Банкеръ Weekly



If someone is wondering how the aggressive growth in crediting could 'hit' the country's balance of payments, let him look at the statistical data for January and February 2005. Within the first 59 days of the year Bulgaria's trade deficit totalled EUR410.4MN, up from EUR299.5MN for the same period of 2004. And the deficit in the current account of the balance of payments amounted to EUR464.9MN, up from EUR128.8MN a year earlier. That means the foreign currency which went out of the country within the first two months of 2005 was three-fold the amount for the same period of last year. What is the connection with crediting? IMF experts claim that the more consumer loans are extended, the more household commodities are imported. The import is also influenced by the credits, allocated by banks to companies which import electronics, furniture and any kind of goods that are not produced in Bulgaria, but are demanded on the domestic market. New credits influence imports with at least a month delay. Bank statistics show that for the first three months of the current year the aggregate amount of released credits rose by BGN2.9MN, from BGN14.1BN in end-December 2004 to BGN17BN in end-March 2005. Even if we assume that all loans extended in the last days of March - about BGN1.7BN - were fictitious, in order to allow banks raise the basis on which the BNB had initially projected to calculate the credit restrictions, the real credit growth will be BGN1.2BN. The reported increase for the same period of 2004 was only BGN800MN. That explains why the BNB introduced in April much more severe restrictions on the credit growth than initially announced and why the central bank reacted so harshly when the banks tried to evade them in end-March. As the BANKER weekly has already writtenBNB's new measuresapproved by its Board of Governors on April 21, will to a great extent compensate the leap of loans in the last working days of March. For banks which reported a growth over 4% during that month the new basis will be formed from their credit portfolio in end-February, increased by 4 per cent. For all other credit institutions the basis will be the aggregate volume of loans in end-March.Credits will be reported to the BNB every day. On an average daily basis their growth may not exceed 5% for the first quarter, 12.5% for the first half of the year, 16.5% for the first nine months, and 23% for the entire year. Banks shall not be allowed to include their audited current profit in the equity capital, which will automatically limit their opportunities to launch credits. Smaller institutions, which do not have big foreign investors behind themselves, are especially sensitive to that measure. Our plans to increase the equity capital by the current profit were upset and now we'll have to make new calculations in order to observe the restrictions and at the same time be competitive on the market, said the head of one of the banks with Bulgarian capital.The big, aggressively crediting bankshave quite different problems. Their managers are presently busy 'cleaning' the already allocated loans in order to extend new credits and at the same time 'fit in' BNB's restrictions. This is done in several ways. Initially, they nullify the fictitious loans which, according to the BNB, are the bulk of the credits, extended in the last days of March. In order to increase the aggregate volume of their loans, the banks closed credit agreements with their big corporate clients and the companies either deposited the received money in the same bank or bought with it government securities from the crediting institution. Now the firms are paying back the loans by these deposits and the repurchase of paper. Thanks to such operations, the total amount of credits decreased by BGN700MN in the first twenty days of April, from BGN16.7BN in the beginning of the month to BGN16BN in the end of the third week. At the spring meeting of the Association of Commercial Banks (ACB), held in Plovdiv on April 22 and 23, the managers of credit institutions with foreign shareholders discussed additional schemes for reducing the volume of existing credits in order to get an opportunity to extend a greater number of new loans. Some of the banks have already preparedpackages of corporate loanswhich they will transfer for servicing in the headquarters of the credit institutions which are their owners. The operation looks like that: United Bulgarian Bank (UBB), for instance, selects four or five big credits of EUR10-15MN, allocated to firms operating in Bulgaria, and commits them to be serviced by the head office of the National Bank of Greece (NBG) in Athens (the owner of 99.9% of UBB's stocks). In that way, the aggregate amount of loans, released by the Bulgarian bank is reduced and it may launch new credits and at the same time observe the restrictions on their growth, imposed by the BNB. The firms, which loans have been transferred to Athens, will pay them back to the NBG and their remittances will be effected through UBB. From the talks between bank managers in Plovdiv it became clear that all bigger credit institutions intend to clear between 5-10% of their portfolios in that way. In fact, loans of about BGN1BN (some EUR500MN) will be 'exported' abroad, and that will in turn automatically increase the external indebtedness of the private sectorIn the end of 2004 the external debt of private companies amounted to EUR5.8BN, but by February 28, 2005 it was already EUR6.1BN. Experts from BNB comment that because of transfers of credits the external debts of the Bulgarian private sector will probably reach EUR7BN by next July. Logically, that will lead to an increase in the amount of payments from Bulgaria to foreign countries.For the first quarter of 2004 Bulgarian companies remitted EUR138MN to foreign creditors. For January and February 2005 alone, the redemption payments total EUR219MN. Analysts from the central bank claim that by the end of the current year Bulgarian companies will have paid EUR1.5BN for redemption of foreign credits. This is currency which flows out of the country and automatically leads to a larger deficit in the current account of the balance of payments.There is also a third scheme for reduction of the banks' credit portfolio. It will be used by institutions that have establishedspecial investment purpose companiesThese are companies which buy receivables (mostly mortgage credits) and in return issue shares or bonds to be traded on the stock exchange. Financial experts call the process securitisation. The scheme is the following: the bank transfers a package of BGN50MN worth mortgage credits to its special investment purpose subsidiary which in turn issues shares or bonds of the same value and transfers the money received to the bank. Loan consumers pay off their debts to the company and the company uses the money to pay to the bondholders or accumulate a profit which it distributes among its shareholders after taxation. Thanks to the transfer of loans, the bank reduces the total amount of credits and releases resources for new credits to be launched. Therefore, it keeps its aggressive policy and in the meantime sticks to the restrictions imposed by the BNB.At the bank meeting held in Plovdiv, the managers did not discuss the measures of the central bank in public. However, in personal conversations they commented that the restrictions would not operate for more than one year because in the meantime the crediting growth would have entered within the limits required by the BNB. However, the European bank regulations which are much stricter and comprehensive than the currently operating ones will be introduced on the Bulgarian market in 2005. They were among the topics discussed by the BNB Deputy Governor Emilia Milanova at the meeting of the ACB. Mrs. Milanova informed the present managers that a new Banks Actwas to be drafted and voted. It will include the regulations of Directive 2000/12 of the European Commission on mutual licence acknowledgement. It means that starting 2007 every European bank will be allowed to open a branch or establish a subsidiary bank in Bulgaria without being licensed by the BNB. The same rule is also valid for Bulgarian banks operating in the EU member states. They will be allowed to open branches or subsidiary institutions without waiting for a permission from the supervision authorities in the respective country. The problem is that a Bulgarian bank will hardly be able to do business in France, Belgium, or Luxembourg, while the large western banks will easily enter the Bulgarian market and sweep away smaller credit institutions.The second important amendment to the Banks Act will concern the introduction of the new capital adequacy requirements known as Basel II. They will oblige banks to report not only the market, currency, and credit risk, but also the operating one. Besides, customers who apply for loans will be examined by much more complex and strict rules. They will be required either to have a rating awarded by an internationally recognized agency such as Standard Poor's or Moody's or to pass through the inspection of the special electronic systems that banks use to assess potential borrowers. These systems will be checked and approved by the BNB which means that the situation will become much more difficult for the borrowers than it is now.Once Bulgaria joins the EU, banks will begin to observe Directive 2002/87 of the European Commission, too, which regulates the supervision on financial conglomeratesThe directive aims at guaranteeing the stability of the European financial markets and introducing general norms of reasonable supervision over the financial conglomerates in Europe. It stipulates general standards for the banks, insurance companies and investment intermediaries which are part of a financial conglomerate. This directive allows the supervision authorities to establish the financial condition and the solvency of each financial group as a whole, Emilia Milanova explained.After the financial conglomerates directive becomes valid, the whole financial sector will be placed under strict single supervision which will make it extremely difficult to apply various schemes for transfer of assets and internal financing among companies within the same financial group.

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