2005 WILL BE THE YEAR OF CREDIT AGGRESSION AND REGULATORY RESTRICTIONS
For banks the year 2004 was marked by a record high growth of extended credits and a big number of restrictions by which the Bulgarian National Bank (BNB) tried to limit that process. Mandatory minimum reserves which banks are obliged to set aside on attracted deposits from firms and citizens for more than two years were raised on two occasions. Thus, from 0% in the beginning of 2004 the mandatory minimum reserves reached 8% in the year-end. BNB also stopped acknowledging the available money in cash as such reserves. Moreover, the central bank forbade credit institutions to include their current profit in the equity capital. This deprived them of the most accessible resource for capital increase. And the volume of loans which banks are allowed to extend depends on the size of the equity capital. Therefore, some banks - as Raiffeisenbank (Bulgaria), Central Cooperative Bank, EIBANK and DZI Bank - increased their shareholder capital in order to continue with the credit expansion. Expectations for 2005 are that we'll again witnessa huge growth of loanswhich will force BNB to respond by a counter-blow, i.e. by imposing new restrictions. According to analysts of some banks, the battle for expanding market positions in 2005 will result in an increase of the aggregate volume of released credits by about 40 per cent. This means they will reach almost BGN20BN within the twelve month of the year, up from approximately BGN14BN in end-2004. Consumer credits alone, which presently total some BGN3BN, are estimated at BGN4BN-plus in the end of this year. The real hit,however, will be housing credits, bank experts predict. In 2004 they registered the highest growth - about 145% - going up from BGN408.3MN in the beginning of 2004 to BGN1BN in the year-end. All big banks launched special programmes for housing loans and several times cut down the interests on them. Towards the year-end credits for purchase or construction of housing were allocated at a 7.3% annual interest. Purchase of real estates in big towns is assuming a hysterical character with the year 2007 approaching when Bulgaria is expected to join the European Union (EU). And that makes most banks reorientate to housing credits. In end-2005 the volume of loans, earmarked for getting flats and houses, is pre-estimated at BGN2BN-plus. Credit institutions hope they will manage to attract clients by long repayment terms - up to 20 years and over, and by flexible repayment schemes, envisioning grace periods. Concerning interest ratesthe forecasts are they will continue to go down. According to some experts, due to the fierce competition between banks interest rates for consumer credits will drop below 9% per year, and interests for housing could even go down to 6.5 per cent. Of course, the realization of that forecast depends to a large extent on the additional measures which BNB would undertake to restrict the growth of crediting. In the end of 2004 the Governing Board of the central bank amended Regulation No 8, including in it a special restriction for housing credits. Currently, all such credits are estimated as 50% risky. As of July 1, 2005, this will apply to housing credits, whose size does not exceed 70% of the value of the motgaged real estate. All other housing loans will be estimated as 100% risky. However, some bank managers doubt that restriction would influence the growth of this type of credits, because even now most banks extend them with the requirement that their size should not exceed 85% of the evaluation of the pledge. BNB's executives are also worried by the fact that almost all money which the banks attract from abroad, as well as those from citizens and firms, is used for allocation of credits. And this is something that considerably jeopardises the stability of the finance and credit system. Statistics also show a speedygrowth of the population's indebtednessIn the beginning of 2004 consumer and housing loans equalled 30% of the citizens' savings, while in the middle of last year (according to BNB's most recent data), the ratio became 36 per cent. If this trend deepens and debtors fail to pay their due instalments for consumer and mortgage credits in time in 2005, banks will have to put the pledges for sale and that will result in a steep depreciation of flats and houses. Experts from the Bank Supervision department are concerned that at a given moment banks could become real estate agencies and make huge losses. In order to avoid the danger of such a shock, BNB will probably continue to impose new restrictions to banks until the annual growth in crediting drops below 35 per cent. Experts from the Bank Supervision department are considering several options for restrictions: from doubling the minimum mandatory reserves to introducing liquidity coefficients. If any of these drastic measures is introduced, banks will be forced to significantly cut down the money they have intended to allocate as credits. And the result will be a steep limitation of the opportunities for lowing down interest rates. The drafted amendments to the Protection of Consumers Actare also a blow against the credit aggression of banks. They have been prepared by Expert Panel 23, called Protection of consumers and their health, headed by the Ministry of Economy, and are directed to general protection of consumers in all spheres. Regarding financial services, requirements will be enforced that will oblige banks to present overall and circumstantial information about the products they offer. Sanctions will be introduced for misleading, unfair and comparative ads, for unequal clauses in contracts for offering of services, distance selling, joint offers, etc. That will limit banks' opportunities to attract clients by ambiguous or deceptive ads or by offering bonuses - presents, trips, insurances, etc., whose price exceeds the value of the service itself. In the first three months of 2005 Parliament should finally approve two draft bills which are important for the future development of the finance and credit system. The first one is the bill for amendments to the BNB ActTill the Christmas holidays the MPs succeeded to vote on second reading the provisions, specifying the order for choosing members of the central bank's governing board. That should be done up to two months before their mandates expire. If that is impossible, the respective member shall continue to fulfil his obligations till his successor is picked up. According to the amendments passed so far, labour relations between BNB's Governor and vice-governors shall be regulated by management contracts, to be signed according to the order, set by the central bank's Board of Governors. MPs have to approve now the most important items of the draft amendments to the BNB Act. They stipulate increased independence of the central bank's Board of Governors from the executive and legislative power. The most important in that respect are the changes in articles 44 and 45, reading: When exercising their rights and fulfilling their obligations under this law the Governor and the members of the governing board shall be independent and shall not have the right to ask for or accept instructions from the Council of Ministers or from any other authorities and institutions. The Cabinet and the other bodies and institutions may not give instructions to the BNB, its Governor, or members of the Board of Governors. A special provision will be included as well, stipulating that BNB's budget shall be approved by its Board of Governors, and not by the National Assembly as until now. This clause, however, will be enforced only when approving BNB's 2006 budget, as the budget for 2005 was voted by Parliament as per the requirements of the currently effective BNB Act. By the end of its mandate the incumbent 39th National Assembly is expected to pass alsothe Money Transfers ActIts voting on first reading in the plenary hall and its approval on second reading by the parliamentary Budgetary Commission showed there will be a serious battle between BNB and the lobbyists of firms who want to step onto the business of internal and international settlements. The main argument in this case is about the size of the minimum capital which companies demanding to operate as payment systems should possess. Central bank experts claim at present that it should amount to BGN10MN. But the MPs, protecting various business interests, insist that capital should be twice less. The parliamentary majority supports BNB's stance for the time being, but the possibility for deputies to become more kindly disposed to the demands of the private business prior the elections in 2005 (which date is not yet known) should not be ruled out. Of course, such a change in their attitudes will show pre-election mercantilism, which could not be satisfied by BNB. Altogether 2005 is likely to be an exceptionally dynamic year for the bank system. The European appearance of the domestic finance and credit sector will be formed in 2005 and 2006. Market shares in consumer, mortgage and corporate crediting will be to a great extend distributed. The bigger contest - with regard to the future purchase of Borika - will be the market of credit and debit cards. Both the leaders in the bank sector and the banks which if not sold to strategic investors will pass to a vegetation phase, will become known this year. To cut a long story short - we'll see with what kind of a bank system Bulgaria will join the EU.