Mugur Isărescu: Non performing loans are concentrated in 2-3 banks

The regulation concerning consumer lending will push the Romanian society towards "civilized lending", which represents an act of normalcy, Mugur Isărescu, the governor of the NBR explained yesterday. He added that most non-performing loans are concentrated in banks which granted the most number of consumer loans.

The governor warned that the Central Bank shouldn"t be criticized for encouraging consumption, and said that a 20-year consumer loan is "nonsense".

Mugur Isărescu said: "I"ve seen this kind of weird reactions when the Central Bank imposes restrictions which prevent borrowers from taking out 20-year consumer loans. A normal, common sense discussion will tell you right from the start that a 20-year consumer loan is nonsense. Lending and the maturity of loans have a philosophy of their own. (...) There have been banks which, in their rush for market share, and for bonuses, and I"ll stop here with the ironies, granted consumer loans with a 20-year maturity. They are rather few, just two or three. They have the most non-performing loans".

He said "that no car or refrigerator can be used for 20 years".

Mugur Isărescu advised bankers to correctly price loans denominated in foreign currencies and to warn their customers of the risk they involve. Furthermore, he warned bankers that if they venture into "this kind of lending", the Central Bank will request additional provisions and capitalization.

The Governor has also said that he encourages cheaper loans in lei, because "that"s where the balance will come from".

• Isărescu: Regulations for lending in foreign currencies is being prepared on a European level

Mugur Isărescu said that next week will see the release of the European Central Bank and of the Systemic Risk Council on loans denominated in foreign currencies.

"Next week you will see that what we are doing is just a small part of what is being prepared on a European level", he said.

The Governor said that the exposure of Romania and Hungary to loans denominated in Swiss loans was not enough, but that of Austria and other countries was strong enough to show European officials how a monetary policy can be derailed.

He explained that regulation in the banking system must be "adequate" and "comprehensive": "Excessive regulation of the banking system is suffocating, especially when it comes to innovation and efficiency. An insufficient regulation can not be compatible with banking activities, which has a high degree of risk".

Mugur Isărescu added that insufficient regulation can lead to financial crashes, which could be catastrophic.

• Isărescu: In September, inflation will fall below 4%

The Governor of the NBR yesterday said that inflation will fall below 4%, at the end of September.

He said: "Inflation will reenter the targeted interval before the year end, more precisely next week (when it is going to be announced by the National Statistics Institute - author"s note). Inflation has fallen somewhere between 3 and 4%".

As for the economic outlook, the Governor said that the economic fundamental data has improved, compared to 2008.

He said: "If we succeed in attracting European funds next year, that would make my pessimism disappear when it comes to next year"s economic growth. We are fighting perception. I do not think that the perception of European grants will improve until their effects will become visible".

Furthermore, the sovereign debt crisis will change how European countries are judged, according to him.

The governor of the NBR also said that the reduction of social security contributions (CAS) would be welcome for stimulating the economy.

He said: "Under no circumstances did I say that I am against cutting the social security contributions (CAS). If I were to take a risk, I would venture even further and make an even clearer judgment. If I were to take a risk in order to stimulate the economy, I think that the reduction of the Social Security contributions would be more than welcome because labor is already overburdened ".

Mugur Isărescu added that the place were victory will be achieved is the ratio between labor and social security: "It is striking how skewed against work and contributors the physical ratio between taxpayers and those who benefit from social security is. (...) Whoever finds a solution to this conundrum will be a winner".

He said he is not against the cutting Social Security contributions (CAS), only against presenting it as a simple solution.