Банкеръ Weekly



Commercial banks will learn on April 21 the price they will have to pay for the explosion-like increase of credits. On that date BNB's Board of Governors is expected to approve new amendments to Ordinance No 21, intended to eliminate the effect of the growth of credits, released in March. As the BANKER wrote, within the last four days of March alone they picked up by BGN1.7BN. Now the central bank's experts are considering various options for nullifying that increase. The BANKER learned that the possibility of introducing with a retroactive effect the 6% limit on the quarterly credit growth is being discussed. The idea is that the calculation should be based on the aggregate amount of loans by March 1, instead of April 1, as Ordinance No 21 presently stipulates. The reason for the leap of credits in the last days of March was that restrictions officially entered into effect as of April 1, stipulating that if the loans allocated by a bank increase by more than 6% per quarter, it should deposit as mandatory minimum reserves the amount of the reported excess. This forced many of the aggressively crediting banks try to raise maximally the volume of loans reported in end-March in order to calculate the 6% growth on a higher basis. The loans releasing campaignstarted still in the beginning of March with large-scale promotions for lower interest rates and relieved terms for extending them. The result was that within the first three weeks of March banks increased the volume of credits by BGN650MN. Had the growth reached BGN800MN, the BNB would have perhaps swallowed it. But willing to begin from better starting positions most big banks made a dash that embittered the life of BNB's Board of Governors. Central bank experts outspokenly said that the bulk of these credits were fictitious. Moreover, they claim that in the last days of March the bank managers, at least seven of them, agreed with some of their corporate clients to allocated them loans, which the borrowers deposit in another type of account, and in a week or two pay back the credit with that deposit. And in order to eliminate losses, interest rates on loans and deposits are equal. Other banks extended loans to their corporate clients, presetting the condition they will spend the money for the purchase of government securities from their creditors. Two or three weeks later the bank would repurchase them from the clients who will use the money from the sale of paper to pay back the credits. These are only part of the schemes applied in the last days of March. It is a fact that the bulk of the reported BGN1.7BN growth was due to the loans allocated to firms which picked up by more than BGN1.2BN. And this, according to some of BNB's experts, confirms the allegation that many of these credits are fictitious, as it is much more easier for banks to plot with their big corporate clients. On the day when BNB's execs got acquainted with these statistical data, the first floor of the central bank where the offices of the Governing Board members are located, was like a rioting beehive.Only the closest subordinates to BNB's Governor and Vice Governor know their exact angry words regarding the credit explosion. We vindicated the banks' interests in front of the IMF and they stabbed us in the back, said a member of BNB's Governing Board who preferred not to mention his name. On his part, the IMF Mission Leader for BulgariaHans Flickenshield voiced his indignationwith the behaviour of credit institutions in our country. Banks sabotage BNB's measures. I am disgusted with their behaviour, said Mr. Flickenshield in an interview for the 24 Hours daily. His resentment is quite understandable, because during the IMF's recent mission to Bulgaria (March 9-16) he insisted for introducing the restrictive measures with a retroactive effect. In an interview for the BANKER (published in Issue 11, March 19, 2005) he quite accurately predicted the developments in end-March. I don't see why the measures approved in February couldn't be applied with a retroactive effect as of January. BNB's lawyers, however, expressed some concerns and the central bank decided to enforce them as of April 1. This, however, opens a window for banks to ramp up crediting without punishment. They may even extend fictitious loans that will be paid back till April in order to open room for new credits, IMF's Mission Leader for Bulgaria said in his interview for the BANKER weekly. Regretfully, his forecasts came true. Therefore, when the measures concerning the bank sector are the topic of discussions during the following negotiations with the IMF, Mr. Flickenshield will have all grounds to recall to the BNB how right he was in his assessment. According to information of BNB's experts,the leader in the express creditingwas DSK Bank. Within the last four days of March it extended to its clients BGN400MN in loans. Most of them are corporate customers and in many cases there is a newly-opened deposit equal to the amount of the credit. That is the stance of BNB's experts. In a conversation with a reporter of the BANKER Violina Marinova, Chairperson of the Management Board of DSK Bank, said she did not intend for the time being to comment on the huge growth of credits in the end of March. United Bulgarian Bank (UBB) is second in respect of loans, extended in the last four days fo March. They amount to some BGN170MN. BNB's experts found an identical scheme with that used by DSK Bank, i. e. a large part of them were extended within a short period of time to selected clients which blocked the money in a deposit in order to repay it to the bank in two or three weeks. We have not played hidden or secret games. We have simply used the money we have received in the form of credit lines from abroad. Please note that we signed contracts for loans with many companies back in the end of 2004 and the money had to be drawn when the customers needed it, Stiliyan Vutev, CEO of UBB, told the BANKER. When BNB's restrictive measures were announced we warned our clients it would be good to use the negotiated loans in advance because once the restrictions entered into effect UBB would be probably forced to reject some of these credits. Most of the firms we had contracts with took advantage of that right. But they did that in the last moment in order to avoid paying excess interest. That is where the steep increase of loans extended by UBB in end-March came from. We just used fully the credit lines we received from abroad. I cannot see anything wrong with that.According to comments in BNB, Raiffeisenbank (Bulgaria) is the institution which has most actively used the scheme including government securities. The bank's managers, however, turned down the BANKER's request to comment on the big increase of allocated credits. BNB's negative list includes also First Investment Bank (FIB), UNIONBANK, and the Bulgarian branch of Piraeus Bank. Of course, there are also banks which have not tried to use the situation in order to increase steeply the size of their credit portfolios= Amongthe conservativesas they are called by BNB are: BULBANK, HVB Bank Biochim, and Cooperative Bank. Post Bank has also behaved properly. According to BNB's experts, it reported a growth in crediting because the BRS company for credit cards then transferred to the bank all loans - amounting to BGN97MN - which it had allocated to citizens. The operation is entirely law-governed as BRS and Post Bank are both owned by the Greek EFG Eurobank Ergasias.Within the last week since BNB's reaction andthe consideration of new measurescommercial banks' execs in Bulgaria got anxious because they will affect all credit institutions, independent of their behaviour in March.Don't forget that all banks were acting without violating BNB's effective regulations, one of the CEOs of a big financial institution, owned by Greeks, commented in a private conversation with a reporter of the BANKER. It's another question if the behaviour of some of them is reproachable from a moral point of view. I don't deny BNB's sovereign right to protect the stability of the finance and credit system in Bulgaria. But I can't see why all credit institutions should be punished because of the improper behaviour of four or five market participants. The BNB and its Bank Supervision department can punish any bank without imposing common regulative restrictions. Any financial manager knows that.The stance expressed by Philippe Lame, Executive Director of SG EXPRESSBANK, was in the same spirit:We really understand the restrictive measures on crediting, undertaken by the BNB. Pitifully, they place in an unfavourable position reasonable banks, too, such as SG EXPRESSBANK, whose credits rose by only 27.7% in 2004. After the considerable increase of expositions in March 2005 we would understand any new measure of the BNB. SG EXPRESSBANK accepts that calmly, hoping that its eventual measures will be just.Fair or not, the measures to be imposed by the BNB this time, will be absolutely unconditional, excluding any possibility to evade them. For that reason the Bank Supervision department has undertaken thorough inspections of most credit institutions which have reported a suspiciously high credit growth. Sanctions may be levied on some of them. This, however, will become known over the next two weeks when the inspectors' reports will be ready and after BNB's Board of Governors has discussed and approved the new amendments to Ordinance No 21.

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