential risks induced to the sector by the legal framework have been mitigated in time. Credit institutions’ strategies include long-term commitments regarding lending to the real economy. We can
think about the challenges brought about by laws recently promoted during the pre-election period: the law on datio in solutum and the law on the conversion of loans denominated in Swiss francs at the original exchange rate. The Constitutional Court expressed its opinion and brought the necessary clarifiations. The analysis of the decision published by the Constitutional Court related to Law no. 77/2016 on datio in solutum indicates the fact that the institution contemplated enforcing this law for social cases only, by invoking the hardship principle. The hardship (exceptional events that occur during the loan tenor which lead to major difficulties for the debtor as regards the loan reimbursement) will represent rather an exceptional situation and not a frequent one.

From the very beginning, the banking community has stated that the core solution for all these problems pertains to the communication between banks and customers and that each bank has tried to find a solution one way or another for the social cases mentioned above. We still have is a problem of setting expectations. The Constitutional Court motivated their decision that rejects the law on the conversion of loans denominated in Swiss francs, by stating that this law breaches the principle of the two-chamber system – meaning that it was radically amended by the Chamber of Deputies, compared to its first wording adopted by the Senate, and compared to its initiators’ objectives. Thus, we had the situation when one chamber, namely the Decisional
Chamber legislated exclusively and this fact breaches the two-chamber system principle.

The payment difficulties of certain debtors to pay in Swiss francs (or in other foreign currencies) have always been submitted to banks which came up with customised solutions. By the end of August 2016, 78% of customers’ requests were approved and, as such, tens of thousands of loans denominated in CHF were restructured and/or reconverted in the domestic currency.The banking sector has been rebuilding the trust affected by public debates in recent years.

The impact upon interest rates

We should not neglect the danger represented by building assets especially in the social assistance segment with interest rates at historically low levels. The historically low level of variable indices (ROBOR, EURIBOR) shows that these indices will go up in the future, a fact which will bring about increases in the cost of financinag. We consider that we have the responsibility to inform the public about this situation and, at our turn, contribute to the Romanians’ financial education.

A loan can be granted for a 20-year tenor, a period in which many of the factors contemplated at the origination of the loan can change, therefore impacting upon the amount of monthly instalments, sometimes even above the debtors’ reimbursement capacity. That is why it is important that each debtor takes into account these possible fluctuations before deciding to apply for a high-value loan whose monthly instalment is a significant part of his/her monthly income. Banks must have an informed public and their role is to inform and have a constructive dialogue with the public.

Implementing IFRS 9 in 2018

After almost a decade since the start of the global financial crisis, capital requirements went up, new rules on liquidity were introduced – with impact upon the maturity of the asset structure – and credit risk assessment is very tight.

The year 2017 means preparing for the implementation of IFRS 9 starting with 1 January 2018. IFRS 9 – a risk-based prudential regulation – has a proactive approach as regards credit risk assessment by recognising the expected losses at the origination moment. And this translates into an early recognition and into a high volume of expected losses. It is not about a change in the total value of the loss registered during the life of an asset, but rather what is different now is the breaking down of the time period of the loss.

It is estimated that the implementing of IFRS 9 will lead to more provisions and that it will impact upon capital requirements. It is certain that the new depreciation requirements will mean a significant increase in the volatility of financial results, ROE and ROA, while the coverage rate with provisions will go up on short term.