The Romanian Association of Banks, an institution which represents the entire banking market, expresses its readiness for collaboration and dialogue in order to develop the most sustainable approaches to public policies with a positive impact upon the business environment and, in the end, upon Romania’s economy, with a view to bring about the sustainable growth of financial intermediation, while providing at the same time the stability and credibility of the banking sector.
The RAB desideratum is the implementation of certain policies at national level with a view to enhance financial intermediation in Romania, under parameters which should avoid slippages or high-growth speed. This is the reason why RAB has as its strategic pillar lending, especially lending to SMEs, next to the integration of financial intermediation, in order to increase the level of accessing European funds, develop Public-Private Partnerships and finance large investment projects. We appreciate the boosting of lending as being all the more necessary, taking into account the fact that Romania has a number of gaps to close against European Union Member States, a situation which fragments integration efforts and leads to a series of adverse effects such as the shrinking of net wealth and the deepening of social disparities, more migration etc.:
- In Romania, the level of financial intermediation is the lowest from among the countries of the European Union (26.4%)
- The weight of bank assets against the GDP stands at 50%. By comparison, at EU level, the weight of bank sector assets against the GDP stands at 255% while in the euro area it stands at 288%.
- Romania has been facing vulnerability on the labour market, brought about by a demographic issue – contemplating the fact that immigration reached a worrying level of 15% of the country’s population, respectively 25% of the active population.
We think that it is in the authorities’ interest to adopt measures which would lead to the reduction of social disparities, in order to enhance economic welfare, reduce migration and boost demographics.
We are of the opinion that these measures are needed with a view to provide a level playing field on the domestic market, so that all economic players benefit from uniform regulations and similar profitability conditions, while maintaining payment discipline.
The banking community is deeply worried about the consequences mainly negative, both for consumers as well as for the economy, which could be generated by the potential coming into force of the three law drafts which are under different stages of debate in the Chamber of Deputies, namely: interest rate restrictions, limitation of the recoverable amount of assigned receivables and elimination of the writ of execution feature of credit contracts. These law drafts, drawn up without any impact study and without consulting market players, could have unwanted effects which would affect, on long-term for that matter, lending and the population’s welfare.
According to KPMG, a potential shrinking of household lending is estimated as having a significant impact on consumption, output and investments, with negative effects on the state budget. Therefore, a 5% reduction of lending will have a negative impact upon the GDP amounting to 1.8%. The primary effects of these law drafts on interest rate restrictions, the limitation of the recoverable amount of assigned receivables and the elimination of the writ of execution feature of credit contracts have already been felt in terms of the public’s expectations and its perception of the banking sector. These law drafts permit the generation of unrealistic expectations.
All these initiatives mean costs for the banking industry, including image costs and, paradoxically, this happens in a country a European Union Member State where financial intermediation has the lowest level, i.e. 26.4%. The big differences as regards the regulatory standards adopted by Member States contribute to the fragmentation of the single market, a situation which affects the free circulation of capital and services across the EU, leading to insufficient competition and to the slowing down of the development of a functional secondary market for bank loans. The promotion of these initiatives, which in a second instance brings about a number of unwanted effects, contradicts the actions taken at the European Union level, with a view to resolve the high levels of NPLs, contemplating the fact that these loans are considered risk to financial stability and to economic growth. In this respect, we welcome the publication by the European Commission, in March 2018, of a package of measures in order to approach the risks related to the high levels of NPLs in Europe. This packet includes a directive draft on credit servicers, credit purchasers and the recovery of collateral, a proposal for a regulation amending Regulation (EU) no. 575/2013 as regards minimum loss coverage for nonperforming exposures and a draft on setting up national asset management companies. As mentioned in the wording of the Directive proposal, the cut of the high NPL stock and of future accumulations is essential for the completion of the Banking Union, for competition in banking and for the maintenance of financial stability. They contemplate measures to enhance the efficiency of claim recovery procedures via some accelerated out-of-court procedures for collateral enforcement, while fostering the development of a secondary market for NPLs. With a view to eliminate the impediments to credit transfer to non-bank institutions, Member States will be requested to lift any restrictions in force in their national legislations which prevent loan transfers to non-bank institutions. Taking into account the measures that are to be implemented at European level which eliminate the unjustified impediments in lending and in loan transfer in order to continue developing the NPL secondary markets, we are of the opinion that the law drafts which lead to the accumulation of NPLs contradict the recommendations at European level and Romania’s commitments with the International Monetary Fund. Hence, the measures to mitigate the risks in national and even European banking markets are affected. The European measures, including the ones that are to be implemented, allow banks to reduce their non-performing exposures and focus on their core business, i.e. financing consumers and companies. Such measures provide financial stability and can even provide economic growth. The Romanian banking sector has applied measures to cut NPL portfolios. The implementation of the measures set forth in the national law drafts will lead to a reversal in the trend of banks cleaning their balance sheets.
Developments in lending
The banking sector has had a positive evolution brought about mainly by the favourable macroeconomic framework, a situation which led to the boosting of lending. The forecast annual growth in non-government credit stands at 6.4% for 2018 in line with banks’ strategies, contemplating the fact that in 2017, the advance
of non-government credit stood at 5.6%. The non-government credit balance returned to €50 billion, a level we had at the beginning of the crisis, despite the fact that, in the meantime, we have had full reimbursements, principal reimbursements, sales of NPLs fully provisioned etc.
The structure of non-government credit broken down on segments is as follows: 53% are the loans granted to households and 47% to companies. The year 2018 brought about changes in the structure of lending to the private sector. Thus, at the end of March, the weight of lei-denominated loans represented 63.8% of total loans – the highest level post 1996. In the context in which in 2017 we witnessed a trend change as regards interest rate developments – i.e. ROBOR went up – the Romanian Association of Banks has analysed the possibility of a wider usage of fixed interest rates when lending to natural persons.
This way, consumers could be additionally protected from the risk of interest rate variations by the setting up of some mechanisms that would allow for the fostering of fixed interest rate loans. We had an increase in newly originated fixed
interest rate loans, i.e. 27% of mortgage loans and 79% of consumer loans granted during January – March 2018 are fixed interest rate loans. By comparison, merely 6% of the mortgage loans granted during the similar period in 2017 were fixed interest rate loans. Following the on-going efforts of the banking sector, the NPL rate went down from the alert threshold to the signal threshold.
The NPL rate dropped to 5.71% in June 2018 (compared to 8.32% a year ago), the cut being almost four-times a cut compared to the year 2014. As regards the non-performance rate per components published by the National Bank of Romania for March 2018, non-performance had a weight of 11.44% for the companies’ sector – with SMEs non-performance rate of 12.7% – while the index stood at 5.68% for households. In Romania, the NPL provision coverage rate stands at a high level, i.e. 57%. In Romania, bank lending has a high growth potential, especially corporate lending, with beneficial effects upon the economy on the overall; but, common efforts are needed of the banking industry supported by decision-makers via the projects they promote.
Small and medium-sized companies represent about 90% of total enterprises at global level and they coverover 50% of the labour force. They are essential for developing economies, playing a major role as regards the creation of jobs and the development of innovative systems. In Romania, SMEs weight stands at 99.7% against total companies compared to an average of 99.81% in the EU; SMEs cover 66.4% of total labour force, a level similar to the European average (66.63%), according to the Eurostat data for the year 2016. Taking into account the crucial role that SMEs play in employment – contemplating the fact that at national level, 2 or 3 employees work in SMEs – it is essential to provide access to viable financing to support their expansion, innovation and development projects.
In Romania, SMEs are mainly importing companies, the NBR data showing that the deficit of the external trade balance on this segment stood at €10 billion at the end of 2017. The statistics published by the NBR mention that the firms with domestic private capital represent about 90% of total firms, concentrating 45% of total assets of the sector and contributing with 44% to the gross added value generated.
The firms with majority Romanian private capital are more efficient compared to the private foreign capital firms. Thus, in the first semester of 2017, companies with majority Romanian private capital had a ROE of 19.2% compared to 17% of the companies with private foreign capital, shows the Report on Financial Stability. At the end of last year, for comparison, ROE and ROA across the banking sector stood at 12.50% and 1.30% respectively, under the level reported by private companies in Romania. Statistics show that companies get financing mainly via commercial debt (19.3% of total liabilities), followed by debts from shareholders and affiliate entities (10.6%) and internal loans in the case of banks and non-bank financial institutions. The weight of the companies that apply to banks for funding is in total 10.4%. Lending to SMEs is the main objective of the members of the Romanian Association of Banks, and the NBR data show us that there is a lot of potential here. According to the NBR data, 14,300 companies, of which 13,400 are SMEs, could support a loan volume of 113 billion lei.
The majority of Romanian companies are not eligible for banks, considering that they have negative equity. In 2016, one third of companies reported losses, and 44 % of companies had a level of capitalization under the statutory level. Credit institutions have the resources needed to support lending, with solvency and liquidity ratios at high levels but, for the appropriate expansion of corporate lending, companies must become eligible for banks.
There are a series of vulnerabilities such as the high level of indebtedness or the long period of time needed for claim recovery which burden banks’ lending efforts. Regarding the average period of time needed for claim recovery, SMEs manage to recover their receivables in 104 days; we realize that supplier credit is used. The first three most pressing issues that companies face continue to be high taxation, the unpredictability of the fiscal environment and competition, according to an NBR survey.
Access to financing ranks only number 9 as a pressing issue for firms. Surveys show that, in Romania we do not still have installed a culture as regards SMEs, with more than half of the set up companies disappearing after at most 10 years since their registration. In the case of companies, loss given default estimated by banks for the loans that were in default in Q4/2017 stood at 42% up from 40% a year ago. In a local climate generally characterized by high unpredictability, business plans are delayed from the start and reassessed while the investment appetite is low. We are open to initiating an on-going dialogue with the Romanian authorities in order to identify the most efficient programmes in order to support lending. In this respect, RAB supports the setting up of a working group which has as objective enhancing the level of financial intermediation in Romania.
- The SMEs of Romania provide about two thirds of total jobs in the non-financial economy and are accountable for 52.8% of the total added value. As regards the added value, this level is slightly lower than the EU average.
- The SMEs of Romania hire on average 5.7 people compared to the European average of 3.9 people. In Romania, SMEs’ productivity – defined as added value per hired person – is lower than one third of the EU average.
- Access to financing was identified as being the least pressing issue for SMEs during April 2017 – March 2018.
- The newly originated loans were granted in rather close weights between domestic and foreign currencies (53% respectively 47%), most loans being granted to SMEs (69%).
- Regarding the average period to recover claims, corporations are characterized by rather lower values of this index compared to SMEs (68 days compared to 104 days in June 2017).