Romanian Banks Remain Excessively Prudent

G.N.

Romanian-based banks tightened the lending criteria for individual customers in the first quarter of 2009, applicable to both mortgage loans and personal loans, according to a study by the National Bank of Romania (BNR). The decision was explained by an accelerated increase in the volume of overdue payments towards existing loans, as well as by bleak forecasts regarding the unemployment rate and the revenues of individual customers.

The number of banks that revised the provisions of mortgage loan contracts decreased from the previous reporting interval, while the object of the revision remained the same: the maximum weight of the monthly debt service against the overall revenue, the difference between the average interest rate against ROBOR 1M and the maximum weight of the loan against the value of the mortgaged property. The changes made to these numeric criteria were at least equal to those made in the previous quarter.

The average value of the maximum debt-to-income ratio applied by banks on loans granted in the first quarter of 2009 was by 6% smaller than in the fourth quarter of 2008, when the average ratio was also decreased by 6%. The average weight of the loan against the value of the collateral decreased by 6.5% in Q1-2009 compared to the last quarter of 2008, when only an insignificant adjustment was made. The changes made to the terms of personal loans are similar to those of mortgage loans.

• Real estate, the riskiest economic sector

Lending terms also tightened for business customers in the first quarter of the year, but not so much as for individual customers, thus contradicting predictions that the two sets of terms would go in parallel. Although this could be a sign that the lending restriction policy for business customers is calming down, the trend does not seem to change for the time being.

The default risk calculated as a function of the size of the company continues to bear negative effects on small-sized enterprises, who are having more and more difficulties to take a loan. Medium-sized enterprises, which used to be placed between small-sized enterprises and corporations as far as the default risk was concerned are now put in the same risk category as the small-sized enterprises. The corporate risk is also increasing, but not as fast as the risk related to small- and medium-sized enterprises.

The risks specific to different types of economic sectors also increased in the recent months for the entire economy, thus continuing the trend set in the previous reporting period. For the second consecutive quarter, creditors named the real estate sector as the riskiest sector of the economy, followed by construction, communications, post and tourism.

The overall status of the economy and the risks associated to the respective industry remain the leading factors that banks consider upon scoring a customer. The strong increase in the overall value of bad loans since the beginning of the year is also playing a negative role in the lending equation. Additionally, the risks associated to the collateral / guarantees backing a loan application have also been increasing, as most of the business loans are backed by mortgages (74% in Q1-2009).

The most significant changes consist of a decrease in the maximum duration of the loans and an increase in the premium charged on riskier loans. As for the difference between the average interest rate on loans against ROBOR 1M, the maximum threshold and the costs of the loans other than interest, the weight of the banks that made changes in these indicators decreased significantly from the previous quarter.

As a result of these factors, which started to produce effects even in early 2008, the annual growth rate of business lending slowed down from 53.92% in March 2008 to 19.92% in March 2009.