Банкеръ Weekly



The road to hell passes through good intentions, a proverb says. It describes well the measures for reducing the growth in crediting, approved by BNB's Board of Governors on February 23, 2005. Practically, the central bank will be slowly roasting the credit institutions with the aim of protecting them from the risks connected with the quick increase of extended loans. That will be the result of the amendments to Ordinance No 21 on mandatory minimum reserves which banks are obliged to keep on deposits at the BNB. Currently, these reserves amount to 8% of the money attracted from citizens and firms and from the sale of bond issues. The amendments to Ordinance No 21 stipulate their increase if credit institutions do not observe simultaneously two restrictions. The first one is that the growth of allocated loans should not exceed 6% within a quarter, 12% within two consecutive quarters, 18% within three quarters, and 24% within a year. The second requirement is that the sum of the credits, guarantees, and other credit substitutes (the so-called off-balance-sheet assets) extended by a bank minus its equity capital should not exceed 60% of its attracted funds. If a bank violates both of these requirements simultaneously it will have to deposit into its account in BNB an additional amount, equal to the doubled excess of the credit growth. At first sight that formulation sounds quite complicated, but in fact it is not difficult to calculate the additional instalment. For instance, a bank has allocated credits and guarantees, and from that sum the amount of its equity capital is deducted. BGN600MN remains, and it has attracted BGN1BN. Over the next three months it increases the size of credits and guarantees by 10% to BGN660MN (again after deducting the amount of the bank's equity capital), and the attracted money reach BGN1.09BN. In that situation loans and off-balance-sheet assets amount to 60.5% of the attracted funds. In compliance with the new ordinance the bank should deposit to its account in the central bank BGN48MN, i.e. the doubled sum by which the stipulated 6% growth of credits and off-balance-sheet assets has been surpassed. But if its attracted funds are more than BGN1.1BN, the bank shall not have to make that instalment because the total size of loans and guarantees (from which the sum of its equity capital is deducted) will be below 60% of the total amount of deposits from other banks, other financial institutions, citizens and firms.The necessity to make additional instalments as mandatory minimum reserves will be quite disagreeable to banks as they do not get any yield from that money. Moreover, BNB's new requirements will certainly freeze a considerable part of the free bank resources. Credit institutions will be additionally burdened by the circumstance that they do not have the opportunity to increase their equity capital by their current profit every other year. Thus, they are deprived of an instrument for reducing the amount which under the amendments to Ordinance No 21 should not exceed 60% of the funds, attracted by banks. These restrictive measures will be applicable as of April 1, 2005. The first report on the growth in crediting will be made in end-July, and the first regulation of mandatory minimum reserves instalments as per the new requirements of Ordinance No 21 will be on August 5, 2005. But if we examine the balance-sheet figures of Bulgarian banks for 2004 it will become clear even now that at least 14 of them will have to limit their credit expansion or make considerable efforts to steeply increase the amount of attracted money. The total sum of credits and off-balance-sheet assets (from which the amount of their equity capital is deducted) of these institutions is way above 60% of the attracted funds. In the case of BNP Paribas (Bulgaria) this ratio is 166% due to the considerable size - BGN188MN - of guarantees the bank has extended to its clients. Their amount is higher than that of allocated credits - BGN160MN. This situation is not repeated by any other domestic bank. The ratio between credits and off-balance-sheet assets to attracted funds was high in the end of 2004 also at Emporiki Bank - 118%, West-East Bank 112.7%, and International Assets Bank (the former FEIB) - 96 per cent. According to BNB's data for 2004, that ratio is high at most of the big credit institutions. For HVB Bank Biochim it is 90.2%, for United Bulgarian Bank (UBB) - 89.5%, for SG EXPRESSBANK - 84.3%, for Post Bank - 71.7%, for DSK Bank - 68.9%, for First Investment Bank and HEBROSBANK - 68.5 per cent. These banks account for 52.4% of all extended credits and restricting their activities on that market will considerably reduce the growth in crediting in the financial sector as a whole. However, the institutions that will have to comply with the new restrictions risk to decrease their market share at the expense of rivals which will have the possibility to raise the amount of launched credits without risking to be sanctioned. According to BNB's data for 2004, the institutions that can do that are: BULBANK which ratio between credits and off-balance-sheet assets from which the amount of its equity capital is deducted) to the attracted money is 45%, DZI Bank which ratio is 47%, EIBANK - 47%, and even Raiffeisenbank (Bulgaria) which ratio is 61%, but over the last three months of 2004 it registered a very quick growth in citizens' and companies' deposits. They rose almost twice - from BGN700MN in end-September 2004 to BGN1.3MN in end-December. In the same period the bank's credits and off-balance-sheet assets rose insignificantly - by 6%, from BGN1,192.4MN to BGN1,263.5MN.It turns out that the regulations of BNB's Ordinance No 21, to be applied for the first time as of August 4, 2005, will considerably influence competition between banks and the distribution of their market shares. That will certainly cause indignation on the part of many banks. What is more important, however, is that this time BNB has found a way to really restrict the growth in crediting. It will hardly drop to 24% annually, but it won't be as high as 45%-50%, as was the case until now. It is not yet clear what effect the new restrictive measures will have on clients. Interests on loans are not likely to go up, but banks will probably tighten the criteria for loan borrowers solvency. At the same time, credit institutions are expected to raise the interest rates on deposits and offer more attractive products in order to attract money. And that will be to the customers' benefit.

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