AFTER RAISING THE INTEREST RATES ON DEPOSITS, Banks may raise interest rates charged on loans

Several domestic banks have entered the race to attract deposits from the population, by raising interest rates on deposits in the month of November.

This led to some analysts to expect the interest rates for loans to follow suit. They also claim that the increasing number of loan arrears will raise the interest rates. It is not a matter of transferring losses from non-performing loans to ongoing loans, but rather an increased margin on new loan contracts, in an uncertain economy, where eligible customers can become loan defaulters virtually over night, analysts say.

According to data from the NBR, at the end of October, the number of corporate and individual overdue loans had nearly doubled over October 2009 (when overdue loans amounted to 7.19 billion lei), reaching 15.9 billion lei. In September 2010, individual and corporate overdue loans had reached 15.65 billion lei.

Ruxandra Andrei, manager of loan comparison portal "FinZoom" said: "When interest rates paid on deposits increase, loan interest rates follow suit. If banks are successful in attracting cash, they need to cover their expenses, and make a small profit, when they sell that cash".

Non-performing loans should cause an increase in interest rates for loans, but only for the new loans. So far, banks have mostly raised interest rates on ongoing loans, according to Ruxandra Andrei.

On a different note, the fact that banks are paying out higher interest rates on deposits not only suggests that loans may become more expensive, but that they also need cash.

In the beginning of November, NBR governor Mugur Isărescu said that interest rates on deposits are excessively high compared to those paid out in other countries, and argued that banks could afford to do this because a lot of people accepted to borrow money at high interest rates.

The fact remains that in November, several banks decided to offer their customers higher interest rates on deposits.

It is unknown for now, whether this will cause the cost of borrowing to rise, as demand for loans remains low.

Mihai Bogza, the chairman of Bancpost explained: "Demand is very low, due to a very important factor: the low level of consumer confidence. Retail and services are still near historic lows; October data shows a slight recovery in consumer confidence in the fourth quarter, compared to the third quarter, but it is too late to be optimistic."

The market has a lot of options available for borrowers, which is a good sign, the official of Bancpost says.

Ruxandra Andrei doesn"t expect banks will raise their interest rate by much: "The higher the interest rate, the higher the monthly payments. The eligibility calculation method, including the revenue calculation, within the maximum accepted degree of indebtedness, - which is for now somewhere around 50% - will make it difficult to find eligible borrowers, now that lending terms are much harder than they were in the past.

Furthermore, the majority of the population has seen a significant drop in revenues, meaning that it will be increasingly harder for people to borrow money."

The representative of "FinZoom" considers that the real factor that will lead to an increase in the interest rate for loans is Government Emergency Ordinance no. 50/2010, which was intended to make loan costs easier to determine and to eliminate certain fees:

"Whereas until now, monthly/annual fees sometimes exceeded 30% of the total amount to be paid to the bank - in order to allow lower interest rates by shifting part of those costs to the fees in question - the cost of loans will now be reflected first and foremost in the interest rate".

We may therefore see higher interest rates in the market but the actual interest rates (which also include the levied fees) may remain at similar levels.